PAGENO="0001" CONSUMER CREDIT_PROTECTION_ACT~~ (~1O~4~b 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 TRADING 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 BELATED BILLS PART 2 AUGUST 15, 16, 17, AND 18, 1967, AND APPENDIXES Printed for the use of the Committee on Banking and Ourreney 0 U.S. GOVERNMENT PRIN~PING OFFICE 83-340 WASHINGTON : 1967 PAGENO="0002" COMMITTEE ON BANKING AND CURRENCY WRIGHT PATMAN, Texas, Chairman PAUL NELSON, Clerk and Staff Director ALVIN LEE MORSE, Counsel CURTIS A. PRINS, Chief Investigator NORMAN L. HOLMES, Counsel BENET D. GELLMAN, Investigative Counsel ORMAN S. FINn, Minority Staff Member CHARLES B. HOLSTEIN, Professional Staff Member SUBCOMMITTEE ON CONSUMER AFFAIRS LEONOR K. SULLIVAN, Missouri, Chairman ROBERT El. `STEP~IENS, Ja., Georgia FLORENCE P. DWYER, New Jersey HENRY B. GONZ~LBZ, Texas PAUL A. FINO~ New York JOSEPH El. MINISH, New Jersey SEYMOUR HALPERN, New York RICHARD P. HANNA, California CHALMERS P. WYLIE, Ohio FRANI~ ANNUNZIO, Illinois LAWRENCE El. WILLIAMS, Pennsylvania JONATHAN B. BtNGHAM, New York ABEAHAM J. MUtTER, New York WILLIAM A. BAB~RETT, Pennsylvania LEONOR K. SULLIVAN, Missouri HENRY S. REUSS, Wisconsin THOMAS L. ASHZ4EY, Ohio WILLIAM S. MOdRHEAD, Pennsylvania ROBERT G. STEPHENS, JR., Georgia FERNAND J. ST GERMAIN, Rhode Island HENRY B. GONZALEZ, Texas JOSEPH G. MINISH, New Jersey RICHARD P. HA~NA, 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 WILLIAM B. WIDNALL, New Jersey PAUL A. FINO, New York FLORENCE P. DWYER, New Jersey SEYMOUR HALPERN, New York W. B. (BILL) BROCK, Tennessee DEL CLAWSO~, California ALBERT W. JOHNSON, Pennsylvania J. WILLIAM STANTON, Ohio CHESTER L. MIZE, Kansas SHERMAN P. LLOYD, Utah BENJAMIN B. BLACKBURN, Georgia GARRY BROWN, Michigan LAWRENCE G. WILLIAMS, Pennsylvania CHALMERS P. WYLIE, Ohio II PAGENO="0003" 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 It. 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 Caidwell, Hon. Alex C., Administrator, Commodity Exchange Authority, USDA 602 Ca~plovitz, 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, Vera, 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 819 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; Clive 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, ~ Tex 414 Keeney, Eugene A., executive vice president, American Retail Federation~. 208 Kelly, Hon. Edna F., a Representative in Congress from the 12th Con- gressional District of the State of New York 204 Keyserling, Leon H., Washington, D.C., former Chairman, Council of Economic A4visers, consulting economist and attorney, and president, Conference on Economic Progress 675 Kimball, Geor~e H., president, Kimball's Store, Portsmouth, N.H., repre~ senting the National Retail Merchants Association, accompanied b7 James WoolE~y 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, an~l chairman, Senate Committee on Commerce ~ 8~7 Margolius, Sidney, 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 Col'ege, Chestnut Hill, Mass 363 Meade, Robert L., assistant attorney general, Commonwealth of Massa- chusetts, arid 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 Ft., general secretary, National Consumers League 682 O'Conor, Herbert R., Baltimore, Md ~ 796 Reuter, Ralph R., chairman, Metropolitan New York Consumer Counci~ 786 Robertson, If on. James L., Vice Chairman, Board of Governors, Fedei~al Reserve System; accompanied by Charles Partee, Associate DirectOr, Division of Research; and Robert Cardon, legislative counsel, Federal ReserveBoard 124 Rosenthal, 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, Hon. R. Sargent, Director, Office of Economic Opportunity; ac- companied by Bertrand M. Harding, Deputy Director, Office of Economic Opportunity 239 Smith, Willet, credit manager, Lechmere Sales Co - - 569 Stapp, Charles D., president, Koos Bros., Rahway, N.J., and presidsnt, 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 U~ban Development, accompanied by Hon. Philip N. Brownstein, Assistant Sec- retary for Mortgage Credit and Federal Housing Commissioner - - - - - 302 Willett, Edward R., chairman, Consumers' Council of the Commonw~alth of Massntchusetts 563 Wirtz, Hon. W. Willard, Secretary, Department of Labor, accompanied by Hon. Esther Peterson, Assistant Secretary for Labor Standards - - 734 Wolff, Hoh. Lester L., a Representative in Congress from the Third Congres~ional 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-Leaders 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 excluded 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 of 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," HTJD 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 DeShazor, Ashley 1).: 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 lion. Joseph W. Barr, Under Secretary of thd Treasuri~ - - - - - ~ 96 Keeney, Euger~e A.: Letter to Chairman Sullivan enclosing table showing six methods of computing 1~-percent monthly service charges - - - - 523 Kimball, George H.: Sample bi~ling statement of Kimball's Store showing charge for credit~ 674 Statement of National Retail Merchants Association supporting the exemptlon 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 revolvingcreditbillingmethods~ 559 Comments on proposed language revision of Richard L. D. Morse coq- cerning disclosure of annual percentage rate on open end credit plans -- 577 Consumets Union exhibit-Service charges and interest rates on a pureha~e of $100-Sears, Roebuck, Montgomery Ward, and J. C. Penney 562 Meade, Robert L.: Comparison between Massachusetts truth-in-credit laws and 1~.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 1~ percent per month is the same as 18 percent per year and if hR. 11601 allo~~rs sufficient leeway to Federal Reserve Board to issue regulations Qn disclosure of differences in identical annual rates - 543 MeEwen, Rev. Robert J., S.J.: Supplementary statement on credit life i~- surance 408 Newman, Satah: S. Klein billing card 682 Rhodes, F. i\Iarion: 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 Lu~ile Ketchum, extension specialist in home management, Michigan St~te University 471 Sullivan, Hon. Leonor K.: Article pertaining to speculation in futures market 151 Consumer Affairs Subcommittee analysis of American Retail Fed~ra- tion submission: Appendix A.-An Actual Customer Aecount~ - 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: Atherican 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 - - - - - - - 881 Barber, Stanley R., president, Independent Bankers Association of America, August 29, 1967 -. - - - - - 802 Berg, C. R., managing director, New York Produce Exchainge, August 11, 1967 651 Blake, William Henry, executive vice president, International Consumer Credit Association, August 18, 1967 860 Bliss, George L., president, Council of Mutual Savings Institu- tions 889 PAGENO="0007" CONTENTS VII Sullivan, lion, 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 11.11. 11601 858 Greek, Clifford P., director, Washington office, American Book Publishers Council, Inc., and American Textbook Publishers Institute 887 Harris, Everett B., president, Chicago Mercantile Exchange - - - 658 1-laugen, 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 HR. 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 release 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 86 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&LoanLeague 852 Watts, Liewellyn, 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.: Appendix £-Margin requirements in commodity futures transac- 1~ge tions 615 Prepared statement of the Kansas City Board of Trade 614 Trowbridge, Hoi~i. Alexander B.: Letter to Chairman Sullivan regarding proper agency to administer advertising provisions of HR. 11601 268 Walker, Charis E.: Response of ABA to question of Mr. Bingham on credit life insur- ance 409 Supplementary comments and recommendations of the American Bankers Association 352 Watts, Llewellyn, Jr.: Prepared statement of the New York Mercantile Exchange 618 Willett, Edward R.: Advertisement of the Provident Institution for Savings showing monthly payments and interest rates for loans of various amounts and repayment periods 56i 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 fronft Eugene B. Sydnor, Jr., president, Southern Department Stores, ]~nc., 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 i 897 Federal Home Loan Bank Board ~ 903 Federal Reserve Board 1 895 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, Iii., and to Hon. John S. Boyle, chief judge of the Circuit Court of Cook County, Ill., enclosing a study of credit litigation in the Circu~it Court of Cook County - 1133 Barr, Hon. Joseph W.: Definitions of terms used in Under Secretary Barr's statement 910 Department of Defense table for computing approximate annual per- centage rate for level monthly payment plans (Opposite page 910) Examples illustrating the applicability 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, Coi4rt Suits With Loan Companies Second," article from the Chattanooga Times, October 2,1960 ~ 974 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, Hon. Jonathan B.: "Senate Unit Studying New York Banks' Allegedly Excessive Lean Insurance 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, Vern: "Wage Garnishment in California: A Study and Rec- ommendations," article by George Brunn, From the California Law Re- ~ge view 1093 Douglas, Hon. Paul H.: Classified ads from several newspapers, not showing information that would be required by H. R. 11601 928 McEwen, Rev. Robert J., S.J.: "Economic Issues in State Regulation of Consumer Credit," article by Rev. Robert J. McEwen, 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 Brathwaite, 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: iluber, 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. Doiwig, 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 1021 "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 ii, 1964 1075 Statement by Mrs. Esther Peterson, Special Assistant to the President for Consumer Affairs 1070 Suggested amendments to title II of ll.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" CONTENTS Mouse, Richard L. D.-Continued "Thirty-six Percent Too Much? Too Little?" article from the Kansas ~age Consumer Credit Journal, summer 1967 1079 "Truth in Lending," pamphlet prepared by Richard L. D. Morse for the Council on Consumer Information 1080 Multer, Hon. Abraham J.: "The Big Hole in Truth-in-Lending," article from Consumer Reports magazine, September 1967 1146 Whitehurst, Elmote: "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," artic]e 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 (Conference held in New York City by Congressmen Jonathan B. Bingham and Seymour Halpern, members of the Subcommittee on Consumer Affairs) STATEME NTS Abrams, Robert, assemblyman, 81st District of New York 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, Morri& D., Jr., chairman of the board, Bowery Savings Bank - 1183 Dubrow, Mrs. E~elyn, ILGWU 1164 Finestone, Leona, director, Chelsea Conservation Project, Hudson Guild. - 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 B., 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, Fred, Association of Commercial and Professional Attorneys 1207 Panarello, Edward, representative of District 20, Retail Clerks Union 1200 Ross, David, raajority leader, New York City Council 1180 Rube!, Frank, eXecutive secretary and general counsel, New York State Credit Union 1201 Rubien, Gere!, 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, Drug and Hospital Employees Union, RWDSU, accompanied by several members of his union 1488 Watts, Robert ~L, executive manager, Installment Credit Division, New York State Bankers Association 1192 PAGENO="0011" CONSUMER CREDIT PROTECTION ACT TUESDAY, AUGUST 15, 1967 HoUsE o~ REPRESENTATIVES, SUBCOMMITTEE ON CONSUMER AFFAIRS OF THE COMMITTEE ON BANKING AND CURRENCY, Washington, D.C. The subcommittee met, pursuant to recess, at 9 :35 a.m. in room 2128, Rayburn House Office Building, Hon. Leonor K. Sullivan (chairman of the subcommittee) presiding. Present: Representatives Sullivan, Gonzalez, Minish, Annunzio, Bingham, Dwyer, Halpern, Wylie, and Williams. Mrs. SULLIVAN. The Subcommittee on Consumer Affairs will come to order. We have set our hearing forward a half hour this morning in order to accommodate Mr. Louis Rothschild, executive director of the Mens- wear Retailers of America. Mr. Rothschild was to have testified yes- terday morning, but by the time we had reached him, I was the only member `of the st~bcommittee still in attendance because the House had gone into `session at noon and the other members had to leave. I was perfectly willing to stay yeste~day morning into the lunch hour to hear Mr. Rothschild but I did not think it was fair to him to have only one member present to hear his `testimony, so I gave him the choice of testifying then or coming in `at this hour this morning. We have been working very hard over the past 10 days on this legis- lation with morning and afternoon sessions, and it is a real sacrifice for the members to come this early in the morning when there is so much to do in our own offices. We will now hear you, Mr. Rothschild, with the understanding th'at shortly before 10 o'clock we will have to turn to the witnesses who have come from out of town for the sched- uled hearing this morning at 10 o'clock on section 207 of H.R.. 11601 dealing with commodity futures. STAT~MENT OP LOUIS ROTHSCHiLD, EXECUTTV~ DIRECTOR, MENSWEAR RETAILERS OP AMERICA Mr. ROTHSCHILD. Thank you, Madam Chairman. I am extremely appreciative to you and the other members of the committee to take time out of your busy schedule `to be here this morning. I am Louis Rothschild, executive director of Menswear Retailers of America-for over 50 years the nationally recognized trade asso- ciation of men's and boys' wear retailers with over 3,300 members in all parts of the Nation. Our industry is typical of small retailing con- stituting an important part of our economy to which Congress and the administration has so often pledged its support. We are acutely 593 PAGENO="0012" 594 CONSUMER CREDIT PROTECTION ACT aware of the ~lifficult problems now being faced by small business in its continual battle for survival and growth. The last Census Bureau showed that 3,000 small men's wear stores disappeared from the eco- nomic picture in the past 5 years preceding the 1963 business census. To a substantial degree, we feel that we appear here today not only as the spokesman for men's wear retailers, but for all small retailing. Madam Chairman and gentlemen of the committee, my presenta- tion will be necessarily blunt, possibly untactful, possibly reactipnary in the eyes of many-but definitely sincere. May I assure th~ com- mittee and the Congress that our effort to get back to fundamentals are made with the highest regard for the integrity and ability of the fine individuals who are serving our Nation in the important adminis- trative and l~gislative positions. Our association. has repeatedly con- firmed by our resolutions committee, by our board of directors and by our membership at annual meetings our opposition to unwarranted Federal controls. This was last recorded in a formal resolution adopted at our convention in Dallas on February 18, 1966, which read: The Menswear Retailers of America is unalterably opposed to the e~tension of the onerous burdens imposed upon the retailers by the continued expai~sion of Government regulations and controls on purely local retail businesses. We re- iterate our continued opposition to legislative proposals . . . which would establish unnecessary and unrealistic controls on credit sales. In the Senate hearingsi and the hearings before this subcommittee, we have been seriously distressed as the representatives of large, mam- moth, interstate retailing have voiced their approval of Federal con- trol of credit sales. There is only one conclusion to reach: these mass merchandisers who fear the adoption of more stringent and varied legislation in the States-where piimary jurisdiction should exist- are sacrificing small, independent retailers in favoring the pr~nciples involved in the sweeping legislation now being considered by this subcommittee. It is our firm opinion that these voices of large re- tailers are selling the small retailers down the river for their own protection ~nd intere~t. H.IR. 11601 is not a proposal to regulate economic stability and cur- rency and thoneys of this country but is a sweeping effort to regulate and control the business morals of this country. This is not a truth- in-credit bill-it is a business control measure. I respectfully submit that the present proposal is not within the jurisdiction of t1~is sub- committee but is more properly within the jurisdiction of other com- mittees of the Congress charged with regulation of commerce within the jurisdiction of the Constitution of the United States. The provi- sion included in H.R. 11601 regulating the advertising of credit, I respectfully submit, is proof positive of this point of argument. The question as to whether this committee has jurisdiction in garnishment would app~ar to me, as a longtime student of government, to he more properly within the jurisdiction of the Committee on the Ji~diciary, which has charge of the bankruptcy laws and legislation pertaining to it. It is my sincere recommendation to this committee as an experienced trade association executive as well as an attorney that this committee obtain studied legal opinion as to the constitutionality of the proposals now being considered. PAGENO="0013" CONSUMER CREDIT PROTECTION ACT 595 Following are the basic points surrounding the constitutional question: First, the proposals are of doubtful constitutionality, in my opinion, because they will attempt to regulate purely local, intrastate commerce. The individual dealings between a customer and retailer in Wichita, Kans., are hardly within the province of the Federal Congress. It is as individual as the price of the garment, the fit of the garment, and the manner in which it is delivered to the customer. A second point of doubtful legality is that the Federal Government is encroaching upon the basic right of freedom of contract between two individuals neither of whom are engaged in interstate commerce. It was my privilege to hear Mr. Margolius yesterday, and on page 8 of his statement: But the question before this country today is whether we should permit laws which enable unscrupulous sellers to take advantage of innocence and trust. In other words, he favors that the Congress veto the legislation of the, 50 States-the legislation which has been adopted in those States to regulate the business in intrastate commerce in those States. If the proposed legislation is amended to apply only to those mass merchandisers, those giant chains of department stores, to the great mail-order houses, all of whom are unquestionably in interstate com- merce and whose spokesmen have told this subcommittee that they basically favor Federal Government control of their credit trans- actions-then, of course, independent, local retailers could have no objection to the proposed congressional action. But, to subject hundreds of thousands of small retailers who are not in interstate commerce to Federal Government regulation and con- trol; to require them to have the same technical know-how in comply- ing with the law, adds an unholy burden to their day-to-day operations. This subcommittee must be aware that the small business in this country is fighting a losing battle for survival, despite the efforts of the Congress and the administration which are intended to help. This proposed legislation adds still another barrier to survival for the small retailer, The small retailer has been forced to go into credit selling in order to compete with the large, mass distributors, lie is not in the credit business by choice. Finally, there has been substantial testimony before this subcom- mittee colicerning the accepted fact that the unfortunate poor in this country are particularly victimized by unscrupulous businesses, includ- ing retailing, and, particularly, in the credit field. We know that in many cases these charges are true. We are familiar with the "dollar down and dollar when I catch you" merchants operating in poorer sections of metropolitan cities. This deplorable situation-and we heard the horror stories from Mr. Margolius yesterday. I, personally, in my distant youth, ran a better business bureau for 1~ years and know considerably of these so-called horror stories-often recited before the Congress by those favoring the proposed legislation, adds weight to our argument that this legislation has the primary purpose of promoting economic sta- bility and regulating the currency and moneys of this Nation, but is a direct legislative attempt to regulate business integrity and practices. PAGENO="0014" 596 CONSUMER CREDIT PROTECTION ACT TJnfortunal~ely, those who favor this legislation to correct the evil of unscrupulous operators of this type `face certain disappointment. May I intorpose to say that many of these cases that were heard yesterday involve fraud_violation of the present law. Fraudulent operators will i~iolate any law_thieves will always be thieves. The way to correct it is to enforce the present law, and there are many facilities existing for the correction and prosecution. of fraud. The committee is aware of the historic fact that the law has never defined "fraud" because the capacity of the human mind is such that those who w~nt to perpetuate fraud find ways to evade all statutes. The questionable credit clothing stores operating in the slums of America and feeding off the poor `and the illiterate normally do not make a charge for credit. In many instances, they blatantly advertise "no charge for credit." They take advantage of the poor in the ex- orbitant charges made for the merchandise. A legitimate store `will normally `sell a suit costing the merchant $50 for about $85. This store, extending credit beyond a 90-day period, normally levies a service charge of 1½ percent on the thipaid balance. The questionable credit operator will buy a much inferior suit for $315 `and `will sell it on the "dollar dow~i and dollar a week" basis for $100 or higher-no charge for credit. The proposals now under consideration will not correct this existing evil but rather w'ill promote its growth. As a matter of fact, if this legislation passes, many legitimate stores will discontinue service charges for credit. They `will find the provi- sions too burdensome and too difficult to comply with. The easy road is to eliminate a charge for credit. The expense of credit will be hid- den in the markup on merchandise. This means' the cash, buyer will be penalized and will be paying for the credit extended to the credit buyer. The cost of credit will be driven underground. For these reasons-because of the fundamentals of Americanism and respect for our great Nation's constitutional principles-I sin- cerely feel it is my duty as a spokesman for Menswear Retailers of America to `oppose the proposed legislation. We realize our arguments differ sharply from the many leaders of American big business engaged in interstate commerce who have preceded us to the witness stand. The explanation is simple. The problems of survival for small, independent, local business differ sharply from their large counterparts. T'hank you very much, Madam Chairman and members of the committee. Mrs. SULLIVAN. Thank you, Mr. Rothschild. We are ~lad to have your statement, for we believe all sides should be heard ~n a matter of this kind. However, I do not agree that this committee has neither the jurisdiction nor the competence to look into these issues. You say that most of your members make a monthly service charge of only 11/2 percent, usually, for credit beyond 90 days. Does that mean-as I hope it does-~-that most of them make no charge at all for the 90-day period, considering that a cash transaction? Mr. RoTHsCHILD. That's correct, in most cases. There is no uniform- ity. Approximately, among our membership today, 70 percent of the sales are ipade on credit. Of that 70 percent, 50 percent is made on the PAGENO="0015" CONSUMER CREDIT PROTECTION ACT 597 basis of a 30-day charge account which sometimes lapses into 90 days with no charge. Then there are 3-month charge accounts, 6-month charge accounts, 1-year credit terms on which there are service charges. A few of our stores are in revolving credit. Mrs. SULLIVAN. Would it not solve some of your problems in com- peting with the unscrupulous credit outfits if we eliminated garnish- ment as a crutch for firms which oversell on credit to bad credit risks, so that they cannot use the courts as weekly or monthly collection agencies? We are just as anxious as you are to end the misuse of credit by both the seller and the buyer. Mr. ROTHSCHILD. The easy answer, Madam Chairman, and may I say that while I do not think this committee has jurisdiction, I did not question the competence of the members of the committee. The easy answer to your last question is "Yes." If we are going to stand on principle, what right has the Federal Government to regulate State laws of the 50 States on the matter of garnishment which is a local matter within the jurisdiction only of the States? I may be awfully reactionary in this modern day and age in making such a firm statement. But if I am going to appear here on principle, on the basic principle against the growing encroachment of the Federal Government on small local business, I have got to appear all the way. Mrs. SULLIvAN. May I refer you to the material I placed in the Congressional Record last night containing the testimony given to us last Friday morning by four referees in bankruptcy from all across the country. They reported to us on the basis of some 54 years of experience in personal bankruptcies in the Federal courts. I wish you would read that testimony. Mr. ROTHSCHILD. I read the newspaper report. I will be pleased to read that testimony. I do not think it changes the fundamental. The fundamental is that credit and collection laws in the State of Missouri are within the jurisdiction of the legislature of the State of Missouri and not within the jurisdiction of the Federal Government. Mrs. SULLIVAN. My only comment on that, Mr. Rothschild, is that we are no longer a stationary people. We are a mobile people and we move from place to place, and there should be some uniformity. Mr. ROTHSCHILD. Let us then amend the Constitution and change our form of government, which we are doing by indirection. Mrs. SULLIVAN. We have about 2 minutes remaining for this period. Do you, Mrs. Dwyer, or any of the other members have any questions for Mr. Rothschild? Mr. Gonzalez? Mr. GONZALEZ. I have one question. You `do have the Wool Products Labeling Act, the Flammable Products Act, the Fur Products Label- ing Act and the Textile Fiber Products Identification Act which in a way regulates your constituents in having to identify and give infor- mation to the consumer as to the product, its quality, and its identi- fication. Mr. ROTHSCHILD. That's correct, Mr. Gonzalez. Those laws specifi- cally read, affecting interstate commerce. The Federal Trade Commis- sion Act itself is different. Mr. GONZALEZ. To be effective they would have to come under some purview of Federal jurisdiction somewhere-constitutional or statu- tory authority. PAGENO="0016" 598 CONSUMER CREDIT PROTECTION ACT Mr. ROTHSCHILD. That's correct. Mr. GONZALEZ. Even if this proposed act would have to come under that general definition. Mr. ROTHSCHILD. We have all forgotten about the old Seliecter decision, NRA, but I am not sufficiently acquainted with the techni- cality of the language, but if the language in this bill is such that it construes a credit contract as affecting interstate commerce, I think it opens the door for litigation in the future. But it does provide an excuse for coi~stitutionality of the bill. However, the fact remains that you are interfering in the rights of local people. (Mr. Rothschild subsequently submitted the following letter per- taining to Mr. Gonzalez line of questioning:) MENSWEAR RETAILERS OF AMERICA, Washington, D.C., August 17, 1967. Hon. HENRY B. GONZALEZ, house of Representatives, Washington, D.C. M~ DEAr~ Ma. GONZALEZ: We deeply appreciate the interest you have demon- strated in the hearings on the Truth and Lending legislation and, particularly, concerning the problems of the small independent merchants who comprise a large portion Of this Association. During the cOurse of my testimony on Tuesday morning, August 15th, you directed a very intelligent question to me concerning the point we have raised over Federal controls on purely intrastate businesses. In this question, you cited as an example the regulations contained in the Wool Products Labeling Act, the Flammable Products Act, the Fur Products Labeling Act and the Textile Fiber Identification Act as being an existing example of Federal regulation of our constituents. While I attempted to answer your question for the hearing record during my appearance and referred to the distinguishing features of the Federal Trade Commission Act, it seems to me, on further reflection, a more important differ- ence should have been cited by me in response to your question. The various forms of regulations noted in your question place the primary compliance responsibility with the manufacturer of the product who, in most cases, is engaged in interstate commerce. There is not a practical day to day compliance problem on the part of small merchants. We would be delighted if you would care to insert this letter as an appendix to our statement as it appears in the printed hearings. Respectfully, Louis ROTHSCHILD, Ewecutive Director. Mr. WILLIAMS. Mr. Rothschild, I want to compliment you on an excellent presentation, and you have been asked4 the question, if garnishments were removed, would that not take something away from the small unscrupulous businessman? My question is, if you remove garnishments as a tool of collection, what protection is the small busin~ssman going to have against the person who is over- extending their credit using perhaps the excuse that they are poor to buy more than they really should be buying? Mr. ROTHSCHILD. The creditor, in his legal efforts for collection today is handicapped. The small claims courts of this country are consumer-oriented today. I have had considerable experience in the picture and in my distant youth I practiced law and handled collec- tions and made some garnishments. It is a tool-a last-resort tool for the legitimate creditor to try to collect from the deadbeat debtor. Mr. WILLIAMS. Do you think this is a tool that the small business- man needs to have available to him in his effort to stay in business? PAGENO="0017" CONSUMER CREDIT PROTECTION ACT 599 Mr. RoniscmLD. I `think it is a proper legal instrument for the enforcement of a judgment. Mrs. SULLIVAN. Thank you, Mr. Rothschild. Mr. ROTHSCHILD. Thank you. SECTION 207.-COMMoDITY FUTURES MARGINS Mrs. SULLIVAN. I would now like to call to the witness table the representatives of the commodity exchanges interested in section 207 of IELR. 11601. Nearly all of our witnesses who have expressed any interest what- soever in section 207 of H.R. 11601 up to this point in our hearings on the Consumer Credit Protection Act have voiced either uncertainty or dismay about having this particular section in a bill dealing primarily with consumer credit and truth in lending. Some have said that if there is any need to regulate margins in commodity futures trading, it should be done in some other bill-not on the truth-in-lending meas- ure, regardless of how broad that measure might be. Others have testified-including the Vice Chairman of the Federal Reserve Board which would have the regulatory power over margins under section 207-that they just don't know anything about the sub- ject. Perhaps, they said, the Department of Agriculture should regu- late margins on commodity `futures-including, presumably, on fu- tures trading in zinc, rubber, copper, silver, platinum, and even bags of silver dollars, along with those agricultural `commodities like pork bellies, live cattle, coffee, and sugar which are now traded in futures contracts without any form of regulation by any agency of the Federal Government. It is true that the Department of Agriculture's Commodity Ex- change Authority regulates trading in a number of agricultural com- modity futures, but it does not have any jurisdiction over margins set by the various exchanges. It has requested such authority from time to time-but not this year, when a new administration bill was sent up to amend the Commodity Exchange Act. It has reported that the ques- tion of margins is still being studied, following `the receipt of a still- secret economic report on the subject by a private consulting firm. The Committee on Banking and Currency has no jurisdiction over the Commodity Exchange Act, and seeks none. We are not attempting to decide what agricultural commodities now traded on futures ex- changes but not subject to the Commodity Exchange Act should be placed under that act-although I, as an individual Member of Con- gress, have introduced bills on that subject for the past 13 years, with only one hearing during all of that time-and no action. But that does not directly concern this committee or the Consumer Affairs Subcommittee. We are, however, interested in-and responsible for-legislation dealing with gyrating prices of consumer products and essential de- fense materials. The Defense Production Act comes within the purview of the Committee on Banking and Currency, and this act originally contained authority for price regulation and for `standby powers in the Federal Reserve Board over consumer `and real estate credit. And, of course, the Federal Reserve Act comes under the Banking Committee. In a comprehensive piece of legislation dealing with all aspects of credit, including defense emergency standby powers over consumer 83-340-67-pt. 2-2 PAGENO="0018" 600 CONSUMER CREDIT PROTECTION ACT credit, some of us sponsoring H.R. 11601 felt that it was time-and long past time-that Congress took a critical look also at futures trading practices on very low margin which lead to great gyrations in prices of foodstuffs and essential defense materials. I do not consider bags of 1,000 silver dollars as essential defense articles, although silver, of course, certainly is. So are the other metals and nonagricultural com- modities traded on futures markets, and so, of course, are those raw and partly processed agricultural commodities also traded in futures contracts but not now subject to any futures trading regulation. Hence the inclusion of section 207 in this bill. We want to know why this large s~gment of our economy-unlike the stock exchanges-is outside of the scope of investor protection and economic stabilization powers. If the Federal Reserve doesn't know enough about futures trading even to hazard a guess as to how to regulate margins, should the job' go to the SEC? Or-as the witnesses today will undoubtedly maintain-should this type of trading continue to go on in rubber, zinc, lead, copper, platinum, silver, tin, mercury, `and so on, with no Govern- ment agency looking over the shoulders of speculators or manipulators, even though the effects of their operation may determine the prices paid by the Defense Department for equipment or the prices paid `by consumers for essential items? And on the agricultural commodities-whether regulated or not, and many `of them are not regulated-should the relative ease with which contracts can be purchased or sold on little or no cash be of n'o concern to the Government either? This subcommittee has had occasion in previ'ous years to' look into spirals in two important consumer items-~coffee and sugar. In both instances, frantic speculative activity in unregulated futures trading set off a spir~il of consumer prices. Ironically, it was trading primarily in foreign sugar futures-sugar which would never come to the United States-which pulled up domestic sugar prices in 1963 to the highest level in many, many years. In 1954, a deliberate hoax about a Brazilian coffee shortage `provided the atmosphere fo'r a rigged futures market, and sent the price of a pound of coffee here in the United States to $1.32. That is the backdrop on which we have set up this hearing this morning. We want to know why there is something so special and un usual and mysterious about futures trading that the public has no right to set limits on gambling with borrowed money in this area, even though the public must pay the consequences of speculative excesses. We invited a representative group o'f the major exchanges-not just in grains and other agricultural commodities, but `in the metals and minerals-to send representatives here this morning, and most of them quickly accepted. Other exchanges also asked to be included, and we invited them, too. Several have since had a change of heart and the group here this morning represents the hardy survivors who have agreed not only to' tell us why we should not enact section 207 but also to answer our questions and let us learn something about their opera- tions. We are glad to have all of you. Before calling the witnesses, I want to insert in the record a most unusual document in the light of most of the testimony we will `receive this morning. It is a letter addressed to me by the president of an ex- PAGENO="0019" CONSUMER CREDIT PROTECTION ACT 601. change which completely and enthusiastically endorses and supports that section of H.R. 11601 which relates to it. It goes all the way in favor of our bill-or rather of one section. It is from Mr. Keith Funston, president of the New York Stock Exchange, and he completely endorses section 203, and I am delighted that this exchange, at least, likes something in H.R. 11601. Section 203, I might add, is the one which exempts "transactions in securities or commodities in accounts by a broker-dealer registered with the Securi- ties and Exchange Commission" from the annual percentage rate credit disclosure requirements of H.R. 11601. A similar provision was in- cluded in 5. 5 as it passed the Senate, and is in H.R, 11602, also. So, on that point, there is no controversy. Mr. Funston's letter will be inserted at this point. (The letter referred to follows:) Nnw YORK STOCK EXCHANGE, New York, N.Y., August 9, 1967. Hon. LEONOR K. SULLIVAN, Chairman, ~S'ubcommittee on Consumer Affairs, House Committee on Banking and Currency, Rayburn House Office Building, Washington, D.C. DEAR CHAIRMAN SULLIVAN: As the Sub-Committee on Consumer Affairs begins its consideration of S. 5, HR 11601 and HR 11602, I would like to take this means to explain why the Exchange believes the provision in Section 8 of S. 5 and HR 11602 and Section 203 of HR 11601 which exempts "transactions in securities or commodities in accounts by a broker-dealer registered with the Securities and Exchange Commission" is well founded. The securities industry is one of the most regulated businesses in the United States. The most significant aspect of securities regulation, however, is the self- regulatory influence exerted by groups within the industry itself, such as the stock exchanges and the National Association of Securities Dealers, Inc. For many years, this system of self-regulation, supplemented by government oversight, has worked to keep the securities industry acutely aware of the interests of investors. Being mindful of the Exchange's self-regulatory responsibility in this area of margin account interest rates, the Board of Governors addressed itself to the sub- ject in July, 1966. As the result of Board action taken at that time, the staff was directed to undertake an educational program designed to encourage member or- ganizations carrying margin accounts to voluntarily disclose to customers the interest rates charged on debit balances. A follow-up survey made in September, 1966 indicated that 67% of member organizations carrying margin accounts showed or intended to show interest rates. After providing a period of time for member organizations to begin disclosing margin account interest rates on a voluntary basis, the Board of Governors, at its July, 1967 Policy Meeting, adopted an amendment to Exchange Rules making disclosure of interest rates mandatory. This proposal was, of course, submitted to the Securities and Exchange Commission before being adopted by the Board. The text of the amendment together with an explanation of its application are included in the enclosed circular which has been sent to all members and member organizations of the Exchange. The affirmative steps taken by the Exchange's Board of Governors in this in- stance provides an excellent example of how the self-regulatory system can and does fulfill its responsibility to the investing public and the securities industry. This action obviates the need for the Congress to direct such disclosure. Further, it demonstrates that the exemption in S.5, HR 11601 and HR 11602 is fully justi- fied and should be retained. Yours very truly, G. KEITH FUNSTON, President. Mrs. SULLIVAN. Now, to go back to the arena of controversy, we will ask our witnesses this morning to group themselves around the table, May I suggest that the representatives of each exchange who are present take turns in identifying themselves for the official reporter and for us, list the name of the exchange, the commodities traded PAGENO="0020" 602 CONSUMER CREDIT PROTECTION ACT thereon, the volume of trading a year in each item, the average value of a contract in dollars, and also in tons, pounds, ounces, or whatever the trading unit is, what the current margin is in percentage of cost of a contract, what that represents in dollars, and then we will go on from there and you can make your statements. I am sure there will be some repetition in the statements which perhaps can be overcome by telling us about the unique differences which may e~tist among the products traded on the various exchanges. First, however, if you will identify your exchange and give the illformation I requested; that is-and I'll read this more slowly-the commodities traded on your exchange, the volume of trading a year in each item, the average value of a contract in dollars and the size or quantity of the trading unit, what t~he current margin is in percentage of cost of a contract and what that represents in dollars. Let us start with the chairman of the New York Mercantile Exchange, Mr. Llewel- lyn Watts, Jr., whose statement, I believe, was the first to arrive. Will you tell us, Mr. Watts, what commodities are handled on your ex- change and give the information I requested about them. Mr. WnIAI4Ms.~ Could I suggest also that it might be helpful to the committee to know to what extent credit was involved in these trans- actions? Mrs. SULLIVAN. Credit is, of course, margin. Mr. WILLIAMs. There may be some disagreement on that point. Mrs. SULLIVAN. Would the first gentleman to my left identify him- self and then we will continue from left to right in the order in which you are seated. STATEMENT'S OF ROGER W. GRAY, PROFESSOR, STANFORD UNI- VERSITY, CALIFORNIA; WILLIS C. THEIS, PRESIDENT, BOARD OF TRADE OF KANSAS CITY, MO.; WILLIAM P. BROOKS, ON BE- HALF OF THE NATIONAL GRAIN TRADE COUNCIL; MAURICE MOUND; ESQ., REIN, MOUND & COTTON, NEW YORK, N.Y.; ~1. S. CHARTRAND, EXECUTIVE VICE PRESIDENT', KANSAS CITY BOARD OP TRADE; P. MARION RHODES, PRESIDENT, NEW YORK COTTON EXCHANGE; LLEWELLYN WATTS~ SR., CHAIRMAN OF THE BOARD OF THE NEW YORK MERCANTILE EXCHANGE; AND ALEX C. CALDWELL, ADMINISTRATOR, COMMODITY EXCHANGE AUTHORITY, U.S. DEPARTMENT OF AGRICULTURE Mr. MOUND. My name is Maurice Mound. I am counsel for the New York Cotton Exchange and the New York Mercantile Exchange. I am here to assist my clients. I am a member of the firm of Mound, Rein &~ Cotton, New York. Mrs. SULLIVAN. The next gentleman? Mr. WATTS. My name is Llewellyn Watts, Jr. I am chairman of the Board of the New York Mercantile Exchange. Mr. RHODES. I am F. Marion Rhodes, president of the New York Cotton Exchange. Mr. GRAY. I am Prof. Roger W. Gray, Stanford University. I am appearing oiii behalf of the Grain & Feed Dealers National Association,, PAGENO="0021" CONSUMER CREDIT PROTECTION ACT 603 which is not an exchange but whose members are members of the numerous exchanges. Mr. THEI5. My name is Willis C. Theis. I am president of the Board of Trade of Kansas City, Mo. Mr. CHARTRAND. My name is J. S. Chartrand, and I am executive vice president of the Kansas City Board of Trade. Mr. BRooKs. I am William F. Brooks. I am president and general counsel of the National Grain Trade Council. We are all users of futures markets. Mrs. SULLIVAN. Now, we would like the information that I out- lined. Please give us the commodities, value of the contracts, and so on, traded on your exchanges. Mr. Watts, would you begin? Mr. WATTS. I have asked if I would yield to Professor Gray because of limitation of time. Mrs. SULLIVAN. Before Mr. Gray begins his testimony could we get from you, Mr. Watts, the commodities ti~aded on your exchange? Mr. WATTS. Potatoes and platinum. Potatoes are regulated; platinum is not. Mrs. SULLIVAN. The volume of trading last year in each of these items? Mr. WATTS. Approximately a half million contracts of potatoes, and 1,200 to 1,500 contracts of platinum. I haven't the figures with me. Mrs. SULLIVAN. The average value of the contract in dollars and the size or quantity of the trading unit? Mr. WATTS. Potatoes will average $1,500 a contract or less, and the average margin on money to be placed for the protection of the clear- inghouse or clearning member is approximately 15 to 18 percent. Mrs. SULLIVAN. Is that unusual? Mr. WATTS. What? Mrs. SULLIVAN. Is that 15 or 18 percent unusual, or is that a normal percent of margin? Mr. WATTS. It is with us. We also have an escalating clause; as the price goes higher the margin becomes higher. Mrs. `SULLIVAN. The percentage of margin becomes higher, or the amount? Mr. WATTS. The `amount goes higher. You see, these are futures con- tracts, not cash markets-when the `market reaches a cash basis, then we ask for $150 more each contra~t-whatever it is-if the margin is up then to around $300 or $350 we ask for another $150 to insure that the contracts will be properly carried out. Mrs. SULLIVAN. You mentioned that the contract in dollars for potatoes runs to about $1,500? Mr. WATTS. That's right. Mrs. SULLIVAN. What is the size or quantity of the unit? Mr. WATTS. 50,000 pounds. Mrs. SULLIVAN. And in platinum? Mr. WATTS. Fifty ounces. Mrs. SULLIVAN. And the value? Mr. WATTS. The value-it is pretty high right now-SO ounces- I don't trade in platinum much. Mrs. SULLIVAN. You can supply that for us. PAGENO="0022" 604 CONSTJMER CREDIT PROTECTION ACT (The information requested follows:) 1966 Platinum volume 1,033 50-ounce contracts. Minimum margin $300, long or short. Value range $5,000~-$G,5O0. Limit permitted daily fluctuation $5 per ounce or $250 per contract. Minimum price change 5 cents per ounce or $2.50 per contract. Mrs. SULLIvAN. Mr. Rhodes, can you give us those answers for your commodities? Mr. RHODES. New York Cotton Exchange trades in cotton futures. The cotton futures market has been almost destroyed in the last 15 or 20 years by the operations of the Commodity Credit Corpora'tion in the Department of Agriculture. As you probably know, the Depart- ment of Agriculture has programs under which they make loans on raw cotton, they take over the loans at the end of the year, and they have it in their own inventory, list it in a catalog, and offer it for sale at a fixed price. Recently they have been announcing their price for as much as 2 years in advance. Everybody in this country and in foreign countries knows the price at which they can purchase CCC inventory stot~ks of cotton. When the market is completely dominated by the Gover~ment there is no need or a place for a futures market. So our market in the last 3 years has been almost defunct. As you probably know, the New Orleans Cotton Exchange closed up completely and liquidated its assets as a result of this Govern- ment program. Now it looks like the worm has turned. Cotton prices now have gone above the loan level established by the Government and cotton trading is beginning again. In March we opened up a new contract based on Middling 1i/16~inch staple cotton. This con- tract is begii~ning to move quite well during the last 6 to 8 weeks. Now after mirny years of inactivity, we are at a position where our market is needed again by the textile mills and by the merchants of this country. We hate to see anything done that would destroy the start that we have made. Specifically to your questions, a contract in cotton is 100 bales- roughly today's price of cotton is about 20 cents, so that the value of a contract would be around $10,000. Both the buyer and seller of a futures contract are required to put up margin, so both sides would put up $500 margin to guarantee their contract. The volume of sales in the last year was about 2,000 cotton contracts. Mrs. Su~IvAN. Does that margin of $500 vary, or is it a flat $500, or a percentage which comes out to $500 on a $10,000 contract? Mr. RHODES. $500 for some time. The board of directors has the power to change it any time it has reason to change it. But it is our be- lief that margins should be as low as it is possible for them to be to promote the maximum amount of trading, because that makes our market more fluid and more liquid and of more use to the public. Mrs. SULLIvAN. I am sorry that the New York Coffee and Sugar Ex- change representatives are not here this morning. They have sent a statement. Back in 1963 they were before our subcommittee on sugar and in 1964 oi' coffee. We were also in New York to watch the bidding on this and sOme of the other exchanges, and then we did some investi- gative work on sugar futures. It was very enlightening. Mr. RHODES. I might add that I have been on both sides of the cotton market. I spent 27 years in the Department of Agriculture where I PAGENO="0023" CONSUMER CREDIT PROTECTION ACT 605 administered the Government's cotton program. I grow cotton myself out in Missouri and I am now on the futures market side of it. So I know from personal experience that a futures market has a very im- portant part to play, not only to the Missouri cotton farmer, the com- sumer of cotton, the merchant and, millowner. I do have a statement which I assume will be put in the record. But since I received your letter I thought it would be better to give one person ample time to explain the operations of a commodity market than to have me take more time. Mrs. SULLIVAN. Your prepared statements will be placed in the record infull. Mr. Theis, will you tell us about the commodities traded in Kansas City? Mr. THEI5. Madam Chairman, as stated, my name is Willis C. Theis, president of the Board of Trade of Kansas City, Mo.-4800 Main Street in Kansas City, Mo. We are now trading, actively trading in wheat, corn, grain sorghums, and feeder cattle. The volume of trade, if you would like to know the volume-do you want to know the volume of the contract or the total amount of trading during the year? Mrs. SULLIVAN. Total volume of trading in each contract, and then an approximation of the value of a contract, and the physical size of the contract in terms of tons or bushels or whatever. Mr. THEI5. I will just ramble on. The wheat, grain sorghum, and corn contracts are of a unit of 5,000 bushels or multiples thereof. The value of the contracts vary as to the level of price, but approxi- mately today the wheat contract, the 5,000 unit, is worth approxi- mately $7,500. The corn contract of the same size has an approximate value of $6,000. The milo grain sorghum contract has a value of ap- proximately $5,500. I have not mentioned the size of the feeder cattle contract, but it is one of 25,000 pounds and this unit today has a value of approximately $6,500. Now, as to the percent of the margin that is asked on all of these- I should back up here. As of last year, we do not have this year's record because the trading year has not been completed. But in the year 1966 we had a total volume in wheat of 929,292,000 bushels. In corn we had a volume of 30,900,000 bushels. Mrs. SULLIVAN. When you give us these totals can you tell us there how many contracts these represented for the year? Mr. THEI5. We will divide by 5,000, and let's say there are about 200,000 contracts of wheat. Let's call the milo about 600,000-that is the corn. About 6,000 contracts there and about 6,500 contracts in grain sorghums and actually 596 contracts in the feeder cattle last year. Now, as to the margins. They average approximately 5 percent of the value of the contract. This is true for all of the contracts, with the exception of the feeder cattle, and I would request that I be given the opportunity to furnish this to the committee on accurate records, because these prices do riot, stay with me on feeder cattle. Mrs. SULLTVAN. We will be happy to have you do that. PAGENO="0024" 606 CONSUMER CREDIT PROTECTION ACT Mrs. SULLIVAN. Mr. Chartrand-~oh, you are with Mr. Theis, and would have the same information. Mr. CHARTRAND. Except there is no credit extended. Margins are charged, req~iired-maintenance and initial margins are required, but no credit is extended. Mrs. SULLIVAN. Mr. Brooks? Mr. BRooKs. We don't do any trading. Our members do. Mrs. SULLIVAN. I am interested in the margin that is needed in order to buy and sell in the futures market because we found that, in the case of sugar, when an investigation was made under subpena-the brokers asked to be subpenaed so they could divulge their informa- tion without breaking confidence with their customers-that specu- lators who had never ever been in the sugar market before were coming into it in 1963 to try t~ make a fast dollar. For a few hundred dollars they could trade on futures contracts worth many thousands. Many of them came out well heeled, while others went broke. But because of the speculative fever involving so many people who had never been into this kind of trading before, the price was pushed up to the highest level in 40 years. Our reason for going into this in 1963 was the dou- bling of sugar prices. Users of sugar-the confectioners, the soft drink people,. and others-pleaded with the Congress to do something to help stabilize a commodity whose price was completely out of control. By the time we started our investigation, sugar had gone to something like 13.9 cents on the world market. Today if I recall the last figures I have seen it is something like 2 cents. Mr. THEI5. Madam Chairman, I would like to make one statement as to margins and percent that were mentioned to you and given to your committee. Please understand that those are minimum margins. As far as mar- gins are concerned on the Kansas City Board of Trade in their con- tracts they are governed by the board of directors and also looked over and scrutinized by the business conduct committee in the action of our members, and they are set at a minimum level as to the times. They do fluctuate and they have been known to fluctuate, and we have a com- plete schedule showing how they have fluctuated. This is the margin through the years. Mrs. SULLIVAN. I do not know about the other committee members, but I think most of us are fairly ignorant of how the futures market works on grains and other regulated commodities. The only experience we have had as a subcommittee have been, as I said, in coffee and sugar futures. Neither of those commodities are under any regulation at all. After the Federal Trade Commission investigated coffee prices at my request, I put in a bill to regulate coffee futures trading, as the FTC had recommended. In 1965, I added sugar to the bill because of what we had learned in our own study into the 1963 spiral. Then this year, based on what I learned as a member of the National Commission on Food Matketing in 1965 and 1966, I also included livestock and live- stock products. Now, if Dr. Gray will proceed with his statement, we will proceed from there. Mr. ~ Thank you, Madam Chairman, members of the corn- inittee. PAGENO="0025" CONSUMER CREDIT PROTECTION ACT 607 I am Roger Gray, a professor at Stanford University, where for the past 13 years my research and teaching have been concentrated in the area of commodity markets and prices. I have consulted with several commodity exchanges and members firms on commodity marketing problems, and testified before Congress on previous occasions on leg- islative proposals affecting commodity markets. Today I am appearing in behalf of the Grain and Feed Dealers National Association, a nationwide association of individual marketing and processing firms, most of which rely heavily upon commodity futures markets for hedg- ing and price determination. Section 207 of H.R. 11601 is evidently based upon a very widespread misconception. It reads in part that "the Board of Governors of the Federal Reserve System shall prescribe regulations governing the amount of credit that may be extended on any (futures) contract." The plain fact of the matter is that credit is not extended or main- tained on futures contracts. This being the case, one might simply say that section 207 is innocuous or meaningless, and let it go at that. I prefer to elaborate, however, because I think that I know what is in- tended in this section, I think that the misconception which it reflects needs to be cleared up, and I share with the sponsor of this section a concern that futures markets be properly understood and regulated. I believe that it is commonly accepted that this section intends to say that margin levels in commodity futures should be prescribed by the Board of Governors. I think further that it assumes that "margins" in commodity markets resemble "margins" in the securities markets, where in fact credit is extended and where the "margin" level governs the amount of such credit. This assumption is mistaken, however, not- withstanding the fact that it is commonly held. Let me then first explain why futures margin regulation is not credit regulation, then proceed to consider other aspects of futures margin regulation which are sug- gested in the other wording of section 207. When the Assistant Secretary of Agriculture, Mr. George Mehren, testified before the Domestic Marketing and Consumer Relations Sub- committee of the House Agriculture Committee on April 4, 1966, he said, "There is a difference between the purpose of margins in the se- curity and commodity markets." I agree emphatically with this state- ment; I should like to spell out briefly what the difference is. The pur- pose of what we call margin in the security markets is clearly stated in the Securities and Exchange A~t of 1934 under the heading Margin Requirements: "For the purpose of preventing the excessive use of credit for the purchase or carrying of securities, the Federal Reserve Board shall prescribe ruleis and regula:tions with respect to the amount of credit that may be initially extended and subsequently registered on a national securities exchange." Clearly, margin in this context refers to the required level of down payment on credit purchases of se- curities. In other words, the purchase of securities on margin is a credit transaction, entailing transfer of the right to use and enjoy capi- tal assets-common stocks-and also entailing the lending of funds. In contrast, the purchase or sale of a futures contract on margin is not a credit transaction. A futures contract entitles its owner to exer- cise a later option to receive or deliver commodities. If this option is later exercised, which it rarely is, then the right to use and enjoy the PAGENO="0026" 608 CONSUMER CREDIT PROTECTION ACT capital asset+-the commodity involved-is conveyed in a transaction requiring fUll immediate cash payment. The only capital asset in- volved is the commodity ~tse1f, which can only be owned and used after delivery oocijirs, at which time ownership is otherwise financed through otherwise established credit facilities, chiefly the banking system. Since no title is conveyed prior to delivery and no loan is extended, no credit can be involved in a futures transaction, hence the word "mar- gin" has an entirely different meaning in this context, and the pur~ pose of margin is different. The purpose of margins on futures transactions is to assure the transfer of funds from those who incur losses to those who profit from futures price movements. They are always established at levels in- tended to cover the prospective price change. These profits and losses must be exactly equal, as there can he no net gain or loss to all par- ticipants in~ futures trading-which there can be, and often is, to all owners of securities. Not only is there a short position opposite every long position in futures, as there is not in securities, but the short sale of a futures contract is exactly symmetrical with the purchase of a futures contract, which is also not true of stock transactions but is true of the purchase and sale of options to buy or sell securities, referred to as "puts" and "calls." Let me sum this up with an illustration. When I buy a $100 share of stock by depositing $70 margin with a commission firm, the com- mission firm loans me the other $30. I may receive dividends which manifest my use and enjoyment of the capital assets which I have pur- chased. But when 1 buy a corn futures contract entitling me to receive 5,000 bushels of corn next December by depositing $500 with a commission firm, neither that firm nor anyone else loans me any money. I have purchased no capital assets, hence I cannot receive `any earnings or other manifestations of the use and enjoyment of a capital asset. From this it is already clear `that futures margins are much different from security margins and that the purposes for which the Board of Governors controls the latter could be in no way served by vesting commodities futures margin control in the Board of Governors. It should also be noted that the relationship `between price and the current ea±ning capacity of the capital asset being priced cannot fluc- tuate over such a wide range, or be distorted over such a long interval, in futures as in the stock market. The price-earnings ratio of the stocks in the Dow Jones industrial average has ranged from 6.4 to 51.5 since 1938, indicative of how far stock prices can range from the true cur- rent earning capacity of the physical assets they represent. This fact in itself is hardly reassuring on the point of efficacy of stock margin controls, but the more salient fact is that this has not occurred and could not occur in commodity futures. Commodity futures prices can depart from the true expected earning capacity of the physical asset which they represent also, but this departure is necessarily brief and limited. Prices of commodity futures contracts must come to the actual commodity price from four to 12 times a year, depending upon the number of delivery months. The question of credit expansion, then, has utterly no relevance to commodity futures. The question of excessive speculation may be said PAGENO="0027" CONStTMER CREDIT PROTECTION ACT 609 to remain, although it remains only in the context of appropriate regulation of futures markets, not in the context of credit controls. If and when excessive speculation should occur in commodity futures, the price level could be temporarily distorted, either upward or down- ward, depending on whether buying or selling was excessive. The ques- tions then become (1) How prevalent are temporary price distortions that result from excessive speculation? and (2) How effective would margin controls be in correcting any such distortions? Our studies of price behavior on numerous futures markets have shown that price movement tends to excessiveness on those markets which have inadequ~te speculation. The thin futures markets, relatively little used, tend to produce two kinds of price distortion. One kind is the relatively large dies and bulges caused by transactions, since the market is not broad and liquid, buyers have to bid the price up to `find sellers, sellers have to offer the price down to find buyers. The other kind of price distortion is the persistence of prices which are too low or too high, as thin markets tend to be lopsided, owing to more persistent trading efforts by one side or the other. The reasons for this imbalance vary from one market to another, `but the fact is well established that some thin futures markets evoke persistent underestimates and Qthers persistent overestimate of price. In contrast, prices on the larger futures markets, with more speculation, display smaller dips and bulges and no general tendency to overestimate or underestimate subsequent price levels. The conclusion must be that, in general, larger amounts of speculation are desirable, for reducing prices, price distortions of the kinds described. In specific instances, of course, the mistaken ideas of speculators may carry prices to an incorrect level, even on the largest market. These infrequent distortions can be identified in a careful retrospective analysis after all the facts have emerged, but it would be virtually impossible to identify them while they are occurring. In April of this year, for example, a front-page article in the Wall Street Journal analyzed wheat prices in relation to the weather and pointed to the likelihood that prices would rise to $2 per bushel from the $1.75 level then prevailing. Instead, as the weather improved, prices subse- quently declined to $1.50 per bushel. If speculation had carried prices to $2, we can now see that it would have been a mistake. Yet in April it would have required clairvoyance to make that judgment. The implications for margin controls may now be summed up. There is no general case for higher margin levels. Existing levels have provided the protection sought whereas higher levels, to the ex- tent that these would discourage futures trading, would be a disservice to the economy. Raising margins on occasion, to discourage tempo- rary excesses of speculation, is not feasible because it is not possible to identify excessive speculation at the time of its appearance. Nor should the fact be ignored that futures markets are essentially hedging markets used `by commodity firms because of the great economy of trading futures. Anything which reduces that economy necessarily raises the cost of doing business, which must be reflected in higher consumer prices and lower prices to growers. I conclude that excessive speculation in futures contracts is rare, that it has no significant effect upon consumer prices, that consumer PAGENO="0028" 610 CONSUMER CREDIT PROTECTION ACT prices would ~ike1y be inflated if margins were raised for the purpose of curtailing speculation, that margin control is not a form of credit control and that credit is not extended nor maintained on commodities futures contracts; hence there can be no need for the Board of Gov- ernors to regulate the amount of such credit. Mrs. SULLIVAN. Thank you, Dr. Gray; your statement will be printed in full. (The full statement of Mr. Gray follows:) `STATEMENT or ROGER W. Gn~~ ron GRAIN AND FEED DEALERS NATIONAL AssocIATioN I am Roger Gray, a professor at Stanford University, where for the past thirteen years my research and teaching have been concentrated in the area of commodity markets and prices. I have consulted with several commodity ex- changes and member firms on commodity marketing problems, and testified before Congress on previous occasions on legislative proposals affecting commodity markets. Today I am appearing in behalf of the Grain and Feed Dealers National Association, a nationwide association of individual marketing and processing firms, most of which rely heavily upon commodity futures markets for hedging and price determination. Section 207 of HR. 11&~1 is evidently based upon a very widespread miscon- ception. It reads in part that "the Board of Governors of the Federal Reserve System shall prescribe regulations governing the amount of credit that may be extended on anly (futures) contract". The plain fact of the matter is that credit is not extended or maintained on futures contracts. This being the case, one might simply say `that Section 207 is innocuous or meaningless, and let it go at that. I prefer to elaborate, however, because I think that I know what is intended in this section, I think that the misconception which it reflects needs to be cleared up, and I share with the sponsor of this section a concern that futures markets be properly understood and regulated. I believe that it is commonly accepted that this section intends to say that margin level's in commodity futures should be prescribed by the Board of Gov- ernors. I think further that it assumes that "margins" in commodity markets resembles "margins" in the securities markets, where in fact credit is extended and where the "margin" level governs the `amount of such credit. This' assumption is mistaken, `however, notwithstanding the fact that it is commonly held. Let me then first explain why fntures margin regulation is not credit reguihtion. then proceed to consider other aspects of futures margin regulation which are suggested in the other wording of Sectio'n 207. When the Assistant Secretary of Agriculture, Mr. George Mehren, testified be- fore the Domestic Marketing and Consumer Relations subcommittee of the House Agriculture Committee on April 4, 19~6, he said, "There is a difference between the purpose of margins in the security and commodity markets." I agree em- phatically with this statement; I should like to spell out briefly what the differ- ence is. The purpose of what we call margin in the security markets is clearly stated in the Securities and Exchange Act of 1934 under the heading "Margin Requirements": "For the purpose of preventing the excessive use of credit for the purchase or carrying of securities, the Federal Reserve Board shall prescribe rules and regulations with respect to the amount of credit that may be initially extended and subsequently registered on a national securities exchange". Clearly, margin in this context refers to the required level of down payment on credit purchases of securities. In other words, the purchase of securities on margin is a credit transaction, entailing transfer of the right to use and enjoy capital assets- common stocks-and also entailing the lending of funds. In contrast, the purchase or sale of a futures contract on margin is not a credit transaction. A futures con- tract entitles its owner to exercise a later option to receive or deliver commodi- ties. If this option is later exercised, which it rarely is, then the right to use and enjoy the capital asset-the commodity involved-is conveyed in a transaction requiring full immediate cash payment. The only capital asset involved is the commodity itself, which can only be owned and used after delivery occurs, at' which time ownership is otherwise financed through otherwise established credit facilities, chiefly the banking system. Since no title is conveyed prior to delivery PAGENO="0029" CONSUMER CREDIT PROTECTION ACT 611 and no loan is eatended, no credit can be involved in a futures transaction, hence the word "margin" has an entirely different meaning in this context, and the purpose of margin is different. The purpose of margins on futures transactions is to assure the transfer of funds from those who incur losses to those who profit from futures price move- ments. They are always established at levels intended to cover the prospective price change. These profits and losses must be exactly equal, as there can be no net gain or loss to all participants in futures trading. (Which there can be, and often is, to all owners of securities.) Not only is there a short position opposite every long position in futures, as there is not in securities, but the short sale of a futures contract is exactly symmetrical with the purchase of a futures contract, which is also not true of stock transactions (but is true of the purchase and sale of options to buy or sell securities, referred to as "puts" and "calls"). Let me sum this up with an illustration. When I buy a $100 share of stock by depositing $70 margin with a commission firm. the commission firm loans me the other $30. I may receive dividends which manifest my use and enjoyment of the capital assets which I have purchased. But when I buy a corn futures contract entitling me to receive five thousand bushels of corn next December by depositing $500 with a commission firm, neither that firm nor anyone else loans me any money. I have purchased no capital assets, hence I cannot receive any earnings or other manifestations of the use and enjoyment of a capital asset. From this it is already clear that futures margins are much different from security margins and that the purposes for which the Board of Governors controls the latter could be in no way served by vesting commodities futures margin control in the Board of Governors. It should also be noted that the relationship between price and the current earning capacity of the capital asset being priced cannot fluctuate over such a wide range, or be distorted over such a long interval, in futures as in the stock market. The price-earnings ratio of the stocks in the Dow Jones industrial average has ranged from 6.4 to 51.5 since 1933, indicative of bow far stock prices can range from the true current earning capacity of the physical assets they repre- sent. This fact in itself is hardly reassuring on the point of efficacy of stock margin controls, but the more salient fact is that this has not occurred and could not occur in commodity futures. Commodity futures prices can depart from the true expected earning capacity of the physical asset which they repre- sent also, but this departure is necessarily brief and limited. Prices of commodity futures contracts must come to the actual commodity price from 4 to 12 times a year, depending upon the number of delivery months. The question of credit expansion, then, has utterly no relevance to commodity futures. The question of excessive speculation may be said to remain, although it remains only in the context of appropriate regulation of futures markets, not in the context of credit controls. If and when excessive speculation should occur in commodity futures, the price level could be temporarily distorted, either upwards or downwards, depending on whether buying or selling was excessive, The questions then become (1) How prevalent are temporary price distortions that result from excessive speculation? and (2) How effective would margin con- trols be in correcting any such distortions? Our studies of price behavior on numerous futures markets have shown that price movement tends to excessive- ness on those markets which have inadequate speculation. The thin futures mar- kets, relatively little used, tend to produce two kinds of price distortion. One kind is the relatively large dips and bulges caused by transactions, since the market is not broad and liquid, buyers have to bid the price up to find sellers, sellers have to offer the price down to find buyers. The other kind of price dis- tortion is the persistence of prices which are too low or too high, as thin markets tend to be lopsided, owing to more persistent trading efforts by one side or the other. The reasons for this imbalance vary from one market to another, but the fact is well established that some thin futures markets evoke persistent under- estimates and other persistent overestimates of price. In contrast, prices on the larger futures markets, with more speculation, display smaller dips and bulges and no general tendency to overestimate or underestimate subsequent price levels. The conclusion must be that, in general, larger amounts of speculation are desirable. (1) In specific Instances, of course, the mistaken ideas of speculators may carry prices to an incorrect level, even on the largest market. These infrequent dis- PAGENO="0030" 612 CONSUMER CREDIT PROTECTION ACT tortions can be id4~ntified In a careful retrospective analysis after all the facts have emerged, but it would be virtually impossible to identify them while they are occurring. In April of this year, for example, a front page article in the Wall Street Journal analyzed wheat prices in relation to the weather and pointed to the likelihood that prices would rise to $2 per bushel from the $1.75 level then prevailing. Instead, as the weather improved, prices subsequently declined to $1.50 per bushel. If speculation had carried prices to $2, we can now see that it would have been a mistake. Yet in April it would have required clairvoyance to make that judgment. The implications for margin controls may now be summed up. There is no general case for hither margin levels.. Existing levels have provided the protection sought whereas higher levels, to the extent that these would discourage futures trading would be a disservice to the economy. Raising margins on occasion, to discourage temporary excesseS of speculation, is not feasible because it is not possible to identify excessive speculation at the time of its appearance. Nor should the fact be ignored that futures markets are essentially hedging markets used by commodity firms because of the great economy of trading futures. Any- thing which reduces that economy necessarily raises the cost of doing business, which must be reflected in higher consumer prices and lower prices to growers. I conclude that excessive speculation in futures contracts. is rare, that it has no significant effect upon consumer prices, that consumer prices would likely be inflated if margins were raised for the purpose of curtailing speculation, that margin control is not a form of credit control and that credit is not extended nor maintained on commodities futures contracts, hence there can be no need for the Board of Governors to regulate the amount `of such credit. (2) Is it your desire now, Mr. Theis and Mr. Brooks and Mr. Chartrand, to read your statements? Mr. THEIS. In compliance with a letter we have received from you in the past week I believe it would not only be proper to ask that our statement be submitted for the record, however, I would like to have the opportunity to give a short resumé of what is within the statement. Mrs. SULLIVAN. That will be fine. Without objection, your full state- ments will be placed in the record, and we will be very happy to have you summarize them. We will then place in the record following these proceedings the statements we received from other exchanges not rep- resented here in person today. Mr. Tunis. Thank you. As stated in the prepared statement before the committee, the Kansas City Board of Trade was officially desig- nated a "contract market" under the original Grain Futures Act on May 5, 1923, by' Henry 0. Wallace, then Secretary of Agriculture. We have listed the different titles here, and we have analyzed sec- tion 207 of H.R. 11601 and shall direct our remarks specifically to the effects of section 207 to commodity futures contract trading. In the first part of the statement we have referred to the title of section 207 which is entitled, "Regulation of Credit for Commodity Futures Trading." Here we again believe that the intent was to call attention and ask for control in the setting of margins, and not of credit. Our entire thinking is contained within that first paragraph. Also, we attach an appendix A which is our thinking and we accept the premise of the paper-written by Dr. Gray some few years ago- when we also now for the record accept the statements and make them a part of our feeling today as well. Going on to part 2 of our statement, where the excessive specula- tion is used within the section itself, we allude to the fact that excessive speculation is what we believe you are calling volume trading. We have PAGENO="0031" CONSUMER CREDIT PROTECTION ACT 613 made the same statements more or less in the same line of thinking as Dr. Gray's today, that excessive speculation or volume trading is not detrimental as far as the action of the market or the type of the market or the dips and curves are concerned. Our fear is in the light of limited speculation or light trading, thin markets. We have gone on and stated in section 3 of our statement where the Federal Reserve System is asked to prescribe `the regulations-this matter has been done by our board for some 90 years, 45 years not under regulation and the last 45 years under the regulation or the supervision of the Commodity and Exchange Authority. We further state too that margin levels are set by our board of directors and that, in addition, our business conduct committee supervises and observes the regulations and rules pertaining to margins and the conduct of our members thereto. In the fourth part of our statement we refer to the inflating of con- sumer prices, and we submit that in excessive speculation, and again we call it volume trading, that this does not have a tendency to inflate consumer prices. In fact, it has just the reverse; it does just the opposite. We draw for you an illustration of what would happen if there would not be volume trading or speculators in operations of futures markets as we know them today wherein buyers `and sellers-they are speaking of buyers and sellers of the grain firms, processing firms, exporters and such within our industry-would have to build into their price factor the risk that they now have assumed within the futures contract itself. We believe that without the trading, and if the `trading would be limited by excessive margins, that the consumer's prices would be in- flated `and that the producer's prices would be deflated. Further than that, Madam Chairman, the whole statement itself tells our story. I would like to mention to you and your committee a recent opera- tion within the commodity markets, and especially the Kansas City market as it pertains to wheat. Last Friday, and again up through the marketing session of this past Monday, one of the flour businesses was conducted-in fact, the major flour mills entered into contracts with `the major bakeries in the United States up through December 31, 1967. This is a sizable forward contract as it pertains to volume. The market's reaction was fantastic, it was extremely `accepted and it absorbed all of the volume that was done at our market as of Monday and it closed a cent and a half lower than where it had been on Friday. This afforded people to do volume business in the future without upsetting the market. Please visualize wh'at would have happened if the market had not been there-the futures market had not been there for this operation and if the buyers and sellers would have to meet to consummate busi- ness that would project itself into `the next 4 months. Thank you very much. Mrs. SULLIVAN. Thank you very much, Mr. Theis, your full state- ment will be inserted at this point. PAGENO="0032" 614 CONSUMER CREDIT PROTECTION ACT (The statement referred to follows:) STATEMENT or W~LLIS C. TunIS, PRESIDENT, BOARD OF TRADE OF KANSAS CITY, Mo. My name is Willis C. Theis, and I appear on behalf of the Board of Trade of Kansas City, Mo., a contract market regulated under the provisions of the Commodity Exchange Act. The Board of Trade of Kansas City, Mo., was officially designated as a contract market under the original Grain Futures Act on May 5, 1923, by Henry C. Wallace, then Secretary of Agriculture. We have analyzed Section 207 of H.R. 11601, and shall direct our remarks specifically to the effects of Section 207 to commodity futures contract trading. 1. TITLE OF SECTION 207 H.R. 11601, Section 207, Is entitled "Regulation of Credit for Commodity Futures Trading." The title refers to regulation of "credit" and in the body of Section 207, p. 24, line 9, "The Excessive Use of Credit" is referred to, and p. 24, line 13, the "Amount `of Credit," which operations do not exist on the trading of any com- modity futures contracts on the Kansas City Board of Trade. In Mrs. Leonor K. Sullivan's letter to Mr. J. S. Chartrand under date of August 2, 1967, it is sug- gested in the second paragraph that there is one section of H.R. 11601 which directly affecl3s the operations in commodity futures contract's and that under the legislation, the Federal Reserve Board would have the same powers to set "margins" in such trading transactions as it does now in establishing "margins" for trading in the stock exchange. We believe that it is the intent of Section 207 to authorize the Federal Reserve Board to set margins and not to regulate credit. A general mi~eonception is that "margins," by virtue of being down payments on credit transactions, should `be set at levels comparable to those on stock purchases. A commodity futures contract is not a capital asset, however, nor is a future transaction a credit transaction. We respectfully refer the Committee's attention to Appendix "A" document, published by Dr. Roger W. Gray, Food Research Institute, Stanford University, in 1964 entitled "Margin Requirements in Commodity Futures Transactions." The paper deals with the nature of a futures contract, its origin and actions, and outlines the purposes of margins. Further, the document deals at great length on the fact that futures contracts are not credit transactions, and the due consequences of prohibitive margin requirements `for commodity trading. There is a supplementary statement at- tached to Appendix "A" pertaining to stock margin regulation's, which clearly shows that margin requirements of the Federal Reserve System governing transactions in the stock market serve entirely different purposes from those of the margins used in the commodity futures market. II. ExCESSIVE SPECULATION One of the stated purposes of Section 207 is for preventing excessive specula- tion in and the excessive use of credit for the creation, carrying, or trading in commodity futures contracts. "Excessive Speculation" is not defined nor has it ever been truly `defined as it pertains to trading in commodity futures in large volume of tra~ding (some believe to be excessive speculation) which c'an cause price changes on occasions. But, light tra'ding (inadequate speculation), the more common condi~tion, has its price effect also. Prices are poorly defended on markets with inadequate speculation where the cost of trading tends to be high. Most futures markt~ts suffer from "inadequate speculation." A renowned economist made a comment recently, where in part `he said, "It is all right for policemen to watch for `traffic violations-but the answer is not to forbid traffic. The function of `the cop is to enable `more traffic, not to complain that it `tends to excess. To be sure, his position would be ea8ier if there were not traffic, or `as little as possible." III. FEDERAL RESERVE SYSTEM SMALL PRESCRIBE REGULATIONS The regulations which `the Federal Reserve System shall prescribe, `allude to the setting of margins and their maintenance on any commodity futures contract, and further, t'he regulations may exempt any transactions the Board m.ay deem unnecessary, and regulations setting differentials amongst commodities, trans~ PAGENO="0033" CONSV~R CR~1DIT PROTECTION ACT 615 action borrowers, and 1ende~s. There is n~ definitioz~ ~s tz~ t1~e lêyel o~ margins, nnd, therefqre, we must assume that in view qi~ the proposed purpose ~xf margins to control e~çessive ~peculatjon, the J~ederal Reserve System woui~d set the mare gins at prohibitive levels. Righ margj~s will drive the public from the market- ~laee, and the contract n~arkets wiji not be able to funetio~ and serve the public ~ts they have for nearly a ~entury. i~[andatery margin requirements have been in effect in the R~nsas City market for many years and have been determined and enforced by the ~o'~rd of Trade. The practice of re~niring i~~n~~~ry margins iS now well established, embodied in the permanent rules of our ezeb4nge, aizd enforced by resolutions. As icing ago as 1877 the ~ainsas Oity $oard of Trade ha~ a rule regarding margin requirement~, which was ehaug~d from time to time na current conditions required. The duty empowered to establish appropriate mar- gins is lodged with the l3oard of Directors, an~l, in addition, our ]3usiness Oondu~t Committee supervise~ 413e observance of rules and~ regulat~Qns p~r~Øn~ng to margins. IV. Ii~'tA1~I~ COW5U~1~ I~BI~515 The purpose of Section 2O'~ of preventing excessive s~cxtla~ticn is said to have the effect of not inflating consumer pricea. It is our contention tba~ without vol- ume trading, consumer prices would be more inflated when there ~s 1i~ht trading. A thin market increases cost to the tr~ers and nil sections cif t~i~ gin~ihçlUnt~y, and ultimately t1i~ increased cast ~q t~e c~onsp~ncr and flu? decreased \r~1~l~ to the pro4u~er. A truer, more reali,stic marJ~et c~tv~ ~s establi4~4 W~iOn the j~rice ~ determined by competltio~1 f~Qm zu~t~y sources opier tZiai a few, and ~ln~ is what we call a volume trading i~qui4 niarket. W~t~i ~ iblfl ~1~adci or no tráde~at all, handlers and processOrs of grain i~i~it build lnt~t~heir purchase price additional Lost-that i~ the est1mateçU~ost o~ risk the~r znus~ asshme t~s tO price fluctua- tion-which the futures m~trket protects. For example, if a flour mill could nç~t ha~re the ~use ~ the eomt4odity f~ttares market as an insurance policy, #hOrëin they coCid ~f1urchase deiferred fu1~ure contracts to establish price for future requirements, and which tbe~v co~u14 use for the establishniont of future, sales, it would be nece~ry for them tci bni1~ ~ttl~in tbe~r p~ri~ ~u~rd ~a1es ~ricee the "risk fapti~r." ~1?hé mope~s 1~t~Oy cp~ld p~y f~r currept inventories and thtures inurent~ries wo~u1d h~ve ta~e red~ice&~p afford theizi the ~ifferentia1 which might~~ei1 e~ist4rom the timed barv~cet whop there wns~vain av$lable up tbrau~th t~he ~inter~n~ ~prix~g n~c~nths w~ien grain~ became less p~~ntif~~, awaiting the new barves~. T~kis rqçluced ~uWin~ prWe woi~u1d directlynffe~t `and c~use a de~ated p~çducer value, j4ewjse, the mt~4r w~pu~çl ~bave to build into his sales price the "rtsk factor" ~ j~ w1~at ~raip~ would ~o~t him in the future in relation te what be should ~e~~4ug fop his flonr in the future. In this area the consumer would be at ecledi,nasmuch jis ftO~ i~p4 b~cepd prices' wou~l neqessarily be inflated. The ~Bon~rd of Trade of Itansas City, Mo., ~ ~ue Coip~tt~eq for ~t1~ op-, portunity to appear end to expre~ his vicM~ wit~ re~%~ç1, tp Sect~cu1 ~07 ØfIT.R. 11601, and respectfully requests that ~ eqtio~ ~e Wit~iidrtwn a$ educed. ~banj~ you. Arrnxuxv "A" MARGIN nf~QuInr4M~E.wTS IN coi~MoDiT~ FUTUI~RS TRAN$ACCXONS 4'he nature of a fn'tures coatra?~t Its orSg'ins and ~se~ A fmtmres contract obligatOs its holder to receive or delivOt a com~nod1ty during some specified future pior~th. It is a, contract with the c1earin~ house' for~ highly standardised description of the com~nodit7, and is thOi~ef0ré )ilghly niaritetable and very secure. Its mar1~eisbility derive~ from the ~en'Oral avallabilitr of the comipodLty and `the org~n1zed trading in it. I'~ stfety derives from its inarket- ,abflit~y `as well as the financial ~p~e~1~ity ~f the cle~tri~g house. Futures tradipg arises from the necessity an'~ convenience otm~king forward purchase and sales commitments In commodities. ~ftlcient coordination of the ~produ~tio~, transportation, storage, proces~ing, and consumption of commodities requires forward conutiittnents. ~`utur~s contra~ts are used' as temporary sub- stltptes for intended later merehandis1n~ c'Oirtiacts. ~ecause they are traded openly on central markets and deal with reprO5~tatiVe grades `of the commodity, they greatly facilitate the pricing of these `fOrward conu~fi1tnIents. Futnres markets arise suit of the situation in which for*ard purchase and sales 4cothmitments are already being undertaken. A clOaring house is established which 83-849-57-pt. 2-3 PAGENO="0034" 616 CONSUMER CREDIT PROTEGTION ACT becomes dfle pai~ty to a11~j~urch~e .~nd sale contracts, thereb~St providing greater security of contract and a1sc~ enabling th~ fulfillment of contract by offset The trading so organize~1 becomes so convenient that nearly all contracts are offset ordinary itierchantheing ~,ontracts being still tised for nearly all transfers of ownership. Under these circumstances most transfers of commodity Ownership entail a double transaction the hedging transaction in commodity futures and the subsequent itierchandising transaction for which it * has substituted. Since transactions cosl~s tire important in the bulk commodity trade where large volumes and small profit margihs prevail, it is very important that the substitute transaction in Commodity futures be aceomp1i~hed at minimum cost-low enough to 3ilstffy the co~hmon practice of making two transactions instead of one The major benefit of futures markets to the commodity trade is the provision of continuous competitive prices at which they can buy or sell with confidence sparing them the necessity of costly shoppliig and negotiations Also because the substitute transection is undertaken in conjunction with a purchase or sale of the actual commodity, their risk is in "basis" changes rather than fiat price changes That is to say their only prospect of profit or loss from price change is in the divergence or convergence of spot and futures prices For this reason financial institutions are able to lend them considerably more money than wouid~ otherwise be warranted. The very great economy of futures trading is important from two standpoints If more capital had to be tied up in futures contracts then the very advantage which futures trading achieves of increasing capital availability to commodity firms would he eliminated Secondly, the economy with which speculators can trade helps indpce them to 1~roaden the market Without their participation commodity firmS find futures marketa little different from ordinary markets, and are required to resort to costly shopping and negotiation Markets which enjoy higher levels of speculative participation provide more reliuble price estimates at lower transactiqns cost than markets which attract less speculation. The `purpose of' margins The clearing house, as a party to all futures contracts, needs t~ insure the validity of all contracts By requiring that all members deposit margin against their net (long or short) contractual position the clearing house protects itself and thereby protects all who have contracts with it The clearing house establishes margins for this purpose, and occasionally chan~es the margin requirements in furtherance of this purpose In so doing another purpose may be incidentally served When the clearing house raises margins because the possibility of wider price movements Is anticipatel and hence more protection is deemed necessary~ it may incidenlalI~y discourage public participation in the trading which could contribute tO excessive price change Given the purpose of margin requirements the appropriate margin level is one which is geared tO (1) prospective price changes and (2) prospective basis changes The margin requirements for speculators whose risk is in price change should be geared to prospective changes in the price leveL Margin requirements' for hedging firms, whose risk is limited to basis changes, is more appropriately' geared to the prospect of change in this relationship. No precise rnargin levels can be derived from these considerations, as the prospective price change is inherently uncertain but guideposts which suggest the correct order of magnitude are readily available and margin levels can be established on ,tbe safe side of such guideposts without impairing the usefulness of the mark~t5. The determitiation pf proper margin levels is coni$rable in its concept to the deterniinatioii of life uisuraiice premiums on an actuarial basis The probability of price changes of any given magnitude can be estimated from recorded experi ence in the various commodities The relevant factors to be taken into account are (1) daily price change (close to e~ose) (2) continuIty of price change from day to day, and (3) the speed and efficacy of margin calls In practice these factors enter into the judgment of the exchange governors who establish margins but statistical estimates of the probabilities are not cowputed Data are readily available from which such estimates could be made, however, and the' Commodity Exchange Authority (or the exchanges) could make such analyses at modest cost,. particularly it the Information were punched onto IBM cards SinCe limitations on daily price changeS are already in existence a reasopabis expedience would be toestablisli margin levels directly in terms of those Iimits~ PAGENO="0035" CONSUMER CREDIT PROTECTION ACT 617 The limits are not entirely consistent, from market to market, with the recorded experience of price change, however, so that margins should be different multiples of daily trading limits in different commodities. Perhaps preferably, both the. trading limits and the margins should be based upon an actual (say, ten-year) record of price changes. Sugar futures prices, which have been volatile ip recent years, require both higher limits and higher margins, relative to the cuntract value, then for wheat or corn, which have experienced relative price stability. Under the conditions of recent years, margins of lO~l per bushel f~r wheat and 8~ for corn (the daily limits) are more than ample for hedging tran~actions, and probably adequate for speculative transactions. But margins of ~ per hundred pounds of sugar (also the daily limit) are clearly inadequate: probably four times this level would be desirable for speculative transactions. The trading limits in some commodities impose a slight tendency toward continuity in daily price change, as they suppress the daily change on some occasions, postponing it to the following day. In those markets whjch have been studied under unre- stricted conditions, however, continuity of price change is not a problem. The incidental accomplishment of margin level adjustments-that of en- couraging or discouraging public participation in the trading-does not deserve much attentio~ in the establishment of margin levels. Speculation is inadequate on many futures markets, but lower margin reuirements do not offer a desirable means of increasing speculation. Little speculation is responsive to such a cop-S sideration; whereas that which would be attracted by lower margins would not be of the most desirable sort, But by the same token, occasional Increases in margin levels to deter speculation are easier to justify because they deter the least desirable sort of speculation. While basic guideposts can be established from the record of price behavior, it is important to retain some flexibility in order to meet unusual circumstances that cati be recognized by exchange governors. And while margin levels should be on the safe side, it is important that they be no higher. It Is pot only waste- ful to idle funds upon margins that serve no purpose, but it is crucial not ~to discourage the use of the markets. There is ample evidence in economic studies that the markets which are used most provide the best estimates of price, and provide an extra margin of safety in the ease with which transactions can be made, which minimizes the role of margins. Margin reqwiirements for different classes of traders Members of the clearing house own stock in the clearing house, which j~rovides extra assurance of their financial integrity. In general, margin requirements for clearing members can safety be very low. It might be useful to require a mini- mum level of ownership of clearing house stQck, and also to require a~1ninimum capital ratio or other evidence of soundness. Members and non-members of the exchanges, who are not clearing members, must clear transactions through clearing members. They are require~l to deposit at least the clearing house minimum margin requirements with clearing mem- bers. Most clearing members police these deposits very well, but there has been little policing of them by the exchanges, probably because the margins de- posited by clearing members are deemed adequate to protect the exchange, It would be desirable if margin enforcement and policing could be improved, partic- ularly as an alternative to higher margin levels. Speculative eonti~aets should be margined at higher levels than hedging con- tracts, because of the greater risk involved. In general, margin requirements equalling the maximum price change expected over any two-day interval would be sufficient for speculative contracts, In certain extreme instances, where the daily limit price move in one direction might occur on more than two successive days, even higher speculative margins would be justified. Margins on bone fide hedging positions should be no more than half those on speculative positions, and in some instances could safely he still lower. Auticipatory hedgju~g-, as de- fined~ in Sec. 4(3) (C) of the Commodity Exchange $~ct, should be subject to ~pec- ulative margin requirements, as the same risk considerations apply. In sum, since the only purpose of margins is to protect the clearii~g house, they can safely be established, ~y the clearing house at quite low levels. For hedging transactions in which the.risk of flat price change does not apply, margins can be lower than for speculative transactions. For clearing i~nembers who are subject to other safety factors as well, margins can be lower than for non-clearing members. PAGENO="0036" 618 CONSUMER CREDIT PROTECTION ACT Futures contract hot a credit transaction There is no tra~isfer of ownership in a futures contraet-only an obligation te transfer ownersfrip at a later date, through the clearing house, for full cash payment at the time of transfer-and this obligation is nearly always cancelled before a t1'ansfe~ occurs, by undertaking an opposite oldigation vie-a-viz the clearing house. Thus a futures contract does not represent a credit transaction, in which olrnersbip of an asset is transferred. The holder of a futures contract owns something 4f value insofar as be may be later entitled to receive a com- modity of greater value, or to deliver a commodity of lesser value, than that agreed upon in the contract. He earns no right to the use or enjoyment of the commodity, or tot Income from it, so long as he holds the futures contract; nor does he e~irn sudh rights througk ~the tiorni~i settlement of such contracts by offset. A contract entitling one to receive 01' deliver a commodity at exactly its market v~iue has zero value, since by definition this can `be done without such a contract. A futures contract has zero estimated value at the time it is entered intc, in that the price agreed upon for th~ future transaction is `the market's best current estimate, by `definition, of what the value of the commodity will be at delivery time. In fact, the long time average value of the futures contracts ac- tually bought and sold in the major grain markets does no't differ significantly from zero; although any particular contract may take `on positive or negative value. ~sgalI~i~ere than one half of' till f~rt~sres eontracts nutstanthn'g are in the liap~ds of dgb~ and of'thesesubst5kIt1eil~ mote than one half are sa~les con- tracts. In these th~ttinees thti hedger owns a ph~sieal asset, changes in the value of which bear tin orderly relationship to the value of his futures contract. If he ~heuld dec~d~e to deliver the pllytieál comtnodlty against the futures con- tract, f till cash ~ayment is req~ulred at the `time of delivery, and this is the only transfer of owntirsbip. `ret even this transfer of ownership in sa'tisf action of fu- tures contitacts is~lnfre~uent. Margin depesits on futures `contrac'ts are in tio sense down payments on credit t±ansactlons. The margin deposit is intended tO represent `full payment at all times for the value of the `futures contract, which Inheres in the uncertain, but statistically definable prospect of price change. This is the most impfrrtant of several reasons why commodity futures margins differ from stock margins. Purchase of a ~tock certificate dqes transfer ownership, and the margin on such a pnrchase~ is a down payment on a credit transaction. It Is becau~e stock purchases' on n4trgin are `iredit tran5act~0ns,' tud because it Is deetiied to be in the publie in~'tiere5t to control the amotint and kinds o'f credit, `that authority to e~tablisi~ rna~gins on stock ~urcluses I~ vested In the Board of Governors of the l~'ederal ~eserve Banlthig System, ,and i~argih levels are much higher than~thoSe on commodity futures. The word "martin" has an entirely different meaniilg in the two contexts. Tf an anaio~y ~witJl stock trading is sought, a closer one exists in `trading Optiotis to htt~ or sell ~tock at a later date. These so called "put" and "call" options bear the resemblance to co~modity futures contracts that they do not transfer ownership; hence the payment `made for them is not a down payment on a credit transaction. The prices of options to buy or sell stock at a later date are roughly comparable to margin levels ~on speculative transactions in commodity futures; i.e., about 10 per cent of the market value of the stock as compared to margins equalling abopt 10 per cent of the market valUe of the com~1nodit~ described in a futures contract. Even though this similar- ity exists, the pnrpose of the payments differs in that no protection against in- solvency of the holder of stock options is required. He has an option to buy If he chooses, whereas the holder of a futures contract has an ~obllgation to buy (or sell), unless he offsets the ebligation In the futures market. The purpose of margins on f~ttures trabsactions is to gtiarantee this obligation. A major rOason for controlling credit p~rcbases of stOck is the concern to prevent such a stock `market collapse ~s occurred In 19~9, after stock prices bad been ctirried to ver~~ high levels, partly through purchases made on short term credit.1 There are two reasons, in addition to the fact that commodity futures transactions are not credit transactiOns, why ~ ~lmilar coUcern does not apply here. The first is th'at commodity futures transactions are absolutely sym- metrical with respect to bUying and sellhig, as stock transactions are not. In- 1'See the SupphmletLtary Statetitent on Stock Margin Regulations attached at the end of this statement. PAGENO="0037" CONSUMER CREDIT PROTECTION ACT 619 vestment capital flows to the commodity futures markets on the selling side in exactly the same way as on the buying side, so there is no reason to fear inflationary cor~sequences of such a flow, An increased flow of capital into the stock market, on the other hand, necessarily raises stock prices, as the new in- vestment capital comes on the buying side. It i~ possible, in a rather cumbersome procedure, to sell stock short by borrowing stock certificates; but this device is by no means the equivalent of selling futures contracts. The second reason why the inflationary concern does not apply to commodity futures transactions is that their prices must come to the actual commodity price from four to twelve times a year, depending upon the number of delivery months. The price-earning ratio of the stocks in the Dow-Jones induatrial aver- age has ranged from 6.4 to 51.5 since i~88, indicative of how far stock prices can range from the true current earning capacity of the phys~cal assets they represent. Commodity futures prices can depart from the true expected earning capacity of the physical assets which they represent also; `but this departure is necessarily temporary and limited because of the delivery provisi~ons~ Occasion- ally a commodity futures price is forced above the true economic value of the commodity in a delivery month squeeze; but such actions are severely punished on other than inflationary grounds, and indeed their general economic impact is trivial. The consequence of proh~bittve margin requirements for the commodity trade Consider a merchant who carries large stocks of grain, hedged in futures con- tracts, margined with the clearing house at approximately 5 per cent of the value of the grain represented in the futures contract, lie `borrowsi ~0 per cent of the value of the grain from his `banker, on the condition that it be so `hedged, His banker's practice is to require 25 per `cent `credit margin on unbedged grain inventory. Now if the futures margin is raised to even 16 per cent, the balance has been tipped against hedging. The merchant can finance his inventory unhedged for 25 per cent, or ~edged for 26 per cent (16 per cent futures margin plus 10 per cent credit margin.) Moreover, his minimum capital requirement has been raised from 15 per cent to 25 per cent. lIe prefers to hedge, of course, for other reasons than the lower margin re- quirements on bank credit Which it assures him. So h'e might approach his banker and request some compensatory reduction in credit margins to enable him to continue hedging with `higher futures margins. But his costs have been increased in any even't, and if the futures margin were set still higher, at say 25 per cent or more, he would almost certaitily stop hedglng. Then he might approach his `banker to request lower credit usargins on unhedgeci grain. The banker could conceivably respond to the iaierclyaiet's plight by granting lower credit margins conditioned upon (1) herlging in forward commitments, instead of futures contracts, (2) relating credit margins' to price changes in the inven- tory, thus in effect taking on one of the functions of the grain trade, which is to watch grain prices. These are, of course~ backward steps in economic development; for these were the practices that had to `be followed before the futures markets etoived. For- ward sales are more costly and less reliable tha~a futures contracts (in fact, it is not uncOmmon to use the futures market for hedging against contract eoncella~ tions.) A hedged position in futures' is a much cheaper way for the banker to guard against inventory price fluctuations than actual day-to-day study of the prices of all the various categories of inventory that serves as loan collateral. Moreover, with the departure of the commercial firms from the futures markets, these markets would soon wither and die, so that the `banker would have no reliable source of price information to watch, even if he chose to study prices, The consequences of tvt~her margins for some grov~ers Commodity futures contracts are used `by some farmers to protect the `price for a growing crop~ or for a crop which `has been harvested and placed in storage, This is particularly advantageous to growers of a crop like petatoes, for which there are no gover~rnerit price supports and which are subject to wide price ~uctuatiorjs. Oftentimes the grower may have to borrow margin money from his local bank, whereaa in other eases a dealer may handle the commodity futures transaction in conju~c~ion with a contract to `buy the `farmer's potatoes at harvest time. The economy of futures trading is of particular ixP~ortance to the potato grower. If margins were `substantially increased he would revett to a system of forward contracting which places him at a bargaining disadvantage vis-a-vis dealers. PAGENO="0038" CONSUMER CREDIT PROTEOTLON ACT 620 The impact upon the economll of ~iscourageme5t of fntures trading The most serious impact upon the economy, if futttres trading were discour- aged, would be loss of efficiency in marketing The greater cost of marketing commodities would be borne by producers and consumers alike. Another serious impact would stem from the fact that an increasing amount of international trade in commodities has been facilitated by our futures markets. ~Tiie European or Japanese Importer of our grains uses our markets increasingly. The exporters o± tropical products to the United States also use our markets. Not only wo'uld this business be lost to the UnIted States, but in some instances futures markets in other countries would pick up the business, possibly in addi- tion to busIness now being done by our domestic commodity trade, which would be transferred to foreigfi markets. This would not only adversely affect our balance of payments, but would tend to undermine our world leadership in the organization and financing of commodity trade. If the needs of a trade which is international in scope are better served in other countries, the trade will shift to those countries. Last year the Chicago Board of Trade had $55 billion business volume, making it, as it has been for many years, the world's foremost coin- modity market. ~Phis distinction could pass to Liverpool or Rotterdam or Tokyo in the future if our markets are unduly restricted. (Jonelus4on There is no doubt but what margin levels substantially higher than present ones would dis~ourage hedging, force resort to other more costly marketing methods, and put futures markets out of business to the detriment of producers and consumers alike. Futures trading grew out of just the marketing methods to which the commodity trade would necessarily revert if the costs of futures trading were made arbitrarily prohibitive. It grew out of those methods as a refinement and improvement of them, in the very sense that it enables marketing at lower cost, which It can only provide with low margins aimed at protecting the clearing house. In the words of one banker who had bad much experience financing the grain trade in the manner here illustrated, futures trading is "one of the major economic creations of all time."* Supp~em~entarY stateinen~t on stock nu~rgin regulations As supplemeuts to general methods of influencing credit, selective methods, of which margth requirements are the most important, make it possible for the Federal Reserve to reach specific credit areas without imposing stronger general credit measures that might otherwise be appropriate. For example, if an unhealthy use of credit tot' stock market speculation develops at a time when credit for production and trade Is expanding no more than would be considered normal, and when the application of general instruments of regulation (open market operations, change of discount rate and reserve requirements) might do more harm to the country's overall economic activity, the power of the Federal Reserve to regulate stock market credit can be invoked. The Securlti~s Exchange Act of 1934, Sec. 7. (a), under the heading "Margin requirements" says: "For the p'uMpoSe of prenenting the ececessive use. of credit for the purchase or carrying of securities, the Federal Reserve Board shall . . . prescribe rules and regulations with respect to the amount of credit that may be initially extended and $ubsequently registered on a national securities exchange" ((2) p.399). For initial ettension of credit such rules and regulations must be based upon a certain standard se~ forth In the act, but the board is authorized to prescribe such requirements lower than the standard as it "deems necessary or appropriate for the accommodation of commerce and industry having due regard to the credit situation of the country," and such higher requirements as it may "deem necessary or appropriate to prevent the excessive use of credit to finance trans- actions in securities." ((3) pp. 35-36.) Tue control effected by margin requirements, although bearing directly on the lender, puts restraint upon the borrower and dampens' demand. It can be *Harry L. Wi~erth, VIce. President, Commerce Trust Company, Eansas City, Missouri, "A Banker Look~ at Futures Trading," Proceedirtgs of the Banking Seminar, Chicago ]3oard of Trade, ~$flj,: ~FederO7 Reserve Bulletiis, June, 1934. 3Aniwal 1~epo+t of the rederal Reserve Board, 1934. PAGENO="0039" CONSUMER CREDIT PROTECTR?yN ACT 621 used accordingly to keep down-the volume of stock mgrket credit, even though lenders are able and eager to lend. ((4) p. 59.) Another effect of high margin requirements is to restrict the amount of pyra- miding that can take place in a rising market. In other words they limit the extent to which traders may add to their holdings, when the market is rising, by borrowing against additional market value of securities already held in their accounts without putting up additional money on rising stock prices as well as -on growth of credit employed in the stock market. ((4) p. 50.) The Federal Reserve in describing its purpose and funëtions points out that by regulation of margin requirements the danger of excessive flee of credit uI the stock market, which caused serious disturbances to~ the economy in the~ast, has been minimized. Thus it is felt that a speculative stock market boom financed by credit, like the one that culminated in 1929, could hardly have occurred except on the basis of very low stock purchase margins. A boom and collapse in the stock market is always possible, but without the excessive use of credit it is not likely to assume proportions or to have the effects it has had on some occasions in the past. Aside from having to do with a specific use of credit, the authority with respect to security loans differs from other Federal Reserve System powers in that it reaches outside the Federal Reserve System to banks that are not mem- bers of the system and to brokers and dealers in securities. It is closely related, however, to other regulatory powers of the Federal Reserve authorities, because the use of credit for purchasing or carrying securities has an important bearing upon its use for business purposes in general. ((4) p. 60.) On the whole one may say that margin requirements should be regarded as one of the instruments of Federal Reserve action which serves the general purpose of regularizing the flow of money and credit, fostering a stable dollar, and pro- viding an effective monetary mechanism that will be conducive to the country's growth. This is evidenced by a brief account of the margin requirement changes from their institution in 1934 to the middle 1950's. For several years before the war, the Board's regulations required margins of 40 per cent. During the war the requirements were raised to 50 per cent, then to 75 per cent, and in 11146 to 100 per cent. The 100 per cent requirement was in effect from early 1946 to early 1947, when it was reduced to 75 per cent, making it possible for banks and brokers to lend 25 per cent of the value of the col- lateral. The margin requirement was reduced to 50 per cent in the spring of 1949 at a time of moderate business recession and was restored to 75 per cent early in 1951 when inflationary pressures following the outbreak of the Korean war were at their peak. In early 1953, when these inflationary dangers had begun to abate, the margin requirement was again reduced to 50 pe~ cent. ((4> pp. 58-59.) As an example of how the use of credit in the stock market influences the decisions of the Board in setting margin requirements, the commentary to the July 10 reduction in margin requirements from 70 to 50 per cent, in the Federal Reserve Bulletin of July, 1962, p. 840, was: "In making this change the Board took into account a sharp reduction in stock market credit in recent weeks and the abatement in specu1atit~e psychology. Bank loans to customers for the purpose of purchasing or carrying registered stocks declined more than 5 per~ cent in June to a level of $1.3 billion. Further- more, preliminary data indicate a $600 million drop in borrowing by stock ex- change member firms from banks on customer collateral, the largest decline in the postwar period." The Board's regulations require the lender to obtain the specified margin in connection with the purchase of the security. If the collateral se~uri~y for the indebtedness subsequently declines in valuer th~ regulations do pçt require the borrower to put up additional collateral or to reduce the iRdebtedness. However, the banker or broker making aloarf may require additional collateral-If he deems it necessary~ ((4) p. 58.) Jt ti-ms acenis clear that the margin requirements of the Federal Reserve System governing transactions in the stock market serve entirely different pur- poses from those of the margins used in the co~modity futures markets. Where the latter are used to proteCt the clearing house, the former i~ a means for in- fluencing the credit conditions in the economy in -general and use of credit on -the securities market in particular. Where margins are used in the sec-w~itiee 4 The FederaZ Reserve System, Purpose and Functions, Washington, D.C., 1954~ PAGENO="0040" 622 CONSUMER CREDIT PROTEOTION ACT market for the ~roteetion of bankers and brokers in ease ef ~rlce ehä~ges, they are not subject to regulations br the Federal Reserve but are up to the dis~ cretion of the bankers and brokers themselves. Mrs. SULLIVAN. I want to advise the members of the subcommittee that we have in the audience Mr. Alex Caldwcll, who is the Adminis- tratoi of the Commodity Exchange Authority in the Department of Agriculture He is here, not to testify for or against this provision of H.R. 1l60~, but to be available to provide us with any technical information we may ask him for He is here as a technical expert, not an advocate, and I am grateful to Secretary Freeman for assigning him to us for that purpose. Mr. Caldwell, will you join these gentlemen? Thank you. I have a series of questions to ask the witnesses, but I will defer mine until the other members are finished, and I call on Mr. Stephens first. Mr. BRooKS. Can I make my statement? Mrs SULL~VAN I am sorry I thought your statement was included with that of Mr Theis But it is Mr Chartrand, who is here with Mr Theis from Kansas City. I am sorry, Mr. Brooks. Please go ahead. Mr. Bnooi~s. I have a summary which has been distributed. Our organization subscribes to all the remarks and recommendations of Dr. Gray and Mr. Theis as he is speaking for the Kansas City Board of Trade. I would like also to make a request before I run through this briefly, Madam Chairman. I would hope that the record might be kept open so that those of us who have not had a chance to read and analyze the subcommittee's statement which you read this morning may have a chance to do so and to comment on this favorably or otherwise. Mrs. SULTJ~VAN. We will be happy to do that. We will leave it open until the 25th of August. Mr. BRooKs. Thaflk you very much. My name is William F. Brooks and I `am here today to represent the National Grain Trade Council. We appreciate this opportunity to express our views in opposition to section 207 of the pending legisla- tion, which is designed to give the Federal Reserve System the same' powers to s~t margin requirements in connection with futures trans- actions on ~ommodities that the System now holds in the setting of margins for credit transactions on the stock exchange. For 20 ye~rs we have consistently opposed proposals to grant to the Government or Government officials authority to set margin require- ments on futures transactions in commodities. We have opposed this grant of authority because in our considered judgment no public official or group of public officials such as the Board of Governors, are so omniscieut as to determine when speculation might become excessive in commodity transactions and to determine when any degree of spec- ulstion in c~mmodity futiir~s contractS would have `the effect of in~ flating consumer prices. We note that the Board of Governors of the Federal Reserve~ throtigh its Vice Chairman, Mr. Robertson, on August 7 advised the subcommitt~e in effect that the Federal Reserve Board would not be the most appropriate ageflcy to administer such commodity market legislation as is contained in section 207 of the pending bills, Mr~ PAGENO="0041" CONSUMER CREDIT I~ROTEOTION ACT 623 Robertson stated the Board's belief, which we. share, that relatively little credit is used in connection with futures trading. The proposal embodied in section 207 is based on a misconception of the nature of commodity contracts markets, on the nature of trading in commodity futures contracts, and on the functions of margins in connection with the commodity futures contracts when attempts are ~nade to draw an analogy between them and the downpayment re- quired to obtain title to stock or goods and chattels ot real estate. My statement develops the thesis that there is no analogy between the margin required to enter into a contract for the futu~re sale ~r purchase of a commodity and the downpayment rE4uired to obtain title to stick, or goods and chattels, or real estate~ My statement reviews for the subcommittee the ~t~içiies and action by this and other committees of Coi~gress when similar proposals to the pei4ing proposal have been considered in the past. We are now here today fao~d with a proposal to grant anth~rity to the Board of Governors of the Federal Reserve which, aocor4m~ to their spokesman, they do not wish to have and are not qualified to administer. This subcommittee is, in effect, ~onsid~ring a propos*1 which in substance has been considered by otlre~com~j4~es aud~b'~ ~Qmmittees in prior Cq~gresses and found ~antiug. We recornmøLi that this subcommittee wnke a s~milwr find~hg. We oppose this grant of authority because ~ve are convi~iced~ that this method of attempting to prevent inflated consumer prices will not york. We oppose this grant of authority because an attem~pt by the Government to exercise) control over margins may well cause a down in the entire I~arketh!1g structure leaving State trading a~a~he only alternative. Raising margins will not keep prices from going uii. It seems to be admitted that commodities that have no faturos fn~rket are usually more erratic in price than those that have. By.. ~aisiug margins, you can reduce and eliminate volume of trading. But you cannot ~eontrol prices. And you ~might wreck the market stnictwe~ I shall be glad to answer any questions whieh anyone nares to askj ~trs. SULLIVAN. `Thank you very much, Mr. Brooks. Now I will call upon Mr~ Stephens to start the q~iiestioning. Mr. STEPHENS. Thank your, gef~tlemen, f~r coming t~ be with us, L appreciate having the opportunity to have the material Dr~ array has presented of the circnmstances involving transactions that you deal in. I perhaps should point out to you that I have introduc~d;a bil1~ simi- lar to the Senate bill that does not include in the bill the co~ttol of the commodity exchanges. Also, you are familiar with the statement made by Governor Robert- son that he did not consider your transactions as credit transactions. One thing I would like to a~k for my own understanding is' this: Sup- pose that I put $500 into futures market. Maybe Mr. Rhodes can give me the answer. If I should buy or put down a margin of $500 on a cotton futures contract that would mean that I would be able to hay 100 bales of cotton. Now, when would I have to buy the 100 bales of cdtton? Mr. RHoDes. That would depend on which month you bought. The futures market operates 18 months in advance, in the case of cotton. You can buy January, March, July, October, or January 196~, cotton futures today. If you decide you want to buy December 1968 you would PAGENO="0042" 624 CONSUMER CREDIT PROTECTION ACT put~ up your $500, yOu \~vould pur~ha~e ~ contract ~f or 100 bales, and then when the pecemb~r 1968 ôontract beëomes th~ current month you would, if yOu were still ho1ding~the contract, take deli~ery of the 100 bales of cotton and pay the full purchase price within ~4 hours. The $500 that you ~ut down is merely put up as a margin to protect the clearinghouse which hs~ndles the contract. Mr. STEPIIE$5~I will get a specific price per bale? Mr. RHoDI~s. Let me explain that should the market go against you and the $500 has been used up, they would call on you to put up additional ma~rgin. Mr. STi~PIIE*~. If the price should rise? Mr. RHODES. That's right. Mr. ST~rn~*5. Suppose the time came within the period of time for me to buy the balance of it-for me to buy it. Mr. WILLIAMS. Mr. Stephens, could I make one point? You would be required to tput up the additional price if the cotton dropped. Mr. RHODEs.1 If the price went against him. Mr. WILLm~Is. Yes. Some comment was made that margin was ~*~t~ulrE~d if the~price went up. * Mr. S~rrn~5. Yes. What I am trying to ~et aei'oss in ffiy mind is this: Suppos~ I do not buy any cotton? Suppose I just buy a $500 futures contract, and then when the time comes, do I forfeit that i~ I do not buy the balance of the contract within a specific time? What happens to that $500 if I 10 not want any cotton at all? Mr. RIXoDES. You do not put it up until you want to purchase the .contr~Lct. If you want to purchase a coi~traot, a hundred bales of cott~t~,, that is whOu your broker will call on you t~ put up the $500. Ybtt put it n~ at that time and the normal situation is, you buy back the other sid~ of the contract before it ina~tures. If you purchase December 19~38 cotton, 99 times out of 100, those are the statistics at least, the p~frohaser will sell a Decembet 1968 contract before it mature~ Then one contract wipes out the other, and you get your $500 back, assuming the price has~ not changed. The $500 margin is there to guarantee the clearinghoi~tse which handles the contract in ~he event that the market goes against ~1ou. It goes to protect the clear- inghouse wh~h handles t~e eontrab1t in the event that the market goes. against you, regardless of ~zhether you ~re a~seller or purchaser. Mr. S~rErIri!~Ns. I am not sure I know what happened to my $500. I appreciate your being before the committee, and from your expe- rience as yoni outlined, you ought to know every way in which cotton men can go brok~. Mr. RHOD1~S. I would like to make one very short statement if I may. I don't desire to summarize my statement, but I do want to~ point out that we should not overlook the fact that if excessively higk margins are imposed to discourage the use of futures exchanges in thi~ country, that the business of hedging may well be transferred to futures markets in other c.on)ijries which have established markets or which ver~r well can establish markets. By doing that we could very well lose the leadership which we now enjoy in this type of business. Just this r~iorning I received a letter from th~ Indian Forward Mar- ket Commistiori asking me to write an article for their publication cx~laining our No, 2 contract which they understand is getting started PAGENO="0043" CONSUMER CREIiIT PROTECTION ACT 625 again. There are cotton futures markets in Liverpool, Japan, and India. If action is taken that would make our markets ineffective in this country, it w9uld result in our bnsiness moving to these other markets. At the present time we have a wool market in New York and much of that business is being transferred to the wool market in Sydney, Australia. Mr. STEPHENS. In other words, what I understand you to say is that this is a real competitive field, this market business, and that regulation of the price that consumers will pay, if you take that com- petition out, will make the consumer pay more. Is that what? Mr. ThaODES. That's right. Mr. STEPHENS. One other question, Madam Chairman. From what Mr. Rhodes has said about the volume of the cotton business, he could consider it more or less a thin market as contrasted with grain, which would be a larger market, is that right, Mr. Gray ? Mr. GRAY. It would, unfortunately, be such an example. As reeenfly as 1953 the cotton futures market was the world's largest futures mar- ket, and incidentally, to further confirm what Mr. Rhodes said, we did publish a study in about 19~O in which we explained the demise of the cotton futures market and its demise was owing directly to the fact that the Government assumed the marketing function. Mr. STEPHENS. That would give price support to the farmer produc- ing the cotton? Mr. RHODES. Yes. Mrs. SULLIVAN. Dr. Gray, the fact still remains, does it not, that the objective sought in playing the commodity market is to rna~imize gains or minimize losses? Depending on the ability of the processors to pass on costs, which are extensive, any losses experienced as a result of playing the com- modity futures market are passed on ultimately to the consumer. Given an economic situation characterized by inflation or inflationary pressures, or the prospects of inflation, commodity prices will be bid up. To the extent that restrictions are placed on commodity futures trading-in terms comparable to margin requirements on stock pur- chases-to this extent pressures to bid up commodity prices, above aily justified economic price, will be eliminated. This has been true as far as stocks are concerned, and I do not see how anyone can argue that the same could not be true regarding speculation in the commodity markets. Mr. GRAY. If that is a question, Madam Chairman, the answer in a word would be "No." If I may elaborate. Mrs. SULLIVAN. Please do, Mr. GRAY. The commodity futures markets simply represent the most efficient price-determining mechanism that has ever been devised. If you interfere with the function of the commodity futures markets, then you encounter much greater likelihood of establishing incorrect prices at either too low or too high levels. If I may illustrate with a couple of recent cases, The Congress did prohibit futures trading in onions in 1958. Subsequent to that time we analyzed the price variability in cash onions. PAGENO="0044" 626 CONSUMER CREDIT PROTECTION ACT Prior to the period when there was active futures trading in onions und subsequent to the period when there was active futures trading in onions, we published the results of this study, the price variabihty was much grei~ter prior to futures trading and after futures tra4~ug than it was during the era of active futures trading. One other example. In November 1965 Secretary of Defense Mc- Namara took the tripartite action to halt what he considered to be an unjustified rise in copper prices. He released, I believe, it was 200,- 000 tons of copper from the stockpile which of course had the imme- diate efl?ect of causing the we~kuess ii~. copper futures and spot copper prices. lie raised margins in copper futures trading to prohibitive levels, and he took some steps with regard to the 1mport~tiQn and exportation of copper. Having prohibited by raising the rna~rgius to prohibitive le~vels futures trading in copper really bad simply the efl~ect of breaking the thermometer but it didn't keep the tempera- ture from3 ris~ng. S~seq~ient~y, in~pril 19~6; copper futqr~s and cash copper re~ched tine ailtime high level in history. He didn~t stop the price ~`ise. lie ~tjd ~ot change the law of su~pply and deman& Tie simply d~prived ~p- per users and copper con~umers and ~copper s~llers of the opportun~ to p]~Qtect3 themselves a~gainst4 price change which the futures market had pi~ovi~ed.~See p. 632.) ~ LLrVA. Can yo~i say that that held, true also in the sugar market o~'196M 3 Mr. GRAY. ~[ did not, Madam Chairman, personally conçluct an in- vestigat~on hito sug~ fu~tures prices at the time of the ri~e,'I am quite )villnig to say that from studies that 1 have done of maqy con'~rnodity ftitures inark~ts, that wiThout the sugar futures n~arket yhu still would have had,-because of the basic underlyiug shoi~t~ge of sugar supplies in the *orld~-you would have ~ad ~ ~i~i~e rise that you bad. The futures markets provide the best device knowh to enable people tO adjust to the~facts of life ~hd price. If you had clOsed down. t~e,sug~r futures marl~et you would have left sugar users amid. suga~r ~roducer~ in a mucji poorer position than they were in because they could pro- tect themselves against the price riSe and against the subsequent decline which bceur~ed, 3of course, after the supplies had once again been built up. Mrs. SULLiVAN. I certainly have not been proposing an end to specu- lation in the futures markets. I want to see it regulated in order to protect the public, not end it. Mr. GRAY~ Indirectly, my fear is that the proposal may amnount to that, particularly insofar ~s any analogy is drawn and this analogy continues to be drawn, even in the financial commlmity. Between trad- ing in stocks and trading in commodity futures, it is of the u1~most importance that the commodity futures margins be kept as low-at the lowest level possible. The essential reason for this, going back to part of my state4n'ient, these are essentially hedging markets. They enable the firms that i am representing here to protect themselves and thereby operate on a smaller profit margin than they otherwise could do. Now, from their standpoint, they always use a futures contract as a hedge, which means they use it as a temporary substitute for an in- tended later transaction in the cash commodity. So they routinely PAGENO="0045" CONSUMER CREDIT PROTECTION ACT 627 engage in two transactions instead of one. And if you much raise the price of engaging in th~ futures transactions, they will simply have to resort to a kind of transaction pattern that is more costly that pre- ceded futures trading before this device came along, and that has got to be passed along to the consumer in the form of higher prices be- cause this margin, their marketing margins, would go up. Mrs. SULLIVAN. Again I go back to the only market in which we have made any kind of study, and that is sugar. In 1963 there was excessive speculation in sugar futures leading to a sharp rise in both world and domestic futures and in cash prices also. The large users of sugar, like confectionery firms and so forth, came in to see us to ask for help and ask what should they do. Because if they had bought ahead as they normally do, they would have had to raise the price of everything that they were producing in the line of bakery goods, and in all products that used sugar-candy, soft drinks, and so forth. In the hearings that we held and the studies that were made, there was definite proof that there was overspeculation. Brokers had been enticing people to come in and turn over a fast dollar on very low margin. This definitely increased the price of sugar at that time. Mr. WILLIAMs. Madam Chairman. Mrs. SULLIVAN. I will give you your time in a few minutes~ Mr. Williams. I cannot speak about grains, Dr. Gray, or other commodi- ties, because we have not made a study of them. That is why we asked you gentlemen to come here and give us your advice. But I cannot see how overspeculation in these commodities ultimately does not go down to the consumer in higher costs of the things we buy, particularly in the unregulated commodities. Mr. GRAY. Madam Chairman, when prices rise there is no doubt in my mind that these prices must be passed on to the consumer, The question before us is whether in general there is any tendency to speculating in commodity futures to cause undue price fluctuations, either upward or downward, because we have got to be concerned with the appropriate price levels for producers as well as consumers. The answer to that, as best as we can do in general terms-and it is my experience at Stanford University for a number of years and they have studied their cases-this has been studied intensively for a period of some .35 years, and the best gei~eral answer is that price fluctuations are minimized with futures trading rather than exaggerated. I am sorry that I cannot speak directly to your one counterexample of sugar. I did ~io't make a study of that particular price rise. Mrs. SULLIVAN. The hearings revealed that while there was much talk of a world shortage of sugar, it was only an estimate of what the world would need in sugar, and there was really no shortage. And the same thing happened back in 1954 in coffee from Brazil; and there was no shortage of coffee. It was manipulation in cofFee futures that caused the coffee price increases in 1954 to the consumer, just as it was the fear of a scarcity of sugar in the world market that caused the excessive speculation in sugar in 1963 and the subsequent price in- creases. S Mr. WILLIAMS. I did not want to ask any questions, I wi~ted to make one point. Mrs. SULLIVAN. If you will pardon me, Mr. Williams. PAGENO="0046" 628 CONSUMER CREDIT PROTECTION ACT Mr. BINOFiAM. Regular order. ~[r. WILLIAMS~ At the same time my time is being sacrificed. Mrs. SULLIVA~t, Please, Mr. Williams. You will receive your turn. Mr.. Halpern? Mr. WILLIAMS, We started on the 5-minute rule some time ago and the past half hour we have heard from two people. Mr. HALPERN. ~`jadam Ohai~man. First, I would like tO commend the distir~guished panel in enlighten- ing us on many phases of this legislation which I am sure will be most helpful to us. I might add, as a little sidenote, that while the subject of commodity fulures is rather du~l to most people, I wasinterested in seeing a recent story in Pla~jrbo~ magazine that puts sex appeal into a rather little known and comp~ex sñbject. Profissor Gray, since the commodity markets are fairly complex institutions, perhaps ypu woifid be so kind to answer some basic questions as to the operatiàn of these markets. First, precisely, what function do these markets perfçrm that oould iiot be achieved by direct transactions between the producers of the products and the commercial purchasers? Mr. GRAY. Several functions, Mr. Halpern. First, and most importantly, they enable better adjustment, a better allocation of the commodity oyer time which would be impossible with only cash or spot transactions which is possible but made very awkward and expensive with forward contracts, forward contracting which is done, so futures affect this allocation of the commodity through time with `much greater econOmy and efficiency than any other market. Secondly, the job of price determinations and where you have a well-used futures market 1~or any commodity, then the price of the commodity is actually determined on the futures market and all of the cash or spot transactions are geared to or related to it. The advantage here is the centralization, the bringing together of all of the supply and demand in~Iuences into oi~e marketplace so that you get a more accurate, continuing reflection of supply and demaud in price at any one time. Finally,ç and ~articularly fro~n the standpoint. 4~the firms that I am repi~e~enting1iece today, hedging, which would%è impoesible~pr pro- hibiti~ely expei~siv'e if you didtt't have commodity futures markets, enables these fir~is, fç~r example, to obtain finanoing of their inventories at considerably more favorable rates prom the banks than they other- wise could dp.Ilênce, rçdi~icing the ~rnarketing margin-hence reducing the cost of d9~n~' bu~ness. ~id again~ it is only because they can trade these oont~acts very éheaply with n~iinimal depo~it~ for protection of all parties to the trading, tbt~ it is possible fó~ them to achieve this econom3~. Mr. HALPER~. Could~you tell us exactly what the relation~hip is be- tween the price It pay for wh~at futures contracts on the~ commodity exchange and the price paid for a bu~hel of wheat by a commercial baker? T~e relationship isyery ~lose,and it is guided essentially b1~ the tiuthtion of what we call Oarrying c~iarges. If, ~for ex~mple, at the present time yqu~ looked at wheat pri~es in say th~ Kaiisas City PAGENO="0047" CONSUMER CREDIT PROTECTION ACT 629 Board of Trade you would find-and .1 am speakthg first of cash wheat prices and let's suppose for illustration they ~re $1.50 a bushel, you might find the September co~atract for future delivery would be $1.55 a bushel or $1.53~ If that were the case then the ma~'ket would be re- flecting a carrying charge, the cost of carrying a bu~bel of wheat from now until the September delivery date. In other circumstances when ther~ is a current shortage of com- modity this relationship is still guided by the~sarne consideration, bpt it may turn out to he an inverse carrying charge because ~2tere is need to pull the commodity out of storage now and use it. So the futures are always guiding present usage versus future usage, and thereby again performing this ailocative functiori~ of the commodity and thereby, incidentally, achieving a diminution in price variation through time. Mr. IJALFERN. You suggest that more rather than less speculation tends to stabilize prices, yet there have been times when speculation has beep destabilizing and has driven commodity prices upward. I have two queries in this regard. If margin requirements are not the proper vehicle for regulating such speculation,~wliat is? Second, what sore of controlling, if any-what sort of control, if any, has in tue past been exercised ovei' excessive destabilizing specu- lation by the Commodity Exchange Conirnission? Mr. GRAY, I did say in my statement that margin control would be ineffective because one can really only ascertain in retrospect whether the price change that occurred was warranted or not by supply and demand conditions. But if you should encounter instances, which you will rarely, on the well-used futures markets where the price change that occurred is sub- sequently seen to be upward-nnwarranted or could be demonst~ated to be unwarranted, this would typically be for one or two reasons, ejther because the market was mistaken in its aggregate judgment. It makes a cOllective judgment and it can make mistakes. About that~ sir, I think you can't do anything. YQU cannot legislate against people making mistakes if they are honest mistakes, Alternatively, ocèasionally this may occur because of manipulative endeavors on the part o~ users of the matket. We do have at present the Oömrxiodity Exchange Authority which is at all times concerned, to prevent these efforts. We further have the bpsiness conduct committees on the exchang~s which are al~o concerned ~o prevent these efForts. The pen~dties a~é~evére for those who attempt this. Most sm4irattewpts fail. Most such attempts~do not change prices. But those Mtempts that do suceced in~ çhan~in~' ~riçes I think are usually caught under the pres~ht i~w. M&e&qtiè2 t~he bill which the Departpi~nt is now intro- clueing further tightening regulations over commodity e~c~ange trad- ing includes ozie pro~ision of making the penalty more-the penalty for manipulative attempts more severe, making this a. felony, and that prov~ion I suppprt and that proylsion, the grain and fe44 dealers national associathjn. supports. I support and they s~upp9rt every con~ structive effort tôimpro~e the regulation of tl~e commodity markets, Mr. HALP~S~I h~v~e one more question. Mr. GRAY. accuse me. I am just reminded of one other point. I ~lso support the inclusion of other commodities under the Commodity PAGENO="0048" 630 CONSUMER CREDIT PROTECTION ACT Exchange Act. So your initial statement referring to the entire panel, I can't speak for all of them, but for me it is incorrect. Mr. HALPERN. You tend to identify speculation with volume trad.. lug. Yet, is there not a difference between stabilizing speculation which leads to a balanced market and destabilizing speculation which tends to overemphasize trends in one direction or another? Mr. Gii~y. There can be that distinction. I tried in my statement to draw the distinction a little bit differently. I think that the chronic difficulty with some of our thin futures markets is inadequate specu- lation. Now, this gets to be something of a hen and egg proposition. Did the pricing go tip because somebody traded, or did the price go up because when somebody traded there wasn't a sufficiently large body of speculators in that market to defend that price? And I think most of the evidence would suggest that the latter is a better interpretation of the events. If you have a large body of professional speculators, they will generally be right on the price. The market is more likely to be right on the price. The price fluctuations are likely to be smaller in those circumstances which is, still, of course, not to deny that you can find circumstances when the best collective judgment of traders will be mistaken for a period of timing and that there you have the ultimate safeguards that it is supply and demand of a commodity that brings the futures price ultimately back into line. Mr. HALPERN. My time is up. Thank you very much. Mrs. SULLIVAN. Mr. Gonzalez? Mr. GONZALEZ. Thank you, Madam Chairman. As to wheat grain futures and the activity in that market, did the recent depletion of the storage quantities have any effect upon the market? Mr. GRAY. I was thinkhig the Kansas City man could speak more accurately. and he may wish to expaiud on my statement. The depletion of wheat stocks-it has been my impression the wheat stocks has improved the opportunity for trading in wheat so that the volume has gone up. Not to the extent, however, that it has in other grains where the extent or degree of Government interference into pricing is still ie~s than it is in wheat. Mr. GONZALEZ. Do you recall any recent manipulative efforts in tbis market, say, within a year, within the past year? Mr. GRAY. No, I do not have any; no, sir. Mr. GoNzAL1~z. Could you explain to us how a manipulation is accom~ pushed? What are the usual tricks of the trade? Mr. GRAY. To cite an example of a case in. which the CEA did obtain, as I recall, a consent decree for alleged manipulation o~ wheat future~s prices in 1959, two people-two men employed by a brokerage firm endeavored to run up the price of the May wheat futures on the Chi- ca~o Board of Trade simply by heavy concentrated buying. This effort did cause prices to be briefly distorted-they were too high for awhile because of the buying. The punishment for this effort was first the people who were. in a positon to move wheat to Ch~cago~ recogthzin~ that this price was too high, did so and delivered the wheat to people who had to pay too high a price for it, so it cost them, and second, they were. penai~zed by the Commodity Exchange Authority, and I, have forgotten what tite penalty was. This was ju~t c~uc~ntr~tcd buying to PAGENO="0049" CONStIMEIt C1tEt~IT E~OTEcTION ACT 631 brokers and the commissions firm, just lined up lots of customers wit1~. lots of money and tried to push the market price up~ and temporarily achieved this. Mr. GONZALEZ. Thank you. Mr. Cald~reU, do you recall any recent e~orts at maniptilation in this market, wheat grain,~ or any strong fluctuations that resulted in price increases to the consumer? Mr: CALDw~L. We haven't had any within th~ pas~t year. The most recent case in which we have brought charges involved wheat in~ 1963. That case has not yet been settled. Mr. GONZALEZ. Thank you very much. Mrs~ Stn~ivAN. Mr. Williams? Mr. THEIS. Madam Chairman, could I address an answer to Mr.. GonzaleZ' question? Mrs. SULLIVAN. Surely. Mr. THEI5. I believe you asked if the depletion of the Government stocks in the past few years-referred to the wheat stocks-had any implication oh the futures contract market. Mr. GONZALEZ. Was it a factor? Mr. THEI5. Yes, it was, and I shall quote you figures from the Kan~ sas City market. In 1~2 the volume of speculative trades were more or ks~ the ~ame~ as the volume of speculative trades on the Kansas City market in wheat in the year 1966~ However, the volume of contracts in hedging in 19~2~ were approximately ~ million busheis~ whereas in 1~)~ they were~ almost double. They were more than double. They w ~8 million bushels. So this brings the grain industry jflto play where they are carrying the grains on a hedge basis rather than having the grains~ carried by the `Government `in the case of ~urplus~ Mr. GONZALEZ. Thank you very much. Mrs. StTLLIVAN. Mr. Williams? Mr. WILLIAMS. Thank you~ Madam Chairman. Dr. Grny, I would like to say that I think it wo~iid be helpful to this committee if you would take the ease rai~d by Mr~ Stephens~ where he has $500 to invest in cotton futures and describe the various~ things that cam happen to Mr. Stephens? $500~ and I would like to suggest that you submit that for the record. Mr. GRAY. All right, I'll endeavor to do' that. (The material requested follows:) tYI$rOSITION or MAEGIN Th~rosrrs Tal~e t~e p~rine of D~e~nbor cosa futures to be $1.00 per bushe1~ and the margin requiremnent to be $500 f~r a 5000 bushel futures contract. When a December futttres contract is purchased (or sold) at $1.0O~per~bn~heI, the opposite side ot the bought (or sold) position is taken by the clez~rimg hetise, wbI~ti there~ore holds the seller's" (delivery) obligation toward all buyers~ dnd the be~r's~ (receipt) obligatIofl tow~d all sellers. The btlsi~ purpose ~f margtes~ts t~ protect the `clearing house in the eveiat of price ebange; so that it can meet its seller's obligation in the event Of ~price decline, ~r Its buyer's ebIigation~hh the e~et~t of~ prièe rise. If prices rise to $1.05 per bthshel, half et the seller's margin has b~en Impaired', so he would be called' upon to d~poslt $25~l additional margin. If prices, rise. further to $1.10, he would be required to deposit an addltionaa$250 margin, etc.,. so long as prices continue to rise. If prices feciined, then bt~yer8 would be re~- quired to deposit ad~1itional margin according to the same' schedule ($250 for each~ 5~ price d~cllim). Phu~ at all times the eh~aring hnuse is' protected., 83-340-67-pt. 2-4 PAGENO="0050" 632 CONSUMER CREDIT PROTECTION ACT rflle market determined value of a futures contract at the moment it is bought (sold) is zero. Only as its price may subsequently rise or fall does it acquire any value to buyers (sellers). Margins are established and maintained to assure that any increments in value are transferred from buyers to sellers (or vice versa) if and when they occur. As to what happens, then, to Mr. Stephens' 5500, the following happens: (1) If price does not change, his margin is returned to him, minus ap- proximately $20 commission fees, when his contract is offset in the Pit. (2) If price changes in his favor, his margin plus $50 for each one-cent change in price is returned to him, minus $20 commission fees, when his con- tract is offset in the pit. (3) If the price changes against him, his margin minus $50 for each one- cent change in price is returned to him, minus $20 commission fees, when his contract is offset in the pit. (4) If his contract is not offset in the pit, then a cash delivery transaction results, and the remaining margin is applied to this transaction. Congresswoman Sullivan submitted the following news release from Office of ~sslstant Secretary of Defense (Public Affairs) NOVEMBER 17, 1965. Secretary of Defense Robert S. McNamara stated that our greatly increased defense efforts in Vietnam and recent international political distarbances threat- en to disrupt and distort the market for copper despite the best efforts of the industry to supply the market. This market disruption can lead to strong in- flationary developments not only in copper essential to defense needs. but also more generally throughout our economy. Such developments would seriously im- pair our defense efforts in Vietnam. To avert them, the Government, after dis- cussion with members of the industry, is initiating the following action: a. Arrangements are being made for the orderly disposal of at least 200,000 tons of copper from the National Stockpile. b. Exports of copper and copper scrap from the U.S. will be controlled for an indefinite period in order to conserve domestic supply. c. Legislation will be requested of the Congress by the Administration to permit the suspension of import duties on copper which at present amount to 1.7~ per pound. d. Discussions will be held with the directors of the New York Commodity Exchange urging them to curb excessive speculation in copper trading by raising the margin requirements for copper from the current level of ap- proximately 10% to a figure more comparable to that required for trading on the New York Stock xchange. Mr. `WILLIAMS. I am quite certain you are familiar with the Inter- national Wheat Agreement which comes under the ~urisdietion of this committee, and we have the International Coffee Agreement which comes under the jurisdiction of another committee. I believe these agreements were entered into with the understanding that the inter- national price and production controls would eliminate undue specu- lation which would tend to decrease severe fluctuations in prices. I-low- ever, leaving otit the consideratiQlls of foreign polióy and foreign aid, is it not trn~ that th~se agi~eements have ~ctually resulted in American housewives ~~ying~ ~nuc14 h~gher pr~.ces? Mr. GRAYS-It is unquestionably true that where we enter into agree- ments to support the prices of the 1~mpc~rted tropical commodities which we do `~ i consa' mg, importing c~uqti v~ th~t this is th effect, it is imquestionftbly true that the leading ~`ni~se of èontinued high sugar prices for the- American housewife- is the sugar quota system which is in effect. It is unquestionabi~T true that the payment which flonr millers make in excess o~ the- price of wheat which they pm'c~se from fa rthers to pay for the market-for the farmer's marketing certificates ulti- mately increases the prie~es of flour and, therefore, of bread. PAGENO="0051" CONSIJMER CREDIT PROTECTION ACT 633 Mr. WILLIAMS. That is all I have. Thank you. Mrs. SULLIVAN. Mr. Minish ~ Mr. MINISH. Thank you, Madam Chairman. Mr. RHODES. Did I understand you to say earlier that you worked for the Agriculture Department? Mr. RHODES. I did from 1934 to 1960. Mr. MINI5H. 1960? Did you not also say that they just about wrecked the co~ton futures market? 4 Mr. RHODES. Yes. Mr. MINIsn. Is that while you were there or after yoif left? Mr. RHODES. Part of it was done while I Was there and it was fjnis'hed off after I was there. Mr. MINISH. Did you administer the cotton program? Mr. RHODES, I administered the cotton program in the Department of Agriculture from 1952 to 1960 under the supervision of the then Secretary Ezra Taft Benson. Mr. MINISH. Do you feel the actions of the Agriculture Department might have resulted in higher costs to the consumer? Mr. RHODES. The prioe-sup~ort programs of the Department of Ag- riculture unquestionably increased the cost to the consumer. I don't think there would be any question whatever about that because the price of cotton during the years that I was in the Department was held up in the neighborhood of 32 cents to 35 cents a pound ~n this country, and it was being sold throughout the world from the k~w to niidd1~ 20 cents a pound. It is the chief ingredient in most household products. Mr. MINISH. Do you want equal time; Mr. Caidwell? Mr. CALDWELL. Mr. Rhodes is more familiar with that since I did not come under the cotton authority jurisdiction. Mr. MINIsn. Mr. Rhodes, you mentioned earlier the for~ign mar- kets-do they set margins in foreign countries? Mr. RHODES. Yes; sure, they have margins. Mr. MINI5H. Can you tell us what they are? Mr. RHODES. No, sir; I wouldn't be capable of telling you what the margin in India or Japan or even Liverpool is. The Liverpool market is very, very thin, too, now. Mr. MINISH. Dr. Gray, I note that the New York Commodity~Ex- change filed a statement with the committee but did not come in. Do you feel that the trading of silver which is important tQ this comn~it- tee had a bearing on the speculation in silv~r ~ Mr. GRAY. I don't understand your question. 1 am ~orry. Mr. MINISH. The New York Comrnqdity Exchange flle4 a. st~te- meirt but did not c~me in. Phe~.tr4ade In ~ilver, whIch is very in~porth~it to this committee. Would~you or any of the other gentle~en~ say that the speculation last May Or June had any impact in the increase in the price of silver? . Mr. GRAY. The speculation in silver futures provided the oppor~ tunity for people to adapt to the inevitable pl~ice rise in ~iTver, ~i,lvcr useth and producers could adapt to that rising price H~è i~ ~he~y ha~d the wisdom to do so by trading in future contracts. 4 Mrs. SULLIVAN. Mr. Bingham? Mr.~BnrniiAM. Thank you, Madam Chairman. I am intere~ted in the comments made by Mr. ~heis abont the necessity of. controlling PAGENO="0052" 634 CONSUMER CREDIT PROTECTION ACT margins. He referred to them on page 4 of his statement. I see youi have a very detailed appendix on that subject. Could you quickly tell us what are the criteria by which the proper margins are set? Does it have to do with control of excesses of speculation? Mr. THEIS. No, sir. As far as the criteria for the setting of the margin, I would like to go a bit deeper than what has been said here' as to the operation of the Kansas City Board of Trade and a little' deeper than what is in the paper. The mininium margins are set by the board of directors of the Kansas City ~Eoard of Trade-for the minimum margins to guaran- tee that cont!~aet. However, we have the Kansas City Grain Clearing' Co. who takes the opposite side of these contracts, and all the trades are cleared through them They have margin requirements for that clearinghouse. Therefore, the members of the Kansas City Board of Trade who are also clearing members are obliged to bring in the' margin of either one, whichever is the highest As far as the directors of the Kansas city Board of Trade are concerned in the setting of minimum margins for our members, we review them, we review them quite often, we also look at the criteria: Is this level, high enough to guarantee the contract-is it also low enough to afitord the public and the hedger to come in and make full use of the mArgin? We sincerely believe the more forces we have in the marketplace dictating their thoughts as to the price up or down establishes what we consider to be a true market price. Mr. BINGIIAM. Is there any parallel between the downpayment made on a real estate contract at the time of signing of the contract~ and what you refer to as margins in futures trading? Mr. GRAY. I think the closer parallel, sir, might be with a deposit of earnest i~oney rather than downpayment. Because the futures' margin is not a downpayment. The title to no capital asset has been made when a futures contract is established by a transaction between' buyer and se~Eler. Mr. BINGIIAM. That' is also true in real estate. The downpayment in a real estate contract is, in effect, earnest money. Mr GRAY Yes If, in the final `inalysis, if it were true, sir, that the futures contracts culminated in delivery of the product, then the margin could serve retroactively or retrospectively-it could serve as a downpayment and the balance over and above that margin would be what-would have to be paid in cash to purchase and own the actual con1n~odity To that extent you could say there is a parallel But the important point is~ the usefulness of markets is for hedging purposes-pç~ople who hedge do not ordinarily intend to take de livery ~peciilators rarely do Therefore, some 99 percent, I suppose, in the well-used futures markets are offset before they mature and, there- fore, you don't have the commodity changing hands through this in strume~it, and if you look at that in retrospect you couldn't say that this niargin depo~it was a downpayment because there was no trans- action. Mr. BINOHAM. Let me ask you this question, Dr. Gray. It seems to meit is a rather key question. I take it prom what you have said before that you would agree' that excessb~e speculative buying in futures can force up the futures PAGENO="0053" CQNSU~EER CREDIT PROTECTION ~CT 6~5 price. That is pretty clear. Now, the $04 question seems to me is~ will that ever affect the price at time of delivery ~ Mr. Gn~r. Typically not. Mr. BINOHAM. Why not ~ Mr. Qn~y. In the illustration I cited earlier what was the excessive and manipulative in one contract in 1959~ the ultim,ate effect in the price of cash wheat was that a small proportion o~ the total amount of wheat was delivered in satisfaction of these contracts. That being the ~case, the prices on those contracts was too high-to the san,ie extent that the futures pricing had gone too high. More usually, in the event of excess speculation in futures this would I think correct itself before maturity and would not usually oulminate in delivery at those prices, though this would vary from case to case. I really also feel, sir, that the key question here is to the extent or frequency of excessive speculation and there again most ~f our evidence suggests that with the futures markets, a more precise job of pricing is doi~e~ because you have brought all the supply and ~leman,d forces to `bear at one place in determining this p$ce you have aud you have an improved opportunity for getting the correct prices established. Mr. BINOHAM. What if anything does the~ Commodity ~change Authority have to say about this ~ Mr. CALDWELL. The Commodity Exchange thorfty~h~s nothing to do with margins at the present time. Mr. BINGHAM. Before yielding back my time, I would like to express a welcome to those gentlemen who are here from New York City. These markets do play an ini~portant role in the financial life of the city', and .1 thanj~ them for appearing here today. Thafik ~ou, MadamChairman. Mrs. SULLIVAN. I have a few question that I would like to ask., First, one of the witnesses-Dr. ~ray-recommended pb~icing all of the agricultural commodities under regulation. Do all of you gentle- men favor placing the additional agricultural commodities Linder r~gu~ lation, and also would you approve some similar type of regulation, for nonagricultural products? Is there anyone that objects to pladiug all commodities under some form of regulation~ Mr. RHODES. I wouldn't say I object. I think it i~ highly questionable whether commodities that are grown entirely in fore~gn countries and ~traded on foreign futures markets can logically be put under super- vision in this country. Mr. WATTS. The New York Mercantile Exchange ~inds iio fault with regulation by Comm1çclit3 Exchange Authority. We welcome it. Mr. BRooKs. As you added the commodities to the tesponsibilities ~of the Department of Agriculture, and you get away from agricultural forestry products and as the volume of trade, because of the economic ~situation, seems to increase, there comes a point in our judgment where the Congress might well look at establishing an independent Tegulatory agency-call it the Commodity Exchange Commission- divorced from a commission composed of Cabinet members-not unlike that established in the securities field-but you have to look at this only when you get to the point in our judgment, are these conmiodities peculiarly agricultural or forestry? Mrs. SULLIVAN. Mr. Watts, what in the world makes bags of 1,000 circulated or uncirculated silver dollars proper items for futurea PAGENO="0054" 636 CbNStYMER CREDIT P1~0TECTI0N ACT trading? I note ~h~t a coritr~ct of thu nature will ~o ~ip on your ex~ change on August ~i. What is the rationale for that? Mr. WATTS. It is not a, futures contract. It ~s a spot contract. We refuse to write a contract for futures trading in silver dollars. This was asked by several of our members, this spot-cash market was asked fo~ b~r several of our members in order to, shall we say,, bring order out Qf chaos in the market for these silver dollars. It seems that there fs a considerable premium on some silver dollars and some not. That is just-we just don't let them-~it is a cash contract, not a futures contract. Mrs. St LIv~~. Professor Gray, we ~n this subcommitee all recog~ nize, I am sure, the legitimate role ~of the speculator in any com- modity exchange. Normally, these are knowledgeable people who buy and sell as a regular thing, keeping up with the market, knowing the range of trading values, and providing a base for the trade to hedge. But what of the doctors and lawyers and merchants and schoolteachers and others wh~ are touted by their brokers into taking a flyer on some commodity which is suddenly spurting upward-people who have no idea of how the niarket operates but, who are pulled in by dye~ams of sud4en ricl'~es-and often end up with a big hole in their bank accounts as the market suddenly shifts? W1~at legitii4ate role do such plungers play in an orderly market? `Mr. thur. ~W~'ell, Madam Chairmau, you have used some fairly color- fui expressions in that question-being touted `by brokers to the extent that this does occur, and if they are u~ot well infQrmed and responsibly treated by their brokers it is objectionable, at le~a~t from the standpoint of the participant. Now, if this js, say, a doctor or dentist as you indicated-people with fairly high in!eomes in this econ~wy and if this affects a transfer payment from that segment of the economy to `the wheat or potato segment `of the economy,, I wou,ldn't pass a' moral judgment on that as being bad. ~t is probably art inefficient way to do it. Mare importantly, Madam Chairman, the marketplace is a con- `tinuing screening process. Those who do succeed are obviously doing a good job of forecasting prices and those who~venture into this with- out proper prçparatiou, without proper understanding are, I suppose, by and large, a~pt to pay a price for that venture; no differently, I think, however, from ventures into any kind of investment if they are ill advised or ill timed' or not properly prepared. We can't-I think we cannot legish~e against foolishness. I think we eafmot legislate agaifist people lackin~ wisdom and intelligence. To the extent, however-to repeat this-tb the extent that it is irresponsible touting by brokers,. for example,]! think it is squarely objectionable. Mrs. STJLLI~~AN. In asking this question, I was thinking back again to our hearin~s `and our study in 1963 in sugar because this is what happened. And it was obvious that in the end the public does pay a price for this and we did pay for it in sugar and we paid for it in coffee when that market soared. Going over the reeordt in the brokers' ac- counts, it was clear that many people who had never before speculated in anything like this were pulled into the market on t.h~ promise of a fast bUck-I hate to use th,at slang expression-~--but that was the only PAGENO="0055" CONSUMER CREDIT PROTECTION ACT reason they~got into it~. They had been 1~d to believe they could make it big overnight. And we found that it took a very small amount. of money, comparatively, to play for big stakes. The broker would allow them to come in with a few hundred dollars and buy or sell contracts worth thousands of dollars. Do not tell us it did not raise the price of sugar to the user, because it did, Mr. GRAY. Ma~Eam Chairman,may I comment on that? Again, I apologize for not being able to deal in any depth with your single counterexample of sugar and futures trading. I simply am not informed asto that particular price movement. I would say, however, that during the course ~f that I personally was visiting with a oomm~dity broker in San Francisco on another matter and a young man came in and said to him that he would like to buy a sugar futures contract and this broker said, "What makes you think you would like to buy a sugar futures contract?" He said, "My friend bought some and told me if I would get $300 and invest in that, `that I would make some money." The broker~ said, "In the first place, I would not accept your account with $300, and secondly, I strongly advise you against trading futurè~s and if you are going' to trade them you will have to do it some place else than with me," `This is the distinction I am trying to draw between ethical and re- ~ponsible brok~rage firms and those who may have, and I didn't have the evidence you evidently had, those who may have touted people th do' this irresponsibly. Mrs. SULLIVAN. We are all aware of the need for, and the use of, the futures market b~ the knowledgeable regular traders, whether they be individuals who ~eñter as speculators or producers or users of the commodity who are hedging. We are no't trying to interfere with orderly trading. Frankly, this section 207 was put in this bill so that we could develop~ more information about futures trading and thus li~rve a better unden- standing of what happens when the futures market was efitered intO by peo'ple who knew nothing about it-who are led to belie~e~ it is' a way of making money fast. Often they find it is `just as easy to lô~e it fast. That is their problem, perhaps, except that when such arnateut's~ aggravate a volatile market, we all fè~el the consequences. Mr. Stephens? Mr. STEPHENS. Madam Ch'airman~ one thing I want ~o do, and that is to not just leave in the record the answer to Mr. Minish's question about `the support price for cotton as raising the price of cotton goods to the consumer. Just by itself it sounds as if that is a great fault in the price of cotton supported by the Government. I think the record should explain the fact that the support is an incentive one to make it profitable for farmers to continue to raise cotton in America. It is to supply the producer with a reasonable return for his work and for his investment in order for us to continue to have textile mills that will employ people in America so that we can compete with people in other countries at a higher wage level than countries abroad and also in order for us to support the worker in the garment industry in New York and Mr. Mjnish's district-which w& intend to main- tain-and I ~want to have it maintained, `at a high ie~ol of employment, a high level of wages for people in the Ootton textile field. If we want PAGENO="0056" ~38 CONSUMER CREDIT PROTECTION ACT to do this we h~ve to provide an incentive for them in America to grow ~cotton. We have chosen the method of cotton supports becaxtse the only alternative to that would be in getting back to where we were many, many years ago when we had terrific battles over tariffs. We either ~had to raise the tariff to prevent these goods from coming in or pro- vide the incentives that would make the farmer get what he gets. So, if we are goi4g to have prosperity in the whole field, of textiles then the consumer is going to have to pay a little higher price. ~ Now, to get back to some of the impressions I got from our sugar investigation.: The first was the tact t'h~t ~u~ba had gone ou~ of the `niarket of supplying the United States. This ma4e ~ lot of people think `that sugar was going to be soarc~ and they shou~d get into the market. `That was one of the things. The other thing that I remember that was brought out in the dis~ ~cu~sion we had was `the fact that sugar was going to have to be pro- ~duced in quantities in other places; that there -was going to have to be, placed, in' the field of sugar production some incentive and the American pe4ple were going to have to adjust to a~ higher price i~ They `waiited to m~ke people in other pojintries go into `the proçluction o~ sugar so they~ could pay higher wages `and pay tor the~ost of investhig in sugar plants. It was not 1~ep~use of speculatio~, ~tbez~e were `effects ançl that.is what' you had in mind, was ;t not~ i~of~ssor G-ray~ Mr. GRAY. Y~es, sir. Mr. STEPIp~NS. Mrs. Sullivan did not enter. into the whole matter. w~re other factors involved around th~ ~i9le thipg, not just the one fact~r of specu~tdrs g~tting. into the marI~t, ThOse `are other things, too. `. , , - Mr. E'aoD~s. Madam Chairman, I would like to say that I appreci- `ate Congressman Stephens' bringing this point up again. My answer was very slu~rt and it may have been misinterpreted. I ~m not opposed `to the cottoi~ program. In fact, I haye supported it and l~iave bem~fited from it for ~5 years. It is only the way in which it has operated t1a~t it has affected' the futures market. On August 1, 1966, the Government had in its inventory over 14 million bales of cotton out of a total carry- over of 16.7 million bales in the country. The Government owned. and had in store over 14 million bales of cotton which they were offering br sale. If you ta1~e cotton, in a cotton shirt that sells for $6 or $8, the cotton would be worth about 27 to 29 cents. So if you increased the price 50 percent you: are only talking about 6, 7, or 8 cents on that cotton shirt. But it has ikicreased the cost. But I dian't mean to infer that it was bad. Our farmers should have an income comparable to other people's. Mr. STEPhENS. I did not mean to imply you were giving an erroneous answer. I did not want to leave in the record ~, statement that we had cotton price supports without the fact that we had them in there with some good explanation. Mrs. SULLIVAN. Did the Government take over that amount of cotton in oi~der to support the price of cotton? Mr. Rno~Es. The Government makes loans on cotton to the farmer. Mrs. Srn~uvAN. It was to support the price the farmer recei~ves. PAGENO="0057" CONSUMER CREDIT PROTECTION ACT 639k Mr. RHODES. At tim end of the loan period, if the farmer has not paid off the loan, plus interest and carrying charges, they take over the commodity. On the 1st of August 1966, they took over about-nearly 6 million bales of cotton and they already had 8 million bales from prior years. Mr. STEPHENS. In other words, the Government increased the inven- tory of cotton in warehouses. Mrs. SULLIVAN. If the Government had not done it, what would have happened? Would the price of cotton have gone down? Mr. RHODES. Present law which the Congress passed in 1965 changes the way it is handled. Now the payments are made to the producer directly and the cotton is allowed to move through channels of trade and be handled as it is normally in other commodities. Now, I, as a cotton farmer sell my cotton to anyone I can sell it to for the best price. I get my additional income in the direct payment from the Government, not `by having the inflated loan rate and having them take over the commodity. Mrs. SULLIVAN. Mr. Bingham? Mr. BINGHAM. I just wanted to pursue a little bit with Dr. Gray the question that Mr. Williams raised about the cotton and sugar interna- tional agreements, particularly in regard to coffee. I do not know whether you intended to suggest that you were opposed to the coffee agreement, Dr. Gray, did you? Mr. GRAY. I have no ax to grind in this matter, Mr. Bingham. If one assesses these agreements in terms of their economic efficiency, I should say that they are not very efficient economically. Mr. BINGHAM. May I suggest that there are other coaisiderations?~ Mr. GRAY. That is why I limited it to just that consideration. Mr. BINoHAi~. The stability of the country producing these com- modities, for example. Mr. GRAY. I am not opposed-I say if we limit our consideration,. because the qnestion which came to me was as to the effect of price on consumers. If we limit it to that consideration we would have to say it is ineffibient economically. Mr. BINGHAM. Is there not also a very good argnnient to the effect that if you do not try to regulate, for example, the prices governing coffee, in Brazil, that you may have such wild swings in prices, such wild swings in production that you end up not serving the interests of anybody, not even the consumer of the United States? Mr. GRAY. This is, sir, an argument that is made in defense of this type of agreement. I should say in general the answer must be that the extent to which the producers in such a country as Brazil do give their response to market prices and who respond rationally to higher or lower prices producing less from the prices lower and more from the price that is higher, to that eitent the most efficient thing would be to rely on the free market system, assuming there is adequate flnan~ing here, and so on. Thit to the extent that that is not true and to the extent that other considerations such as considerations of political stability, considera- tions of hemispheric relations coming into play, then these obviously must be weighed into the total attitude abotft this. PAGENO="0058" ~64@ CONSUMER CREDIT PROTECTION XCT~ I am in total not opposed to or a proponent of the coffee agreement. If I look at it just from the standpoint, from the economic standpoint, I think I can indicate what the results will be. Mr. BING~IAM. For the record I wOuld like to say that there are many who say that we should have trade and not aid for the develop- ing countries, If we are going to have trade with the developing coun- tries, you ha~~e. to encourage trade in those commodities that they can effectively produce, and it is better in my judgment when there is some restratht on the wild fluctuations in price. Mrs. SULI~IvAN. I would like to comment on that, too. During the debate on the coffee agreement-and there was a very hot debate on the floor-those of us who worked on this problem had the feeling, and the assurance, in fact, from our consumers, that consumers were willing to pay a fair price for any product that was wholly imported. But they were not willing to pay the kind of high price that was the result of mapipulation of the market, such as happened back in 1953 and 1954 when, through a hoax on the consumer, the Brazilian coffee people tried to frighten the American processors with exaggerated reports abot~t the scarcity of coffee. It was this kind of hoax we are opposed to. We knew that if the supply of coffee was stabilized to a certain degree under an international agreement, the price might be raised to the consumer. But we would be giving these underdeveloped countries a chance to stabilize their economies by stabilizing their most important product. And I think some of them have done it, We recog- riize that an agreement on supply puts a floor on the price of coffee, and we would want it to be a fair price. When a market is misused and manipulated, however, we have the obligation t~ investigate and to try to correct the situation. This was the reason we went into those two products, coffee and sugar. We appret~iate the willingness of you gentlemen to come here and help us understand more about this subject. It may very well be true~ as you have all stated, that margin on a commodity futures contract does not mean exactly the same thing as margin on a stock market transaction. But it means something very similar~ in this respect: people can come into your markets and buy and sell contracts worth many, many times the amount of money they put for margin. Their margin can be wiped out in a~ single day's trading. They can't always get out of the market unless somebody is willing to buy them out. I think the term you use is "locked in." They can be locked in during enough days of trading to be ruined financially. That is their worry, perhaps. But when people who are jaded by the slow pace of sto~k market changes see achance to make a quick killing for a small downfayment, and are recruited int~ your markets by brokers who tempt them with yast riches at small risk, they contribute not stability but chaos to your niarkets, and I'm sure this happens periodically. You have pointed to technical deficiencies in the language of our bill to accomplish *hat we seek to do. I am sure if we were to correct the language te~hnicaiTy, you would stilbwanti~s~to drop ~ny provision of this nature from the bil1~ We will take your ~dvice~ i~nder advise- ment. PAGENO="0059" CONSUMER CREDIT PROTECTION ACT 641 I am hoping that before we mark up H.R. 11601 the Department of Agriculture will have made public the Nathan r~port on this subject, and will have some recommendations on the general subject of margins on agricultural commodities, at least. Depending on the research find- ings, it seems to me that what would be important for agricultural futures would be important also for the defense materials also traded in the futures market. I want to thank you, Mr. Caidwell, I appreciate your coming here this morning and though we did not make very much use of your broad knowledge and experience, I felt better in having you here as a back- stop. We will place in the record at this point a letter just received from the Secretary of Agriculture on the general subject of margins, ex- plaining that the Department has not changed its position on margins, but is still studying the new report before making any recommenda- tions. (The letter referred to follows:) DEPARTMENT OW AG1rrOULTURE, Washington, August 15, 1967. lion LEONOR K. SULLIVAN, House of Representatives, Washington, D.C. DEAR Mns. SULLIVAN: I regret the delay in responding to your letter on lIE. 11601, your bill to provide comprehensive consumer credit protection. I had hoped to have more specific information regarding section 207, the proposal to give the Federal Reserve Board authority to regulate commodity futures mar- gins, as a result of a special study of this subject which we commissioned. As I indicated in the departmental report on the bill, we have supported mar- gin controls in the past, and we have not changed that position. We are still in the process, however, of evaluating the study. It examines the nature of specu1atio~ in grain futures contracts, and represents a pioneering ~effort to determine both the bearing of "excess speculation" on commodity price fluctuations, and the effect of margin requirements on speculative activity and prices. More questions were raised by the study than were answered, and we want to nssess these carefully before drawing any conclusions or making any recom- mendations based on the study, Let me cite a number of questions to illustrate my point. We are reviewing the basic data available for the study to make certain that it does not contain errors which could weaken or nullify some findings. We need to clarify how the various futures positions-~such as anticipatory hedging, offsetting transactions and others-were classed for the study to determine their rolativ& price influence, We are working with the firm which made the study to resolve these and other questions, and we are hopeful that this final phase of the study can be completed by early September. Until this phase is completed, we do not feel that reasonable judgments can be made, or that qualified recommendations should be attempted. At that point we will be more than happy to discuss the study and report With you and your subcommittee. We feel it represents a substantial accomplishment in an extremely complex area as it is the first effort to obtain meaningful answers tO the questions of speculative activity by economic analy~is. Prior to then, we will be happy to have the officiaisfrom the Commodity Ex- change COmmission be present at your hearinga to discuss margin regulation. Sincerely yours, OEVILLE L. FREE~rAN, secretary. Mrs. SULLIVAN. With that I want to say. that~tomorrow morning we meet at 10 o'clock for a full morning and if we can, for a full after- noon, too. It is a big schedule whiôh I hope we can complete. We ~wlll have in the morning, Mr. Leon Ke~serling, fdrrner Chairman ~of the PAGENO="0060" 642 CONStJM~R CREDIT PROTECTtON ACT President's Council of Economic Advisers; ~witnesses from the Na-~ tional Retail Mercht~nts Association, and also from the National Senior Citizens Association, and Mr. David Caplovitz, author of "The Poor Pay More"; and in the afternoon at 1:30 we will hear from the Na- tional Consumers League and the National Retail Furniture Dealers Association, anid from Prof. Vern Countryman of Harvard University Law School. With that We thank all of you who contributed to this interesting discussion. (The complete statements of Mr. Brooks, Mr. Rhodes, and Mr. Watts and a statement submitted by the New York Commodity Ex~ change, Inc., follow:) SDATRMENT or WILLIAM F. Baoo~cs, PRESIDENT, NATIONAL Gs~IN TEAms CoUNcIL My name is William F. Brooks. I am President and General Counsel of the National Grain Trade Council. We appreciate this opportunity of registering our views against the approval, by this Subcommittee or the Committee on Bank- ing and Currency, of SE~ction 207. The stated pu~pose of this section is to prevent "excessive speculation in and the excessive us~ of credit for, the creation, carrying or trading in commodity futures contracts, having the effect of inflating consumer prices." To accomplish this, the Board of Governors of the Federal Reserve would prescribe regulations which, according to the Chairlady, would give the Federal Reserve System the same powers to set margin requirements in connection with trading in corn- modity futures ~ontract~ that it now holds in the setting of margins for credit transactions on the stock exchanges. On a number of occasions Congressional committees have studied proposals which w~u~4 grant to government officials authority to set margin requirements on futures transactionS in commodities. We have opposed this grant of ~utbority because in our c~nsid~red j gluent, no public officials or group of public officials,. such as the Bo5i~d of Goverilors, are so omniscient as to determine when specula- tieii might beeei~e e~cesSi~e in eoinmodlt3'~ transactions and to determine w'heu any degree of s~eeuIatiot~ In commodity futures contracts would have the effect of inflating cons1~mer prices. We are convinced that speculative transactions have little effect on the price paid by consumers for. commodities and that speculation is not a basic factor in determining the general level of prices in the long run. We doubt that it is an appreciable factor even in the short run. We note that the Beard of Goverirors of the FederSi Reserve, through its Vice- Chairman, Mr. ~obertson, on August 7 advised the Subcommittee In effect that the Federal Reserve Roard would not be the most appropriate agency to admin- ister such comi$dity market legislation as is contained in section 207 of the pending bills. Mr. Robertson stated the Board's belief, which we share, that relatively little èredit is used in connection with futures trading. Our reeollectibn of his answer to OEe question put to him by the Chairlady- whether he thought the Department of Agriculture should regulate stock market margins on Gen~ral Foods or other food companies-is that Mr. Robertson stated that the Department o~ Agriculture was probably as ill-equipped to deal with secudty margins as the Board of Governors would be to deal with margins on commodity futw~es contracts. We agree with that observation. The proposal embodied in section 207 is based on a misconception of the nature of commodIty contract markets. on the nature of trading in commodity futures contracts, and on the functions of margins In connection with the corn- modity futures contracts when attempts are made to draw an analogy between them and the dqwn payment required to obtain title to stock or goods and chattels or real estate. Organized eo~itraet markets are recognized commercial institutions. Most of the ~ommodItieS for which futures tracing is available, are subject to the Com- modity Exchange Act. Additional commodities may become subject to this Act. These recognjzed commercial institutions make possible an orderly movement of agricultural commodities from production to consumption. Their operations PAGENO="0061" CONSUMER CREDIT PROTECTION ACT 643 assiire a rough equality on the buying and selling sides of the market. The avail- ability of futures contracts makes substantial contri!butioJ~ to the linancing of crops as they are planted, harvested, and start thereafter through the marketing channels to ultimate end users. Speculation within the commodity markets makes hedging possible and permits the operation of the Nation's mw-cost efficient grain marketing system. The grain marketing system, because of the availability of futures markets where people trade in futures contracts covering grain, is a highly competitive, low-cost marketing system. The function performed by futures markets is to regis- ter the forces of supply and demand by open public trading. In doing this through the medium of futures transactions, producers, processors, exporters, and others are offered a~ opportunity to obtain price insurance that today they may agree to deliver in the future something they may not now own or that today they may agree to take `delivery in the `future of goods they may now anticipate they will need, or that today they may obtain a price certain for comm'o~ties they are buying or have bought and intend to carry awaiting sales or use fot processing. Through trading on exchanges, a steady flow of commodities rno~es from produc- tion into consumption. The rules of futures markets require that the users of these markets deposit collateral in the form of margins, to guarantee the performance of their contract. The minimum margin to be deposited is determined by the governing boards of contract markets. Futures commissioii merchants can and often do require de- posits in excess `of the minimum established by governing boards. The minimums required are subject to constant review. They vary by commodities, by type of trade, and may be different for different delivery months. Attempts are at times made to `draw an analogy between the margin required to enter into a contract for the future sale or purchase of a commodity, and the down payment requi~~d to obtain title to stock, or goods and chattels, qz~ real estate. There is no analogy between t~iepe tran~aetLops. In sp~culativ~, securities transactions actual title `to the number of. secnrities traded passes `from the seller to the buyer. The speculator~i~ securities deposits his owu ~aoney in the aaount required by the Federal Reserve Board tp, obtain title to the securities, and his broker then loans `the balance, either ~rom his own funds or from a lending bank to complete payment for `the ti~a'mac~on's. In `spoon- lative `transactions actual title to `securities, e-vi'denctng the acquisition or dispos~1 of an equity in a corporate entity, passes from a seller to a buyer. So too, as to transaction's involving goods a,n4 chattels or real estate. There purchasers obtain a title 1~y ~nahing a down payment and arrange to pay~the balance either with the seller or through a bank on `terms sati~faotory to the buyer, the seller, and `the bank. Tl~e `buyer receives ~ tltle to somqthi~g tangible~- Something be can use-something he can de~J with--subject, of cour~e, to the rights of his le~l~r-~-tbe seller or the `$~uk~-e~ these rights ~ay `be defined in a chattel mortgage or mortgage deed In transactions covering agreements to sell or buy c'onlWedities for future delivery or receipt, no title passes to `the buyer and no title pas~as from `the seller. Each party to `such a contract entered j~to on a commodity exchange de- posits with his broker an amount-of earnes't money to assure compliance with the contract when, in the future, it matures, or until an offsetting contract is entered into. Only if the contract is completed by delivery, when it matures, `does a title pass. And then, contrary `to the practice in transactions involving securities ~r goods apd chattels or real estate, full payment must be made. Implicit in each futures transaction is an intention on the buyer's part to make delivery, and on the seller's part to take delivery. These obligations often are liquidated by offsetting trades. To the e~tont that they are not so offset, delivery will be made by th~ seller and title `to the grain covered by the contract will be accepted by the buyer. The experience of late 1947 as to grain prices, indicates that in commodity markets, where the volume of speculative trading has been limited, prices react in response to supply and demand factors. In October of 1947k as d~emanded by the President, a 331/s percent margin was set by the e~rchanges for sfec,ulative transactions. At that time, May~ (i948) wheat at Kansas City wa~ selling at 52.641/4. May wheat Contln,i,ied upward, reaching nearly $3. During this period the markets lost mnch if not all their liquidity, and such trades a~ were avail- able to hedgers-processors or exporters, country and terminal handlers-caused rather wide changes in prices. PAGENO="0062" PAGENO="0063" CONSUMER CREDIT PROTECTION ACT 645~ trading in commodtty futures contracts. Congress did not approve the grant of this authority. En 1966 a Subcommittee of the House Committee on Agrictilture held hearings on a bill which would have granted a number of authorities to~ the Secretary of Agriculture, including the authority to set margins on commodity futures con~ tracte. According to the TJ.P. ticker of April 6, 1966, Congressman Matsunaga, after the hearings had been concluded, told newsmen that if this committee approved any part of the bill it would only be in greatly modified form. The same news item reported that comments by other subcommittee members indicated the margin control section of the bill was not expected to survive. That subcommittee did not report a bill. We are now here today faced with a proposal to grant authority to the Board of Governors of the Federal Reserve which, according to their spokesmen they do not wish to have and are not qualified to administer. This subcommittee Is in effect considering a proposal which in substance has been considered by other committees and subcommittees in prior Congresses and found wanting. We recom- mend that this subcommittee make a similar finding. ~We oppose this grant of authority because we are convinced that this method of attempting to prevent inflated consumer prices will not work. We oppose this grant of authority because an attempt by the government to exercise control over margins may well cause a breakdown in the entire marketing structure, leaving State trading as the only alternative. Raising margins will not keep prices from. going up. It seems to be admitted that commodities that have no futures market are usually more erratic in price than those that have. By raising margins, you can reduce and eliminate volume of trading. But you cannct control prices. And you might wreck the market structure. STATEMENT SUBMITTED FøR INCLUSION IN THE HEABINO RECORD BY TEL NEW YORK COMMODITY EXCHANGE, INC. My name is Matthew S. Fox. I am President of Commodity Exchange, Inc., 81 Broad Street, New York City. I reside at 201 East 19th Street, New York City. I have been authorized by the Board of Governors of Commodity Exchange~ Inc. to appear before this Committee to express the views of the Board with respect to H.R. 11601 and, in particular, with respect to Section 207 of the Bill. Before doing `so, I should like to give the Committee a brief picture of the operations of our Exchange and its background. ~be Exchange is a non-profit membership corporation which operates a trading floor at 81 Broad Street, New York City, to enable its membership ti engage in the purchase and sale of futures contracts for the following comrn inoditles: copper, lead, mercury, silver, tin, zinc, hides and rubber. The Exchange does not buy er~ sell commodities or futures contracts for its owr~ account. It merely provides the trading floor and facilities for the operation of a~ futures market. Transactions executed on the floor of the Exchange are reported by ticker service to all areas of the United States and other countries,: providing instant dissemination of information as to the price of each purchase and sale. Trade interests and others who have need to follow the price movements of `the corn- inoditles on the Exchange are thus provided with continuous price quotations as a guide to marketing policy. All transactions on the Exchange are entered into as the resalt of open outcry at rings at which the floor brokers gather. It is a true auction market with bids and offers freely and openly made. It thus reflects with great accuracy the relative Impact of demand and supply upon the price of a given commodity at ~ny given moment. In a true sense the Exchange provides an accurate in- strument in a free marketing system. We wish to cail the attention of the Committee `to the following considerations: 1. The purpose of the Bill, as set forth in the introductory paragraph, Is, among other things, to authorize the Board of Governors of the Federal Reserve System "to issue regulations dealing with the excessive use of credit for the purpose of trading in eommodlty futures contracts affecting consumer prices". It is a misconception of the mechanics of futures- ~trading to speak of the "excessive" use of credit. When -a man buys or sells a-~futares contract, his broker requires a deposit of original margin in an amount specified by the Exchange. This deposit is a down payment on the contract. The full purchase PAGENO="0064" 646 CONSUMER CREDIT PROTECTION ACT price is paid ozily when a buyer takes delivery. The full sales price is realized only when the seller makes delivery. Thus, trading in commodity futures is essentially dlft$ereut from the purchase or sale of securities where the entire purchase pricel is payable ordinarily within four days of the execution of the trade and whi~re the broker furnishes a part of that purchase price, thub ex- tending credit jo the customer. Such credit isliever extended by the broker who bandies theactual delivery at maturity of the futures contract. At that point the customer, *ho is a buyer, must place the broker in funds for the full amount of the purchase price. It is obviously a misconception of the functioning of the ~o.mmodity fut~tres markets to relate the margin deposits which are requWed u~. ~der the Rules of the Exchanges with the use of credit. 2. The ~futures markets perform an economic function which can only be served properLy if these ma~kets have sufficient breadth and liquidity to euable hedgers to buy or sell thefr requirements without causing price distortions. It is unnecessary to elaborate upon this function beyond saying that ~xcessive margin requirements imposed by any Governmental agency will inevitably restrict the an~ount of trading and thus impair the eceliotnie funCtions *hlch the markets porform~ This result does riot serve to lower the price to the consumer ;~ on ithe contrary, it invariably results in sharper price duetuations because of the ~nability of the producer; dealer and consumer of the commodities traded to hedge. their respective requirements and positions and thus reduce their inventory risks, 8. The ~rOposa1 to give the Federal Reserve Board authority t~ deti with thi~ problem is inapprOpriate in any case. It would place the Federal RSSe'rve In a position of conflict with the CEA and would impose upon the' Board respon- sibilities for policing these markets which it has neither the' personnel nor the expertise to discharge adequately. In conclusior~, we respectfully submit that there is no need for the proposed legislation and no justification foi it in the light O~ conditions now prevailing in our cemirmod~ty Mt'ure~ ~narket~s. We ~O rWt belie+e `that It Is. in the }nt~retn of the users of these markets or'the public that Section 207 of the proposed Bill~should be enacted. ~ Ot~F. MA4~a9rr 1~I~1iIm~S, P h~tncr,~ ~W ~dtt~ QO~u6rt 1~itcwkrtsn I. `The NeW ~o~k~ottbn~ abp~nge'ule h1e'~4taèq~ithi~4n d 1~t~ Setcliion `207 ofH~. jj~O~I ~bich~eO~e~s Oii the ]~a~eraI Re~br~e 8&~itl ~the er to s~t margins on commodity futures cont*aeda. - We submit thnit the proposed legislationis basl~d upon misundecstatw1m~g of the economic fiunotiou of a futUres mam~(fset and a mnisthmceptli*n of the purpose of in a £~tizres fraunketioun. ` The wordju~ of the bill clea'shot~ra tb~atit is based on thO assflmptlon that excøsstve speculation on odnnnbdi4my markets h'as~t1ae~eftiect-of inflating cdaistaner prices and thatf by itnereaSing ~ioa~sp~eiwLatfomF will be d1scouiu~ed, A mnent of the Chairman of the Subcommitte in announcing the introduction of ~R. 11001 i1k~us' the credit ext~eau~hd `on stock exchange trausoietion~ to the margins re~iuitre~min eOnlmodity A~u~esa~s~tjons. It Is our pltrp(se to explain to the Ooaimittee-that the function of margins on a futures exehan~e is entirely 4i1~1et~ent `frOm lims nation on `a atock e,rchange and that if se r&~are idlacouniged-from `~adTh~ on a~'eo'mmetitiey exehauge by the raising of margins the effect will not be to `low ~prtoes4*~ eonsmnets but rather to -disrup4m the op~rations of the market-and -destroy the abi1it~ of hedgers to utilize the future market. This will Increase the ~o~ts o~! production and marketing `of a~ricu1tura1 prndunts ahd *111 have an a4verse etfe~t On ~rlees to consumers. In o~derfio de~eo~oi~r arguxrient-I ~v~onl4 like to outitne brieflytht e~*raaioda of a commodity futures exchange. It is recogialaed ~ otiu1ut~ `Snd b~*'~the I)epartm'e~iit of Agricu11ki~e theta fh esexohang~p~mss~ ~vuIonb~Eeteconomic functionin the ~publlo `1uterest~ Riehe in husiness uitmst be paM f~*. They tre generally passed~ on to the-consusner. To the e~tent~ehat t1hu3~ can be eltEaIna~edo±- retluced, the- corilsunier benefits. It is the ftii~tIott kf a m~od1ty futures i~kei~ to elIm~nato~ov *uduee ~t~ha u,isk of price tuatiOns~4st'~o iiroeess by Which a cotumodity moves from ~ruwer to consumer, This IS dOne by hOdging oh the exchange. The kedgirig facilities a!!ot~ded by a futures market rOduce the cost PAGENO="0065" CO1~TStMER CIIEDIT PROTECTION AC~ 647 of marketing and thereby perm!~ the farmer to ~bb~in a be~ter price for his produce and enable the consumer to obtain products at lower cost. Among these Who use a futures exchange for hedgi~ng, citing cotton as an example, are growers, shippers, merchants and manufacturers, Since there are not an equal number of hedgers taking long and short positions on the exchange, `speculator~ are necessary to a futures market and, for an expected profit, they act as insurers for those who deal with the actua~ commodity. The hedger who purchases, sells, or holds, a ~ommodity obtains protection ~against a change in price by taking an opposite position on a futures exel~ange. If he is a farmer or a merchant who holds cotton he hedges by selling a ~u~ures contract. If the price of his cotton goes down he liq~fldates his futures contract and what he loses on his cotton he makes up on his futures transaction, it is the speculator who generally takes the position opposite to the hedger and performs the function of the insurer. Markets which enjoy higher levels ~f speculative participation provide more reliable price protection. A market with fewer speculators is less effective, less liquid and less useful to a hedger. If margins are increased to drive out the speculator the functioning of the futures m~trket Will be impa~re~ and the benefits of hedging to the cou~try'~ economy will be lost. There is little similarity between the operation of a sto~~k exchange and a `commodity exchange. On a stock exchange when a person buys a security he receives it within a few days and must pay the seller the full price in cash. If be requires credit to finance his purchase he borrows from his broker. The margin is the amount of cash he puts up which Is the difference between the purchase price and the amount borrowed. Lower margins mean higher buying power. Thus, when margins are low there is a greater demand for Stock and this has a tendency to increase prices. When the Federal Reserve Board is of the opinion that excessive speculation on the stock exchanges is causing an excessive increase In prices, margins are increased and it is believed that the effect is to reduce the demand for stocks and thus stabilize the market. Margin on a futures exchange is based on an entirely different concept. It has nothing to do with the amount of money made available to purchase commodities. It is not a downpayment on the price. A futures contract is a contract to purchase ~nid sell a commodity for delivery in the future. Most contracts ai~e liquidated by offsetting contracts before the delivery date. Delivery is the exception, in those eases where delivery is made, the purchaser pays cash and the margin put up on hi~ futures trade Is not related to the cash which be pays. The margin on a future exchange. Is merely security to guarantee to thu clearing member the obli- gations of the trader When he buys or sells a futures contract. What is that obligation? When a customer buys a futures contract he owes nothing. If the prk~e changes in his fa~vor he owes nothing, It is only when there is an adverse change in price that he incurs an obligation. When he offsets his contract by a contra-contract be must pay his loss. The margin is to guaran- tee to the clearing member that he can pay this loss. The amount of the margin is fixed in relation to the loss which he may sustain as a result of an, adverse change in price. When the price changes so that the margin is partially used up additional margin is called for and this additional margin is also merely to guarantee to the clearing member that the customer will be able to pay the loss resulting from an adverse change in price, When the governing boarcj of an ex- change see~ a likelihood of large price fluctuations, initial margins are increased by the exchange because it is anticipated that there will be a larger obligation to pay for an adverse variation in price. We have discussed the margin' applicable to the buyer. Every transaction on a futures exchange involves a seller and buyer. Generally. both parties are required to put up margin. In a normal transaction on a stock exchange, margin Es required only of the buyer because the seller's transaction is completed. On a futures exchange every single t~an$action involves a short sale and there are speculative shorts as well as speculative longs. The amount of the mnrgin is Euld should be geared to the objligatio~ of the trader which is to pay for the variation in ptice ` when he closes out his transaction whether he is long or thort, When ithe pnrpose~'of margin ofl a `~bmmodjty exchange is ufldem1~ood~that tis not a dowxipayment on theprice~4t should be apparent that an increase or `oduetlon in~nax~gjns will not he effective to toutrol Prieesi}ioWever~ny increase n margins beyond the point necessary to guarantee the cThligation. of the tra4er nay interfere with the operations of a futures exchange in facilitating the 83-340---67----pt 2------5 PAGENO="0066" 648 CONSUMER CREDIT PROTECTION ACT marketing of py~ducts by discouraging speculators from performing their func- tions as insurer~ of the rl~k Qf a change in price. And, if higher margins were applied to hedg~rs as well as speculators it *ould be more expensive for the farmer and others who deal in commodities to protect the value of their crops and products. The history o~ trading on the ~e~w york cotton ~xcbange does not bear out the contention that prices rise ~wl~n speculatton lncrease~. Cottoyi prices have risen when the speciiLa1iv~ literést has been low, And~' when. margins li~ve been increased by the Board of Managers of the Exchange prices have still gone higher. T~ie manner in which a futures market operates require~ special, knowl,edge. If tbe J~'ederal Iteserve BoaI'd were to increasC margins when com~nodity prices increase, In tb~ mistaken belief that increased margins would reduce prices, the economic fth?ctlon performed by futures e~e~anges for the benefit of growers and processors ~nd therefore for the benefit of tile ultimate consumer will have beeti destroyed. We should not overlook the' fact tb~t if excessively high margins are imposed. to diseotirage th~ use of fututes exchanges in this country the business, of hedging may well be transferred to ftiture~ markets which exist or can ~be established in foreign countries, ~ime lead~rship the United States currently enjoys in world commodity tradç~ would be threatened. ~ think the record will show, that in general the exchanges haye done a good job in the establishment and enforcement of margins. Tile Board ~f Managers and their administrative committees are ideally ejuipped to determine minimum margins and keep them adjusted to current trading conditions. STATEMENT OF lttEWELLxN WAP~, ~tn., ~iHAtIIMAN OF THE Bo~im OF `rim Nuw M~EOANTILE ExcHANGE In response to the~ invita~tiom of Hom Leonor K. Sullivan1 Chnirman of the Subcommittee tin Oousmiler A~ffairs, `I am submitting herewith our views oil Section 207 of ]~I.Th 1l6tXL~wh~ieh~ jmrports to confer on the Feder'ai 1~eserve Board the power to fiximarginS on commodity fntuves ~tehanges. A bill introd~need In the last CongresS at tbe~requeSt of the Commodity `ax- change Authority, HR. 11788, representing a contprtibemslve ameiedmetit~ of the Commodity Exchange Act, contained a provision giving~ power to th~ `Secretary of Agriculture to prescribe minimum margins on futir~s,~~x't'iTiltige5~ Tilt bill was the subject of extensive bearing's in April 1966; `before the Subcommittee on Domestic Marketing and Consumer Relatiofl~ of the House Committee oil Agri- culture at whith representatives of "commodity exchanges, growerS; processors, cooperatives and others appeared and explained to the Committee why it WOuld not be in the pitblicinteresttO'bave governmental control over margitis' on ~ltttires contracts. As a result ~f that bearing the Department of'Agriculture sought further light on this subject' by ordering an economic report by an independent ftr~n of econ- omists. The re~u1ts of that report are not knoWn. However, the D~p~rtment of Agriculture has sponsored a new bill, H.R. 11930, to amend the Comipothity Ex- `change Act which was introduced in the House on July 31, 1967 by Coll~essnman Poage and this bill no longer contains a provision for the control of margins on futures `exchanges. The attempt to invest the Federal Reserve Board with control over margin's on commodity markets shows even less undei,standing of the subject th5ti that exhibited by the Department of Agriculture in advocating governmental margin control l'ast ysar. H.R, 11601 is based upon a misconception of the operations of a commodity ful~ures market and a misunderstanding of the function of margins on commoditY exchanges. `Taken literally,' Section 207 of the bill does riOt accomplish its `stated purpose. In its public statement of July 20, 1967 announcing `the introduction of the bill,' the Subeommi~tee said: "Another section of the bill gives `to the Federal Reserv'e System th~ same powers to Set margin requirements iii connection with trading in commodity futures contrrtets that It now holds In setting margins for credit tr&nsactions oil the stock e~~hangeS." PAGENO="0067" CONSUMER CREDIT PROTECTION ACT 649 While that is undoubtedly the intent of the bill it fails to carry out that intention and its failue is a result of a lack of knowledge of the character of margins on commodity exchanges. Nowhere in the bill is the word "margin" used; it deals with "credit." The draftsmen have cenfused margins with credit arangements because the word "margin" is used on stock exchanges to repre~ sent the difference between the price of a security and the aiuount of credit extended to purchase or hold the security and have assumed that the samç~ meaning is ascribed to the word "margin" on a commodity excbnge. Thus the bill gives the Federal Reserve Board power to "prescribe regulations governing the amount of credit that may be extended or maintained on any lfutures) contract." Since 110 credit is extended on futures contra~sts as far as commodity ex- changes are concerned, the proposed regulations would have, no c~ect. But if the bill should become law and if it should be interpreted,: as its draftsmen do, to permit regulations governing margins on commodity exchanges, we are con- cerned that the same misunderstanding as to the margins utilized on futures exchanges would prevail to the end that commodity futures markets might lose their economic usefulness. The operation of a commodity futures market is technical and intricate. But one does not have to be a n expert in its intricacies to understand the difference between margins on stock purchases and margins on futures exchanges. The former regulates the amount Of credit that may be extended on the purchase of r~ security; the latter has nothing to do with credit on purchases and is merely a fund to guarantee the customer's obligation to his clearing member when there is a variation in price. When a person buys a security on a stock exchange the transaction is closed within a few days and he must pay for the stock and receive it. He may borrow from his broker or other lender a portion of the purchase price and must put up the balance in cash. What he putS up in cash is called margin in stock trlttis- actiOns. When the margin is 10% he may borrow 90%; when the margin is 70%, as now, he may borrow 30%~ Thus when the Federal Reserve Board in- creases margins it decreases the credit permitted on stock purchases. The economic theory behind governmental control ~over margins on stock ex- changes is that when credth is easy, more stock is purchased, and when there is more buying, there is a tendency for prices to increase. `1~hus margin controls for stnck purchases ia believed to have the effect of preventing excessive prices for ?stocltst It ~is a~Iso ~t~lieved t1i~it such controls are nece~sary to p1event~ stock market collapses such as occurred~ in 1929 when margins were very low and stOck pricesreach very high levels. We thave no quarrel with these economic theories. It i~ cit~r purpose to show that they have nothing to do with commodity futures ~rading. A stock market Is a place where people buy stock with convenience. It is undoubtedly wholesothe for the economy generally atid for the purchasers in particular for the government to prevent them from o~ier-ext~nding their credit. A commodity futures market is not set up as a place where people buy commodities. It is an intricate device for reducing the risks of price changes by affording growers, producers, proces- sors and merchants an opportunity to hedge those risks. When a per~on enters into a contract to purchase a commodity on a futures ex- change (which is a contract for delivery at a fixed time in the future), he does not incur an obligation to pay for that commodity within a few days ~s in the case of a stock purchase. If he retains his contract until the delivery date, Which be rarely does, he pays the full purchase price in cash. The margins contemplated by the bill have nothing to do with those transactions which culminate in de- 1i~rery and are the exception. In the usual transaction and almost always in tile case of a speculator, against whom the bill is aimed, the person who contracts to buy will actually not purchase the commodity but will instead discharge his obligation to purchase by an offsetting contract to sell an equivalent amount of the commodity. The margin which a purchaser of a contract on a commodity exchange is re- quired to put up by exchange rules is not a down payment on the purchase price, as in the case of stock. It has a different function. It is to protect the clearing member of the exchange, against loss resulting from the customer's transaction. What is that loss? It Is the varlatlpn in price during the period between the date the customer entered into the contract to purchase and the -date he cancelled his contract by an offsetting sale. If there is a price change PAGENO="0068" 650 ~o~st~Mi~tt ~ft~iP PEOTECT~ON ACT adverse tG the customer during this pe~,4ed, he will sustain a loss on the liquida- twa c~f hta eonti*et That loss will be paid b~r his clearing member To secure his clearing member for his obligation tc~ pay the amount of the loss he puts up cash in advarke an~t this cash is ca1le~I margin ~n a conunodity exchange The amount of the margin required is measured by the probable amount of the obligation to pay for the price differential It has nothing to do with the pur chase price and itis uot a dowli payment ~n the purchase price. ~ ~ The raising of margins on a stock exi~hangc will discourage purchases because less credit a~gain~t the purchase price Is permitted ; but there Is no credit against the purchase prite in a purchase on a commodity exchange To raise margins on commodity trading is to force the customer to give excessive security to his broker This excess is n~t needed and would merely act as a penalty without relation to Its purpose. If more were *ieeded to demonstiate the erroneous thinking behind this bill we might cotisider the case if a sellOr Unlike the situation on a stock exclu~ige every contract to purchase on a commodity futures exchange involves a short sale and sellers ~tre r~quired to put up the same margin as buyers This is so because the margin is to secure the broker against variatienn in price and a seller who liquidates his position staiids to lose as much as a purchaser by rei~sou of changes in price since margins should be the same for sellers and buyers the raising of margips beyond the point necessary to secure the broker would dis courage sOllers from entering the market with the result that (if the market were still alive) prices would presumably rise. Assuming that experience has proved that increases in margins for stock purchases has been effective to halt increases in prices, the experience on the commodity exchanget has been to the contrary Without burdening the Com- mittee with details we refer to the testimony submitted last year at the hear Ings on fl R 117~S which showed that when margins were increased for copper gtuln and cot,to~O prices did not decline Prices may have risen because of the discouragement o~f short sellers by making it more expensive for them to trade or for Other reasobs In theory however there is no reason why increased margins should prevent increased prices because they are not a part payment on the price aild are nnrelate~i to the bttension of credit Inh~rOnt in the thinking behind this bill Is the assumption that speculatwn Is the root of all evil and that excessive speculation causes higher commodity prices Thus the bill states that control Is to be given to the Federal Reserve Board to prevent `excessive speculation in commodity futures contracts having the effect of inflating consumer prices." This is a mytl~ which again results from eonfuslhg stocks with commodity futures Speculation may be detrimeutal when It has the effect of Increasing the price of stocks But specubtioh ~s tin absolute necessity for the functioning dt a futuree mar~et. Coinmothty futures exchanges are recognized by economists as important mechanisms In the production processing and marketing of agricultural prod ucts The govern~nent also recognIzes this value and an entire bureau of the Deaprtment of Agriculture is devoted to the regulation of futures exchanges The economic good performOd by fututes markets Is the reduction of risks result ing from changes in price If these risks were nOt reduced it would cost more money to bring the product from farmer to consumer and such Increased costs would be passed on to the consumer. Growers merchants and manufacturers hedge their commitments by taking a long or short position on an eachatige Someone must take the opposite positiofi This is done by the speculator who for an expected profit provides price insurance for the hedger A market without speculators cannot function A market with g large speculative interest provides more reliable price protection to the hedger because it iS more liquid. Where there are more bidS and offers the range of price fluctuations Is narrower. If higher margins are to be imposed on speculators as a penalty it will drive them out of the market and the hedging process will be weakened or destroyed to the detriment of thq nation s economy and at the ultimate expense of the consumer. Tb~ puce o± the actual commodity is pot determined by the prwa on the futures market Elven if we assume that the activities of speculators can drive a price up over a short period (and we must remember that the price can also be driven down, for there are s~eeulative shorts tis well as sp~cuititlve tongs) thi&caunot PAGENO="0069" OO~SVMJ~t CREDIT ~ROTEçTiON A~CT have much ~ effect ~ the price of t1~e actual ~eornn~odity becai~is~ t1~e day o1~ reckoning comes in f1~14r4~ markets from four to twelve times a year when the commodity must be delivered and must be received by those speculators who re main in the market In th~ delivery month the price of the future becomes the price of the actual commodity which price is establ~shed by the natural forces of supply and demand. Your Chairman has stated that H.R. 11601 contains many provisions for the protection of consumers. There does not seem to be any reason why Section 207 should remain a part of this bill when so much doubt has been cast upon the efficacy of governmental controls over commodity futures margins as evidenced by last year's hearings on the Department of Agriculture's bill to control margins. Mrs. StTLLIVAN. We will place in the record at this point a letter from, the New York Produce Exchange and statements filed by the New York Coffee & Sugar Exchange, Mr. Robert L. Martin, chairman of the Chicago Board of Trade and others interested in sectiOn 207 of IELR. 11601. (The material referred to follows:) Nkw Youx PII6DUOE ExoaANen, Nero York~N.Y., August ii, 1967. lion. LE0NOR IC. SULLIVAN, Chairman, Subcommittee on Consi~iner Affairs of the Committee on B4nlcing and Currency, House of Representatives, Was?~ingto~ki, D.C. DEAR NLRs SULLIVAN This will acknowledge receipt of and thank you for your letter of August 1 1967 concerning II R 11601 the Consumer Credit Protection Act, and particularly Sec. 207 thereof. Mr William F Brooks President of the National Graifi Trade Council of which this Exchange is a member plans to appear before your Subcommittee and will present the viewpoints of the Council which we of course endorse without reservation and he will therefore also be presenting our position on Sec 207 In addition to Mr Brook s testimony and statement we submit the fol lowing statement for the record of your bearing and refer solely to Sec 207 of H.R.11601: We are opposed to Sec. 207 and we urge in the strohgett possible terms that it be deleted from the Bill. Sec. 207 would vest in the Federal Reserve System certaIn powers "For the purpose of preventing 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 Excessive speculation in commodity futures contracts has already been de'~ dared by Congress as an undue and unnecessary burden on Interstate commerce and the Congress has vested exclusive authority in this area in the Commodity Exchange Commission, specifically by Section 4a of `the CommodIty Exchange Act as amended. The Commodity Exchange Act and the regulations issued thore~ under provide ample authority for such regulation as Is deemed necessary in compliance with the Act by an independent agency of' the Government composed of persons tar more knowledgeable in the field of commodity futures marketing than are those who are officials of the Federal~ Reserve Board. We refer to recent testimony before your Subcommittee `by Mr. J~ L. Robertson, Vice Chairman of the Board of Governors `in whl~h he states in effect that the Federal Reserve does not have the knowledge or expertise to regulate margins on commodity futures transactions. On the other hand the Commodity Exchange Commission and the Commodity Exchange Authority, having been vested by the Congress with the responsibility as indicated above, have frequently in the past issued orders fixing speculative trading position limits covering various commodities. You will note that the authority given to `the Commission resulted In action related to trading and position limits and not related to margin' controls. The reason we believe is' obvious. Trading and position limits may be fixed specifically for specific purposes which on the other hand margin controls affect every person or organization making transactions in commodity futures. Margins should therefore be set in the light of their purpose which is in the nature of a payment for a contract for future delivery, not a stock or a cash commodity, as a protec~ tion against price depreciation or appreciation as the case may be. PAGENO="0070" 652 CO~STTh~t~~ CREDIT PROTECTION ACT Margins are ~re~en1iy s~tin all commodity futures markets by the g~verning hoards of the rè~spectlkre 4~xehaiiges. They should eonthme to be so sat as they are fixed and ehañged~fi~om time to time as circumstances demand and by those persocesin the induatr~ who are the most knowledgeable and the most responsible. Margin controls du ~ot constitute ~redit controls. There ia no analogy or dm1- larity in margin requirements for securities and margin requirements for coni~ zuodity futures transactions. Margiü payments on commodity futures transactions do not constitute a down payment for equity and no possession of a commodity nor title to a commodity is passed at the time a commodity futures transaction is executed. Transfer of title to a commodity occurs at the time the contract ma- tures and is delivered at which time full payment must be made for the com- modity involved. On the other `hand, margips (down payments) paid for stock transactions constitut~ credit transactions as the purchaser of the security im- mediately becomes the~owner thereaf and from that time is entitled to all benefits such as equity in the i~suing company, dividends, stock spllts, rights or ~rarrants, etc., while still owing a part of the purchase price. Margin controls on commodity transactions have absolutely no effect on the extension of credit. High margins or low margins have no effect in inflating consumer prices. The price of a commodity future comes to Its relative value with the price of the same cash commodity when the delivery month becomes cnrrent. The price of the conu*~dity future at that time does not dictate the value of the actual com- modity but to the contrary, and therefore commodity futures prices cannot in~ fiate eonsumer prices. Here again, the di#erence in any potential inflation factors arisin~ kent of purchases of securities and purchases or sales of commodity futures becomes apparent. When ~omnibdity futures t~ansactiqns are entered into, monoy paid in terms of `margins comes from `both `sides of the transaction and when the future month matures the pi~rcliaser receives the commodity aced pays its full value' to the seller. `That tran~actIou ~ than o~t of the market and tl~e iuve~tment `capital ratio has not chang~ When, bo~e'~er, pur~has~s of securities are arranged, money flows into the ~eeuritie~ market as' the money entering on the purchase side of the `transacUca~. is ordinarily new capital moving from savings or other Investments into the s~bek t~i~rket. We therefore conclude thht the adoption of Sec. 207 would be unwise, unneces~ sary and undesi~abie, We appreciate `the opportunity you have afforded. us to be heard. `Sii~cerely yours, C. ~ Bano, Managing Director. SPAPEMuNT SuceMrrTnf Fon kHEAIUNG Bcoonn ~x Nuw Yoai~ COFFan AND SouA5 EXCHANGE, IiW. The New York Coffee and Sugar Exchange Inc.~ wjsbes to go'on record as oppoSed to `Section'207'of proposed H.R. 11601, (a Bill to safeguard the consumer in connection with the ti'tilination of credit) for `the following reasons: 1. Margins as applied to commodity trading are not credits. A transaction does `rot result in immediate dollar `obligations, since k5ueb obligations only become existent `when the previously purchased goods are delivered in the futmre. As in any buying and selling tranSaction,. the bnyer is ashe~l to deposit with the brokerage ftPti as 4 s4~n of good faftlv, a sum. related to the valne of the contraet~ lie is also asked ~to m~lntain the atsount of this payment should market fluctua- tions erode the comm~rcial value of his purchase. This is not a credit4inasmucb as tim `brokerage firm. floes not make up the difference between the amount of the depc~slt and the total value of the transaction. In no sense can this practice be' called a "credit". 2. The seller is also asked to deposit this evidence of financial rEcspo~sibility and he, in turn, is obligated to maintain `the dollar amount sho'uld~ the market value be higberkthan the ofiginal sale; but clearly, since the seller will eventually receive payment upon delivery, his "binder" is not a "credit" ia any sense of the word. ` ` `3,The ultimate defeDmina'tion of price is the .relat$ionshipcof supply to demand. Oomm~dity trading reflectS thedhanging opinions `on supplydemand from da~ to day,, montb~to month. Trading in ituetf, does not change the supplr-demand situation which' determines the prices of commodities which go into consumption~ PAGENO="0071" CONSUMER CREDIT PROTECTION ACT 653 4. The investor who buys a commodity for market appreciation must sell it to someone else in order to realise a profit. The user is always the ultimate buyer. The investor purchaser does not reduce the overall physical supply of the com- modity. Thus, the control of commodity ecoohange margins as a tool to keep con- sumer prices down is not a practical meauurc. 5. Such control would not prevent the investor from purchasing directly from the producer for future delivery under the usual "cash-on-delivery" or "cash-on documents" terms without any margin whatsoever and without going through any exchange. 6. That we are correct in our premise is attested to by Dr. Roper W Gray of the Food Research Institute of Stanford University in his testimony before a Subcommittee of the House Agriculture Committee on April 5, 1966, in which he said in part: "~ * * Commodity futures transactions are absolutely sym- metrical with respect to buying and selling, as stock transactions are not." 7. Coffee and sugar a/re international commodities which are traded on foreign ecoehanges, notably in London. Margin requirements that would be considered unreasonable or expensive, or both, would simply transfer futures trading to foreign exchanges, where margin requirements are practically non-existent. 8. The principal business now of our Ecochange is trading in world sugar futures contracts. These contracts are in world prices. And this commodity is not deliverable in the United States. Imports of sugar into the United States are under import quotas established by the U. S. Department of Agriculture. The amoubt of domestic sugar produekon and the quantity.of imports~are controlled by the government. The domestic price of sugar i~ thus maIlipulated by the gov- ernment in controlling the domestic demand-supply situation. 9. The New York Coffee and Sugar Exchange conducts an active market in world sugar futures contracts, but we have only a neglilgible activity in domestic sugar and coffee futures contracts. We believe that the existence of government authority to establish and make chnnges in margin requirements would, in due course, result in the transfer of our world sugar futures market in its entirety to the European exchanges. Trading in coffee futures has already shifted to the more favorable trading climate of London. 10. We believe that the curtailment in the United States of trading in sugar and coffee futures contracts may result in discontinuance of American of1l~ces of some. foreign coffee and sugar firms; the loss of an estimated 15 million dollars per year to local commission houses; business losses to American banking institutions incident to their participation in transactions worth millions of dol- lars annually; ana the consequent loss of tax revenue, both corporate and indi- vidual income, to the U. S. Government from the closing of businesses and loss of Jobs. It could force American firms to meet foreign competition on foreign ~oll with a resultant investment in dollars having adverse effect on the balance of paymepts. / The Board of Managers of the New york Coffee and Sugar Exchange there- fpre urges the elimination of Sec. 207 from KR. 11601 for the protection of the sugar and coffee industries, and . the American consumer. STATEME~ SUBMITTE1~ nv Ronnur L. MARTIN, CHAIRMAN, CHIcAGo BoARD or TRADE The Chicago Board of Trade appreciates the opportunity to file this statement regarding H.R. 11601 and H.R.11602, th~ important consumer protection measure now before your Subcommittee. . The Board enthusiastically et~iorses the view that éonsumers should be pro- vided with full and ~omplete information on the cost Of credit. For that reason we favor most of~theprovisions of this legislation. I am sure, however, that, like other commodity exchanges, we were asked to comment in this instance primarily on Section 207 ~ich provides for Federal Reserve Boerd regulations of commod- ity futures margins. We are opposed to Section 207 because we feel 4t ii4 unwise and undesirable to attesnpt to affect commodity prices by FOdel~l control of ~commodit3r futures margins~ In our rtew the Federal Reserve Boar¼l function regarding, sectiritles margins is not comparable and it would be Inappropriate for the Federal fleserve Board to exercise this authority. Because of the ample coverage of Section 207 during hearings before the Sub- committee, the reasons for our views will be summarized briefly here. Our corn- PAGENO="0072" CQNSUMIiI~ CREI?IT PROTECTION ACT ments are nec&marily restricted to agricultur*~l commpditie~ as our experience is limited~to thh~ fthld. Comiijxodlt~r fi~itures `plan an essential role in the distribution of agricultçirai products to con~umers. )~`irst, they prOvide a coritintious pricing mechanism which guides future p~rothiction and regulates the rate of consumption. Se~ond1y, corn- inodity futures protect both farmers, and processors against the risk of price change. Thus, the farmer, whose crop is still in the ground, can assure that he will receive a known price for it by selling a ~ontract for future delivery and shifting the risk of a future price decline to the buyer. Similarly, elevator opera- tors and processors can plan for the future with certainty by hedging their stocks or requirements. This redound~ to the benefit of consumers. It provides a form `of price insur- ance Which ajloWs everyone from the fa~tn to the store to operate , at narrower' piq~1t margins' than would be possible if they~ were subject to the hazards o~ future price fiuctuaticir~s. The coinmodili3~ futures market, however; is de'pendE~nt on traders represent- ing the ~peculative Interest for its strength and it~ stability. A thin market i~ a vk~Iati1e market, and `price instability is more likely to' res~lt from under- speculation thaii `from over-speculation. Our experience leads us to concur with The viewa presente'h to your Subcommittee by distinguished economists and rep- resentatft~es of the futures markets, and `apparently held by a majority of the' Rouse durl~g previous coi~sideration of marvin control legislation. ~ssentially, th~se views are summed up by a statement made on the Rouse fioor~ by ~ foTmer Agriculture CothmItted~ChSirman: "where there has been a r~iativeiy~ ~inaui volume of trading `the increase in prices tends to be even, larger than where there are mapy trader~ and thuch activity In the mark~t" 96 Cong. Reé. 11754. ~1r, as Representative Boggs stated in th~'same debates: "the idea that by con- trolling thkrgins and eothmodity exehanges, price advances ~au be controlled hits no fonndktlo~i in fact." 96 Cong. Ree. 111'59. Interestingly enough, this point of vie* was underscored several y&rs ago~ wheti the possibility of the 1?èdèVal Reserve ~oard setting margins for com- modity futures contracts wa~ f1r~t raised. At that time Chairman William Mc- Chesney Martin, rr. stated; The 1!'ederiil Reserve Board does not View its function as one of con- trolling security prices and has not used it~ margin requirement authority for this purpose. I `think It w~il'd be sirni~arly undesirable Or even danger- ous for an~t Government agency to vary margin requirements in the corn- r modity tharkets for this purijse. (Letter to senator Williams, J~an1har~ 13, 1964.) It is possible that se~e confimion arises from use of the term "margin" itself. ~1n the securities inmri~et, under certain circnthsta~ces, ~ down payment is made' for securltie~ p~r~hased vu credit. In the commodity futures markets a payment is made when a futures contract is b~pght or sold. Each of these payments Ia callel a "marg1n'~,' `but' any slmilarit~ hetween them is more appltrenjt t~han real. The securities down payment is ~ partial payment; aiid the part not' paid is' financed with credit. In a commdities futures contract no credit Is Involved: the margin payment is 100% of the value of the margin at the time, and later, if delivery is taken, the purchaser pays 100% of the value of the commodity purchased. This is no mere legal or economic distiuctiop. It Is a basic funda- mental difference of function. One "margin" is no more like the other "margin" then "security" meaning a sliare~ of stock is like "security" meaning a protected copdition. Testi~nony from gpvernm~enta1 as well as private witnesses before' your Subcommittee has served to emphasize this point. .Furthar it Is op view that it woul4 be in~pprnpriate as a matter qf futic- lions as welt as ~urisdletion for t~ie Federal ~Reserve Board to `regulate, e(vfli~ piodity futum~es margins. The Board itself has been the first to point this nut. Its position has been consiatent~ from the statement of Chairman Martin referred tQ herein to the more recent testimony of Governor Robertson before your' Subcommittee: "We have no knowledge that equips us from any point of view' to administer such legIslation." Perhaps more conclusive is the point, also referred to by Governor Robertson,. that because commodity futures margins do not involve credit they are outside the jurisdiction of the Federal Reserve Board, the authority of which Is Umitecli to transactions inVolving credit. PAGENO="0073" dO~StT~AWO~E1YT PROTECTION ~CT For th~ foregoin~ reasons we would urge that Section 207 be eliminated from H.R, 11001 id H:iI. 11002. Iii the view of experience ~ts weJ~1 a~ economie theory~ it would not serve the Important consumer luterest it is intended to oteet. STATEMENT SUBMITTED ron HEARING R~conn ~ F~i~i~ T~NELI4, ~l~P oi~ TIlE WOOL AssooTAvus OF THE Naw YORK COTTON ENOIIANGE; INC. The Wool Associates of the New York Cotton Exchange, Ir1~., loeated In the City of New Yorl~ w4sbes to register its objection to Sec. 207 of H.R. 11601, Inasmuch as the proposed legis1ationJ~~ cited as the "Consumer Credit Pro- tection Act", it is difficult to understand why the authors of this bill would include in it a provision granting ~aut1iority to the Board of Governors of the Federal Reserve System to prescribe regulations governing the minimum mar- gins the various commodity futures markets mt~st require. The grant of power proposed appears to be based upon a lack of appreciation of the economic function of a futures uiark~t and a misconception of the purpose Qf margins in a futures transaction. Mr. J~ L, Robertson, Vice Chairman of the Board of Governors of the Federal Reserve System, before this very Committee, stated that margins as related to commodity futures markets were not credit. The arbitrary raising of commodity margins-by, no matter what outs1tt~ agency-will not and can not have any effect to quell Inflationary credit teuden- des in the economy, It is generally recognized by edQnplni5ts that a fntt~res exchange performs a valuable economic function in the public interest. TI margins are raised to levels that deter spç~ulation, the hedger loses his institer and must assume a greater risk. This added risk is, of necessity, paid ~tqr by his customer and p1tim~tely the consumer; thus ad~tin~ to the spiral of intlatión. History has. proven ~that the Governing Boards of the ~var1otis commodity exchanges, being on the scene, have been effectively able to control margins in all contingencies. With this in mind, and with the protection of the consumer being the object of this bill, it behooves this Committee to delete section 207, for it can only be reiterated commodity margins are not credit. AMttICAN `TEXTILE MANUFACTURERS INSTtTUTE, Ixo., Wttshin?,ton, DC1., August 24, 1067. Hon. Lnoxon K. SULLIVAN, Chairman, Subcommittee on Contumer Affairs, House Committee on Banking and Currency, 17.5. House of ~epresentatives, Washington, D.C. DEAR MRs. SULLIVAN: The purpose of lbls letter is to express the concern of the American Textile Manufacturers Institute over Section 20~' of ILR. 11601. The Institute is the central organiRation of the textile manuf~qturing indus- try. Its member mills have traditionally used ~commodlty fututh~ markets to minimize the losses that would ~çcnr from price fluctuatioti~ i1i~ the normal course of accumu1~atlng inventories of raw cotton and wool to sustain regular maaufacturii~ Operations. Section 207 of ELLt. 11601 would direCt the Board of Governors of the F&lerai Reserve System to establish regulations governing margins on the commodity futures markets in a manner similar to those now governing the purchase and sale of corporatiQnstocl~s, We agree with others who have pointed out the very distinct difference between ~(a) commodity margins in fbtEres tran~aetions on commodity exchanges and (b) stocl~ margins in credit transactions of stock certftlcaté~ on the stock excl~ai~gO~. The tefr~i Ilehérve 1~Oard iS pro~erly concerned with the volume and terms of credit tFansactions in Which thete is transfer of ownership such as a transfer of stock certificate owners1~ip. however, a commodity futures transactions on margin is not a credit transaction since there is no trabsfer of ownerI~hjp b~it an obligation t~ tran~f~r later with one dtty cash settlement. Otl~er dlftereñces èan he pointed out which su~gest that regulation of eaminbdlty transactiOns shoEM not be thefunCtion of the 1~'ederal Reserve 1~oard. Growers, merchants, manufacturers, or others who are involved In the han- dling or processing of basic commodities, including cotton and wool, are, of PAGENO="0074" 6'56 CONSUMER CREDJT. ~RQTE~IQN 40T course, n!ot spee~1ator~. To the contrary, they are protected from disasterous price fluriuations by~ an abundance of legitimate speculatQrS. Because there are unequal numbers of hedgers seeking commodity price protection at any given time, the speculators are necessary for efficient functioning of the futures markets. Unduly high margin requirements could reduce the number of speculators, thus serving to render futures markets less effective In their functions. After car~fu1 study of Sedion 207 we strongly recommend that this section be eliminated from the Bill. Respect~tilly, ROBERT C. JACICSo~t, Eceee'utlve Vice President. NATIONAL CorreN CoUNCIL OF AMERICA, Washington, D.C., August 25, 1967. Representative LEONOB IC. Sur~LIvAN, Chairman, Contmittee on Banking and Currency, ~ubc'ominSttee on Consumer Affairs, UJ~I. House of Representatives, Washington, D.C. DEAR Mns. SULLIVAN: The `National Cotton Council, the overall organization of the cotton industry, adopted at its Annual Meeting in February, 1967, a res~ution which urges that an envlrohment be maintained that will permit and, encourage `the efficient f~nctfon of the cotton futures exchanges. T~o efficient tmarketin~g a3nd processing of raw cotton requires a marketing system under tvhich t~ié ris1~ of wide price fluctuation does `not~ ba~re to be bQrne by the p~ercb~tut or processor. Durlr~g the past 10 or 12 years, Govern~ ment cotton pytlgrai~is have all b~t eliminated tile risk~o!1! price fluctuation since tlu~se program~ have ~se~t 1~Otlj~ a ceiltJ~g'ttn1~t a floor on the price of cotton within a very, very nitrrow range. thie flçor was set by' a nov-recourse, price support loan offered to farmers. The ceiling u~as set by the governñle!it' off in~ to sell its huge ~itocks of cotton at a price just slightly above' the "floor". With no imipediate risk of any significant price Change, there was no oppor- tunity to speculate In cotton futures. In addition there was no need to hedge against a price change. Tfie two purposes of a futures exchange are to offer the opportunity to speculate on a piiç~e change and to hedge against one. During the period when speculation and hedging were no longer possible or needed, the New Orleans Cotton Exc1~ange closed and only very limited trading toOk~ place on t~be New ~qrk Cotton Exchange. But stocks of cotton have been reduced to a point where the surplus will be gone by next )~&ugust 1. Before the ~l968 crop is hai~vested, it seems almost certain that there wil4 be a ~1iortage, of cotton stapling 14s Inch and longer. As a matter of faCt the price of thIs kjtp~I of cotton is reported to have gone up 25 to 35 per cent above, the governmei~ floor. Accordingly, the government pro- grain no lQnger, rest~lts in a ceiling on price. Receiitly, tJI~ ~New Yo~r1t qQltoIl Exc~ange establi~hed a new fui~ures contract for tr~d~ng in cotton stapUng 1~~j6 inch. There ha~ been considerable activity in this contract as merchants snd proqe~sors ,~ought~, to' minimize the risk of price fluctuation of `this type of cotton. This theans that it now Is very impor- tant that cottou~futures~ t~ading not Je saddled with Govern~'ent regulations t~1iat prohibit j1 frprn ~unctioning p~jp~rly It is for this reason that the, National Cptkop Council opppsCs. Section ~ of Ith.,1t601. We feel the lransfer of authorit~ to sOt margin requir~ments. fro~n the com- modity exchap~es to the J~'ederai Reserve ~~ard would, d1sco~trage `the efficient functioning of ~thp cotton i~utures markets. The comino~ty exchanges themselves are in a better position to judge what is an adequate margin than is an outside body. The various commodity exchanges fln4. it to tbet~, qwi~ interest to set margins at a safe level, high ~nougb to prevent an und~1y 4ijgh volume of ~pe.ctulative transactions a~nd Jew enough t~ encourage .lqgitiniate u,se of the futures market for hedgii~ 4pth~poses. Spine cQinpa~e, a comn~pc1it~ My own re~earc1i q~ the coiisun~ier problema of'the poor ba~ couv1n~ed me th~t~ the poor more tbar~ a~iy other group in so~iety are victims of abtises a~rIsmg from eonsun~rr credIt They are particularly prone tO exploitatiOn b~1 un~ern pulous credit, uiérchants who now ~*erate `wIth~ virtua~ iurununity as a resitit `M loophQles iii current lOgislation tL~id the absence of enforcement m,aehinOry. The poor, more thah any otherTgrotlp,'are apt to be thisied hr the false promises of the credit salesn~en, by the "bait ads" that, appear in the mass media, and by the misrepresentation of price and quality by h~g1I-pre5sure saiOsmth. It `is not uneomrnon,for the poor copswfler' to be sold re~iônditiofled rnereha~ikHse~that is misrepresented as new, aild ~,et th~s obvio~ly a~idi~ilenf~practieO Is aithost never punished by, our la*~ enforéemefit agetici~k `~hould the poor con~iirneF' protest the fraud by wit~holding payments, ~he soon, disco\~ers that his wagea are being garnisheed and by that ~time be basgreat difficulty protecting his job, let alone his legaL rights in the transacticit. I canuç~t stress the strongly the flOod fç~r government to do e'verythlng hilts power to staxpp out consumer fraud and et~loitation. The need is partlc'illatly great today when our cities are being torn a~udder by ghetto tiots~ La~t year, when I. testide'd before another congressional subco~mlnittee, I suggested that resentment agaipst co~isumer exploitation was one of the many gri~vances that find expression, ~n riots. I ~m even more convinced of this toddy. Numerous newspaper ac~ounts have quoted ghetto residents as rationalizing the looting on the grounds that they have been tictimized and robbed by the mOrchants for niany years. The common thief is severely sanctioned whep apprehended, hut the credit merchants who abuse the law to bilk the xinsuspecting cpfisumer run little risk of punishment. Untold millions of dollars are stolOb each, year from bonsnthers by' disreputable used car dealers, home r~pOir firm~, vactium, cleaner firths and many other types of firms. Brtt instead of being met With criminal sanctions, the perpetrators of this kind of thievery more often than not become wealthy men respected ip tlie~r comniunities. How can we expect the disadvantaged to learn respect for the law when those in positions of ~e~ponsibllity dO not them~ selves respe~it the law.? And how can we expect the disadvantaged to obey the, law when we do not enforce the law fp'~ their protection? I believe the time has. come when society can no longer tolerate d dual system of law, one set of laWs for the ~isadvautaged and another. set for those in respected positions `of responsibility. It is in the light of these ohservation~ abqut thp `compelling nee~ for c'oilsumer protection that I shall comment on the, proposed legislation. I wholeheartedly endorse the provision for full disclosure of credit costs ini,terlns of a true annual rate. The arguments for this reform are so cçgent' and are so well known that I need not repeat them. I should only add that I part~ieular1y approve of the provisiQ'n to inclu,de the cost of insurance that the debtor is req~iired ~o buy as part of the credit cost. From the vantage point of the consumer, this is~ part of the price he must pay for credit and it makes little sense to exclucle~ it from the calculation of that cost. Moreover, it ~nay well have the additional ~4vantage of bringing down ~the exorbitant charge~ that are now being `mi~de~,for. this type' of insurance. I feel less strongly about the provision to th~ a ceiling on credit charges, With full disclosure of cost, perhaps the market mechanism will be suffic~ent to' keep credit charges at reasonable rates'. I am in complete agreement with the provision to' ab~1ish ,confess~ons of judg- ment. The confession of judgment assumes that the transaction was s~rupu,lously carried out `and that the debtor has no defenses for defaulting on payments. Needless to say; ,this is not allvays the case. My own research, has shq,~w'n ~bat many debtors stop payments when they belieye they have,boen' cbeate4. ~lnc~i fraud is not uncoinmo1L~l1L credit transactions, the 4ebtQr should~not be dgprived of his day in court. `~ ` ` ` Perhaps the most controversial feature of the proposed aet is Title II which would abolish wage garnishments. I share the Oommittee's view that this remedy of the creditor is frequently abused and often results in severe hardships for the debtor, particularly when he loses his job because of the garnishment. Studies PAGENO="0084" CONSUM1~R CREDIT PROTECTION ACT have shown that some of the "hard-core" unemployed are in fact unemployable because they have garnishment records. Not only does garnishment Impose a burden upon the debtor, but also it is quite costly ftr the employer as well. I see little point in making Ameri4~a's employers into collection agents for the creditor. Nor, for that matter, should the courts have as much of that respon- sibility as they now have. Studies have shown that many of the minor courts in various states do little more than collection work, and In some states the minor judiciaries make their living from the fees charged on the debts collected. Doing away with garnishment might well make the more unscrupulous creditors more hesitant in foisting heavy debt burdens on the consumer. But all this not- withstanding, I am not yet convinced that doing away with garnishment is e~tlier feasible at this time or would have the desired effects even If it were possible to pass such a law. For example, garnishment is not permitted in Penn- sylvania and yet credit merchants are thriving in that state and consumer fraud is just as prevalent there as elsewhere. The creditors in Pennsylvania do not hesitate to attach both personal and real property and sheriff's sales of furniture and even homes are quite common. To lose one's home because of a consumer debt is certainly as harsh a consequence as losing one's job. Although eliminating garnishment is probably a desirable long-run objective, I would urge the Committee to consider a more modest proposal now, the adop- tirni of a stronger version of the New York State law which prohibits employers from firing employees because of garnishments. The New York law flow applies only to the first garnishment, but there is no reason why such a law should not cover two or eveii three garnishments. Moreover, If the abolishment of garnish- ment is not yet feasible, attention should also be given to the amount of income that is exempt from garnishment. Many states have harsh garnishment laws, while sonic states permit garnishnieiit on only a small percentage of income. (It should be noted that personal bankruptcy rates are higher where garnishment laws are harsh.) Although problems may arise in trying to abolish garnishments now, there is hardly any justification for wage assignments which circumvent the courts en- tirely. I would strongly recommend that the Act do away with wage assignments which are now permitted in a number of states. If I may, I should now like to call attention to some aspects of the consumer credit problem that are not covered In the proposed legislation. One of the major abuses in the legal procedure leading up to garnishment has to do with inadequate service of process. All too frequently the debtor has no idea that he is being sued until his employer informs him of the gariiishment, for the simple reason that he was never properly notified. In some jurisdictions-New York, for example-im- proper service, known as "sewer service", is quite common, Needless to say, failure to notify the defendant of the law suit is a fundamental violation of our whole legal structure, and yet this happens all too often. Many suggestions have been made about correcting this abuse; one is to have process served by registered mail. I am not sure what the best solution is, but I would suggest that the Com- mittee look into this problem. As you know, the State of Massachusetts has recently passed a very progressive consumer credit law and there are two provisions of that law that I would strongly urge be adopted in the proposed legislation. One attempts to control the frequent abuses that occur in door-to-door sellifig by introducing a cooling-off period. In Massachusetts the consumer is given 24 hours in which to rescind the contract in direct selling. In England, the comparable law provides for a 72-hour cooling-off period. I believe that a "cooling-off" period in direct selling would go some way toward reducing the abuses associated with this method of selling. The second feature of the Massachusetts law that I think should be adobted in this Act has to do with the assignment of contracts to third parties. Under the "holder in due course" clause, these third parties are not responsible for any defenses the consumer may have agaihst the original sellers. According to the law, they are entitled to payment-whatever the fraud involved in the trans- action~ As a re~ult, many finance companies do not hesitate to buy the contracts of nnsel'iipuloiis mOrchants who employ deception to obtain the consumer's signa- ture on the conti'~ct. These fly-by-night credit m~rchauts could not long survive without the finance companies that buy their paper. Thus, one way of controlling fi-aud and increasifig the protection of the consiinier would he to (10 away with the hOldOr-in-dfle-Course doctrine mmcl mhke the assignee also responñble for the transaction. This may have the beneficiary effect of making time finance companies beha ye in a more responsible fashion. PAGENO="0085" cr~Ern~ ~ ?RO1~EcTIO~ ACr± As I noted earlier, our sOcief~ c'an no longer a~ford to condone the c~a~s exj~1~i' tation of consumers that is now so prevalent If consumer flaud is to be done away with, it is essential that there be strong enforcement machinery and that the perpetrators of such fraud be confronted with criminal sanctions This is not the case today The Attorney Generals of some 28 states now have Consuzner ~ mud Bureaus modelled after the one set up in New York by Attorney Geni~ral Lefkowit7 But for all his investigation of consumer complaints and his efforts to negotiate them the Attorney General of New York does not have the power to proseei~ite the pOrpetyators of fraud To my knowledge n~t a single bu~iness man in New York has been put in 3ail for cheating his customers Until strong enforcement machinery is instituted I see little hope of making much headway in eliminating fraud. One ~f the merits of the proposed law is that it does .~rovide for criminal penalties for violations I would like to suggest that these penalties be strengthened and made to cover even moi e offenses In this connection I would also like to suggest that the responsibility for enforcement of the various provisions of the Act be placed in the hands of the U.S. Attorneys' offi~estather than in the central office of the United States Attorney General. The U.S. attorneys are thuch closer to the local scene in which the violations occur and they should not have to wait for authority from the Attorney General to act In elosing, I again commend the Committee for attempting to come to grips with one of the major problems confronting America today. Mrs. SULLIVAN. Thank you, Mr. Caplovitz. Mr~ KilTiball, do you think you could summarize your paper? Mr. KIMBALL, I most certainly will. STATEMENT OP `GEORGE H. EIMBALL,~ PRE$IflE2 , Kfl\~BALL'S; PORTSMOUTH, N H, REPRESENTING THE NATIONAL E~ETAI1~ MER~itANTS ASSOCIATION; ACCOMPANIED BY J~AMES WOOLEY Mr. KIMBALL. Since Congressman Wyman introduced me I will skip over the introduction and you know what the National Retail Mer- chants Association is. I will say that we are a group of reputable businessmen and the large portion of our membership is composed of businesses doing $75,000 to $2 million annually which is considered small business. Since the original introduction of the first truth-in-lending bill in the Senate, the National Retail Merchants Association has been work~ ing with and appearing before committees in an attempt to develop legislation which can be considered fair and equitable to all concerned. Our policy during this entire period has been and remains as follows: Consumer credit is an indispensable element of a sound and prosperous Amen- ~an economy It has enabled the American consumer to enjoy a standard of living naparalleled in the history of the world-a standard of living which could not have attained without the liberal availability of consumer credit. NRMA member stores extend credit in response to. the needs and desires of their customers. We accept a ~espons~bility to accurately and fully present to the consumer all the important facts pertaining to the merchandise and its use, including the terms of purchase. We support the principle of full disclosure of credit terms in a manner which is truthful, complete, and meaningful to the consumer. Any legislation which seeks to regulate consumer credit should be consistent with the principle stated above It should not encumber the retailer with impossible, burdensome ri~qinrements that might tend to limit the availability of credit to the consumer It should give recogni tion to the fact that the costs of extending consumer credit represent more than simply the cost of money, and give due regard to all of the PAGENO="0086" ~68 CQNSV~tE~ C~EDIP PROTECTION i~CT costs ~óf ~exteuding ~r~dit iu es~ablishing ~u-iy minimum ~r maximum rates. ~t appear her&today i~t~he same spirit to;di~cuss my views on ~LR. 11601 and H.R. ~IG02; S S With re~pec~ to H.R~ 11601 we~ ftnd it d$enlt to understand ho~v all the time an4 effort spent. by the Sena~e~ can, be ignored. The Sen- ate hearings reports ar~fihled with testimony showing that an accurate ~nn~i rate cannot be applied to r~vOlving ~redit. This, in fact, was one ofthe major reasons for the great delay in the~ passage of the bill. }LR. 11601 w~uld be detrimental to my bus!ness, to the livelihood of my employees, to the community of Portsmouth, N.H., and to the entire t~ountry. Its enactment is unnecessary, as at the present time we are furnishing our customers credit information, and the additional amount of information required by H.R. 11601, such as the "annual percentage ~ would only confuse and bewilder the consumer. Credit is a very important tool of the modern retailer ahd he can- not survive without it. At Kimball's 65 percent of all saie~ are trans~ acted on our optional credit plan, referred to in H.E. 11601 as a re- volving or open end credit plan. Without the ~tension of this amottnt of credit, two things would happen that would put Kimball's into red ink immediately. Anything that would prevent coii~uni~rs from using our credit plan would 1mp~ediately reauce our ~les volume, reduce our gross profit while ~ti~r fixed ct~sts ~would remain the same. Our net profit would ~ecome a minus figure~instead of a plus figure.~ At the merchandising level, the consequent reduction in volume would increase markdowns, de- crease selection and further reduce our aibili'ty to employ citizens of Portsmouth, N.~H., and to purchase merchandise from manufacturers throughout our Nation. To be specific, I would like~tö discuss section 203 (d), starting on line 22 of page 11 of H.R 11601. Uzider part (2) the bill requires a store like Kimball's to furnish, prior to the extension of credit, a state- ment declaring "the annual percentage rate of the finance charge to be imposed." S I submit our invoice which we mail to each customer every 5 weeks. In the lower left corner we clear~1y~ explain about optional credit ac- counts. We tell `the customer exactly how much she is expected to pay. Then. we state~ "The only charge for this øredit is 11/2 percent of amounts owed for 85 or more days per billing period ~of 3.~ days." At the bottom we rep~t that there will be a service charge On a previous past due balance-this in bold print. S Kimball's dô~s not ha~ie the only unique system in the country, and 1~ do not think it would be fair to subject all stores to present a customer ~ith a general figure which ~would represent all system as the same as all others. We ~*e already clearly stating to our customer, in a language ~be can understand, that our service charge is 11/2 per- cent of ending balance~ per billing period. As it is, our customers are ~marter than ~*e are. `Phey. charge at the beginning of each cycle and ~y at th~e~ndbf each cyc1e,thetebybbtainin~'aln~ost 70days of credit withotit any' ~ehrice charge. Believe me, thiWi~hot t~t~ 1~percent thst H.R. 11601 `would have me t~l mj~ cii~thmek~s,' but~can be less than 8 o~ ~ pçi~cent on a si*xpie annual rate. ` S ` 5 jS''S 55 ~55 55* PAGENO="0087" cO~SW4~R ~DIT P T~EOTIQ~ AQT I am very much opposed to the statement of an annual percentage rate, as it confuses the shopping pi~blio between tl~e words "service charge" and "interest." Even `the Internal Revenue Service claims that oniy one-third of the service charge can be used as an interest deduction on individual income tax returns. Under revolving credit, we supply our customers with extra service for which there is a just charge made. This charge discourages excessive c1~arghig, and it also has the tendency to make customers pay their~ bills more promptly. For example, we can send seven invoices to a customer fur the pur- chase of one $30 dress. I show you the chart here: PURCHASE MADE APR. 5, 1966 Invoice date Payments Balance due Service charge on account May 10, 1966 $5. 00 $25. 00 $0. 38 Junel4,1966 5.00 20.38 .31 July 19, 1966 5.00 15.69 .23 Aug. 23, 1966 5.00 10.92 .17 Sept.27, 1966~~ 5.00 6.09 .09 Nov. 1, 1966 5,00 1.09 Dec.6, 1966 1.09 Total -III__ ~ ~ ~. 18 13.9 percentol sale. You can obse~v~ ~by the chart ~tat she bought a dre~s~ on April 5 for $30, and we sent out stotements every 35 day~s. The customer made regular payments of $5, the total service charge of this transac- tion was $1.18, or 8.9 percent of the sale cost. Thus 1~imball's does have a unique sy~tem working on a 10-month annual plan.. The above transaction necessitated sending this customer seven separate bills. The cost to the store was at least 25 cents per invoice or a total of $1.75. We charged our customer $1.18 or, 8.9 percent of the actual sale. It actually cost the store 57 cents more than the customer paid in service charges. Over 50 percent of my customers want and use revolving credit. They have little or no objection to the service charge, such as we use. They only expect it to be expressed in a language they can under- stand. They know what their ending balance is, and they can multiply this figure by 11/2, and know that their service charge has been ~c~rately computed. If they do not want to pay the ~harge!,1 they always have the option of paying the bill within 35. days,~ and- thereby avoiding any charge. - H.R. 11601 would take me iuto a proven iiOnt~orkable area by insisting on inclusion of the annual rate disclosure for all types of credit transactions. The NRMA endorses, as stated in ELR. 11602, the exemptioft pre- scribed for the cJpsed-end or installment credit from `an~riual r~ate dis- closure transactibns in whi~I1~'tite total ftnance,c~iarges do not ~xeee4 $10. This feature~ ~~igin,ally. recommended by the Fede~a1 fleserve Board will be a definite assistan~e~'to the smali~ ot specialty -store where they ~re foi~'ced, for ~easoils ~f ec~Onothks, to lnainthnl4 otil~y ap ij~stallment type of itecount This te~ttire is tipt iheluded Sn fli R~ 11601k Other areas not relating directly to~pecific crèdiftmnsactio~is hav~ been included in H R~ 11601 Areas such as advertising of cred~t PAGENO="0088" CO~SU1¼~R ~ ~rn~nn~ ~nd~th~o~ ~A~i' terms, standby controls, ~b~n on g~rrnshrnent of wages, usury and a national commission on consum~r credit, should not be considered as part of a bill of this natuie As brought out by previous witnesses before this committee, includ- ing Miss Betty Furness, the President's Adviser on Consumer Affairs, Under Secretary of the Treasury Joseph W Barr, aIld J L Robert son, Vit~e Chairman~ Fe~leral Reserv~ Board, most of these items are already under study by separate groups In conclusion we ~must state that we are opposed to H R 11601 It encompasses many areas which in our opinion ~tte nottrül~ ~re1ated to truthful and accurate credit disclosure and its powers of enforce- ment given to the Federal Reserve Board far exceed normal needs. The Board itself has said many times that it does not want this authority. H.R 11602 eliminates all of these additional and unrelated proposals and in the area of enforcement leaves the major part of civil suits, limiting the Board's responsibility to regulating methods of disclosure and establishing reasonable tolerances of accuracy In addition we must continue to oppose H B 11601's requirement foi full disclosure of an annual percent ~ge rate for revolvrng credit As previously described at length this provision would create false and misleading information thus creating a situation which we be- lieve would be completely contrary to the desires of the congress. H B 11602 does not meet with the full approval of all of our mem- bers In fact, as brought out in testimony by NRMA before the Senate Banking and C~rrency Committee mi June 2, 196?, th~re ate sec~ tions concernrng the distinction between open eud credit plans which we do not feel are conducive to developing a proper competitive situa- tion within the industry However, H R 11602 represents a compro- mise develop~d from 7 years of work and study. We would hope to further improve upon it~ provisions However, if left with a choice between accepting H.R. 11602 or regressing to H.R. 11601 we express the view of the majority of our members, which would be acceptance of H.R. 11602. (The full st~tements of Mr. Kimball follows, as well as a sample invoice:) STATEMENT OF Gro~on H. KIMBALL ON BEHALF OF TH~ NATIONAL RE1~AIL MERCHANTS ASSOCIATION Madame Chairman and members of the Committee, my name is George ~ Ximball~ a reSident of New Castle New Hampshire Kimball's store is a family- owned store specializing in women s and children s apparel We employ 55 women and 5 men on a ~egula~' full time basis and peak periods bare as many as 90 people on the payroll Our annual volume of business is around $950 000 Our payroll amounted to $191160 last year These people pay approximately $40 000 in Federal incoiñe taxes. The store also pays $15,000 a year in State and Muin~Ipej taxes I would elasaify Knnbali's as a small industry in a small corn munity in a sman state. I come here today representing the National Retail Merchants Association a non profit trade association with its executive offices at 100 West 31st Street New York New York I am a member of the Board of t)irecters of NRMA and am speaking with the authority of that body There are over 2 000 members of NRMA representing more than 15 400 retail store units throughout the United ~ates and In more tIlan 50 other countries These stores range in size from the largest to the smallest retailers Approxi mately 6~ per cei~t of Its members are storS owners with Individual sales vol nines ranging fro~n under $75 000 to $2 million annually The members of NRMA engage in retail ~redlt transactions and are, of course, deeply concerned as to PAGENO="0089" CQNSTJMER CREDIT PROTECTION ACT 671 any develQpmepts in this area. Since the original introduction. o~ the first "Truth in Lending" bJ~JJ~ in the Senate, the l~Tational Retgjl Merchants Association has been w~rkin~ with and appearing before conimittee~ in ai~ attempt to develop' legislation which can be considered fair aro~ equitable to all concerned. Our policy durl~ this entire. perio~ has been and remains as follows; "Con- sun~r credit is ai~t i~idispen~ab1e element of a sound and prosperous American economy, It has enabled the American consumer to enjoy a standard of living unparalleled in the history of the world-a standard of living which could not have been attained without the liberal availability of consumer credit." NRMA member stores extend credit in response to the needs and desires of their customers. We accept a responsibility to accurately and fully present to' the consumer all the important facts pertaining to the merchandise and its use, including the terms of purchase. We support the principle of full disclosure of credit terms in a manner which is truthful, complete, and meaningful to the consumer. Any legislation which seeks to regulate consumer credit should be consistent with the principle stated above. It should not encumber the retailer with im- possible, burdensome requirements that might tend to limit the availability of credit to the consumer. It should give recognition to the fact that the costs of extending consumer credit represent more than simply the cost of mone~r, and give due regard o all of the costs of extending credit in establishing any minimum or maximum rates. I appear here today in the same spirit to discuss my views on II.R. 11601 and H.R. 11602. With respect to H.R. 11601 we find it difficult te understand how all the time and effort spent by~ the Senate can be Ignored. The Senate hearings reports are' -filled with testimony showing that an accurate annual rate cannot be applied to' -revolving credit. Phi~~, in fact, was one of the major reasons fec th~ great delay in the passage of the bill. - H.R. 11601 wohld be detrimental to my business, to the livelihood of my em- ployees, to the community of Portsmouth, New Hampshire, and to the entire country. Its enactnlêut is unnecessary, as at the present time we are furnishing iur customers credit information, and the additional amount of information required by H.R. 11601, such as the "annual percentage rate" would ~only confuse and bewilder the consUmer. Credit is a very important tool of the modern retailer, and he cannot survive without. it. At Kimball's 65% of all sales are trans'acted on our optional credit plan, referred to in H.R. 11601 as a revolving or open-end credit plan. Without the extension of this amount of credit, two things would happen that would put KimbaWa into red ink immediately. Anything that would prevent con- sumers from using oUr credit plan ~W6uld immediately reduce our sales volume, ±educe our g~ross profit, while our fixed costs wodid remain the same. Our net profit would become ~ minus figure instead of a plus figure. At the merchandising le1~el, the consequent reduction in volume would increase markdow'ns, decrease selection, wad further reduce our ability to employ citizens of Portsmouth, New Hath~sblre, and to purchase merchandise from manufacturers throughout our nation. Po be specific, I would like to discuss sectIon 203(d), starting on line 22 of j~age 11 of H~R. 11601. Under~part (2) the bill requires a store like Kimball's to furnish, prior to the extension of credit, a statement declaring "the annual percentage rate of the finance charge to be imposed." I submit our Invoice which we mail to each customer every five weeks. In the ~1ower left corner we clearly exDlain abOut Optional Credit Accounts. We tell the customer exactly how much she is expected to pay. Thea we state "The only ~Jsarge for this credit Is 11~4% of amounts owed for 35 or more days per billing period of 3-5 days." At the bottom we repeat that there will be a service charge on a previous past due balance. .. this in bold print. Kimball's does net have the only unique system in the country, and I do not think it would be fair to subject all stores to present a custo~uer with a general figure which would represent all systems as the sgme as all Others. We are al- ready clearly stating to our customer, in a language she can understand, that our service charge is 1~~% of ending balance per billing period. As it is, our customers are smarter than we are. They charge at the beginning of each cycle and pay the end of each cycle, thei~eby obtaining almost 70 days of credit without an~r service charge. Believe me, this is not the 18% that 11.11. 11601 would haire me tell my customers, but can be less than 8 or 9 per cent on a simple arniual rate. I am very much opposed to the statement of an annual percentage rate, as it confuses the shopping public between the words "service charge" and ~interest.~r PAGENO="0090" 672 CONSUMER CREDIT PIfIOTECTION ACT Even the Internal R~venue $ervice claims that only one-third of the service charge can be used as an in~terest deduction on individual income tax returns. Under re~ volving credit, we s~pply ~itr customers with extra service for ~vhich there is a just charge made. This charge discourages excessive charging, and it also has the tendency to make c~isto1ners pay their bills more prompt1y~ For example, we can send seven invoices to a customer for the purchase of one $30 dress. I show you in the chart here: PURCHASE MAbE APR. 5, 1966 Invoice date Payments on account Balance due Service charge May 10, 1966 June 14, 1966 July 19 1966 Aug. 23', 1966 Sept. 27, 1986 Nov. 1, 1966 - Uec.6,19~6 $5. 00 5.00 5. 00 5.00 5. 00 5.00 1.09 $25. 00 20.38 15.69 10.92 6. 09 1.09 - $0. 38 .31 .23 .17 . 09 Total 11.18 1 3.9 percent of sale. You can observe by the chart that she bought a dress on April 5th for $~0, and `we sent out statements every 85 days. The customer made re~u1ar paynlents of $5, the total service charge of this transaction was $1.18, or 3.9% of the sale cost. Thnt~ Kimball's do~vs have a unique system working on a 10-month annual plan. The above transat~tion necessitated sending this customer `seWen separate bills. The cost to the st*e was at least 25~ per invoice or a total of $t75. We charged our customer $1.1~ or 3.9% of the actual sale. It actually cost the store 57~ more than the customer paid In service charges. Over 50% of my customers want and use revolving credit. They have little or no objection to the setvice charge, `such as we use. `They only expect it to be expressed in a languago they can understand. They know what their ending balance is~, and they can multiply this figure by one and one half, and know that their service charge has been accuratel~ computed. If they do not want to pay the charge~ they always have the option of paying the bill withIn 35 days, and thereby avoiding any charge. 11.11. 11601 would take me into a proven non-workable area by insisting on in- elusion-of the ann*al rate disclosure for all types of Credit transactions, The NRMA'emlorses~ a~ stated in H.R. 11602, the exemption prescribed for the closed-end or inst~ilnient credit from annual rate-disclosure transaetion.s In which the total finance charges dO~ not exceed ten dOUars~This feature originally reconi- mended by' the-Federal Reserve Board will-be a definite assistance to the ~smaller or epecialty store where they are forced, for reasons of ecOnomIr~ to maintain `only an instalimelit type of account. Tbis~feature is `not-included In ~R. 11601. Other areas not relating directly to specific credit transactions have been in- cluded in ILR, 11601, Areas such as advertising of credit terms, standby controls, ban on garnishment of wages, us~iry and a National Comnlission of Oonsumer Credit, should no~ be considered as part of a bill of this nature. As brought out by previous witnesses before this committee, including Miss Betty Purness, the President's advisor on consumer affairs, Undersecretary of the Treasury Joseph W. Barr, arid J. ~L. Robertson~ vice-chairman, Federal Reserve Board, most o~ these i-tents are al~t-eady understudy-by separate groups. - -In conclusion trenurst state that we are opposed to 11.11. 11601.-It eneônt- insses many areas which in our ~pinion are not truly related to- t~nthfUl and accurate credit disclosure and -its' `powerS of enforcement given to-the Federal Re- serve: Bbard far exceed normal-needs. The Board itself has Said many times that it~ices not want this authority. ` - - HR. 11602 eliminates all'n~ these additional and imeelated fsropoSals and its th~ area of~euforeethent 1eai~e,s the'snajo~ part to civil suits, itmitiag the -Board's re- `Sponsibility to regulating methods of disclosure and establishink reasonable toler- ances of necuracy. ` - ` ` `~ In addition w~rnnst continue -to ®pnse-~LT~. 11601's requir~mentforfa1l diselo. sure of an anu~dl porceStage l~àte for~rovOlving credit. - As- pr~viotssl~ described at length thispikosis-ibn'wonld' create falsC and' misleading Inform~tton thus `cre- ating. a- sitizatlofr which we -believe would be cotapletely cohtrary to the desireS ~f the f~5on~ress. ` - - ` ` - PAGENO="0091" CONSUMER CR1~DIT PROTEOTIO~ ACT 673 H.R. 11602 does not meet with the full approval of all of our meihbèrs. In fact, ns brought out In testimony by NRMA before the Senate Banking and Currency Committee on June 23, 1967, there are sections concerning the `distinction between open-end credit plans which we do not feel are conducive to developing a proper competitive situation within the industry. However H.R. 11602 represents a com- promise developed from seven years of work and study. We wonid hope to further improve upon its provisions. However, if left with a choice between accepting E.R. 11602 or regressing to H.R. 11601 we express the view of `the majority of our ~tnem~bers, which would be acceptance of H.R. 11602. STATEMENT OF NATIONAL RETAIL MERCHANTS AssocIATIoN Surroarixu THE Ex- EMPTION OF CREDIT SERVICE CHARGES OF LEss THAN $10 FRoM DlscLosuim IN TERMS OF AN ANNUAL RATE Governor R~bertson recommended an exemption from annual rate disclosure of credit transactions under $100 or where the credit service charge is $10 or less. lie said ". . . a small finance charge-in dollar amount-is not of great signifi- cance to the credit user regardless of the effective rate of finance charge." The disclosure of credit service charges in terms of an annual rate may be desirable on large credit transactions, particularly where the terms of repayment extend for periods as long as five years. It has no meaning or importance on small sales with maturities of less than one year. For the small retailer careful control of costs is necessary to remain competitive. He has~neither the personnel, the equipment, nor `the time in connection with each small sale to convert credit service charges into an annual interest rate. His customers would neither ap- preciate nor tolerate the `delay in being waited-on. Furthermore, such conversion and disclosure would be more confusing than helpful to the consumer. Certain basic facts about credit should `be considered. Most significant, there are tixed initial costs `of processing each credit application and credit transaction which are `constant regardless of the amount of the account balance or the amount of the particular purchase. Such costs include initial interviewing and credit investigation, clerical and `bookkeecping costs, and collection expense. Because of small purchases these fixed costs are spread `over a smaller dollar amount, they are disproportionate in percentage terms to the same costs on larger transactions. The disproportionate flayed cost element of ec'~tendAng credit for short periods on .sm~afl sales is an economic fact which cannot be disregarded, and it shonki be viewed properly as a service charge, rather than an interest charge for the use of nwney. If retailers who sell small-ticket Items almost exclusively are required to ~uote a dollar and cents service charge in terms of a simple annual interest rate on `transactions that liquidate in periods considerably shorter than one year, that rate would appear to be disproportionately hLgh. It would place these sellers at a competitive disadvantage with those who include all or part of the credit costs in their cash pricing. When such disclosu~e discov~rages cu~torm~r8 ~from making the more valid comparison of time price a(!,ainst time price, they may find that in the end' they have gotten poorer value for their money. Let us consider this illustration. A $12 soft-goods sale with a small service charge of $1.50 may pay out in three installments. A merchant who competes by maintaining a low cash pricing policy with minimal mark-up needs' that Service charge to defray the costs of exten~ling credit. Yet, by quoting an annual rate of 75% he may lose a minor but important segment of his `business. His cus- tomer, motivated by shock rather than reason, could pay as much or more by patronizing a firm that includes credit servicing costs in its original pricing. In this instance, the unwary shopper-most in need of protection-would be the most vulnerable. Annual rate disclosure will `adversely affect s'mall retailers, and consumers as well, in another important respect. Nearly all retail Installment credit plans allow the buyer to add subsequent purchases `to his account. Betailers with small-ticket add-ons do not customarily refinance the entire package because of the time and expense involved. The credit service charge is imposed on each separate sale under~ Its original terms and when the payment terffi: of ~rior pureheses is extended by virtue of add-on purchases, no additional service charge is assessed tq the buyev fQi- the extended time a11ow~d. ~boul4 the seller he required to compute an annual rate on small sales of $100 or less, and be forced to bear the expense of this additional work, there would be no reason for him PAGENO="0092" 674 CONSUMER CREDIT PROTECTION ACT not to refina~ice all add-on transactions under a new blanket contract. This would result in a greater charge to the buyer, measured by the period of time from the due date of the last installment oii each prior purchase to the due date of the last installment of the combined balance. While the motion of having a simple, common denominator for all credit service charges has tremendous appeal to the erudite among us, it is really not that simple. Consumer credit, which is an imnportaimt tool of mass marketing in our present clay complex economy, takes many forms and each form has separate facets. The spectrum is very broad, ranging from amounts of a few dollars to many thotisamids of dollars ; from maturities of a few mouths to as many as 60 months or more. At the lower end of this spectrum severe distortion is apparent whemi oui~ "simple" common denonminator is used. The impact of this one, `simple" denominator may well cli~rupt sound competitive practmces 3! it is applied across the board without proper regard for the interplay of all )f the factors that enter into the pricing ot all ol time goods, soft as well as dmrable, in the market place today. I 9 25 MA~ I~ ~ PORTSMOUTH, H. H ~ I Fhone: diS- ~QO PLEASE DETACH AND RETURN UPPER PORTION OF THIS STATEMENT WITH YOUR REMITTANCE AMOUNT 1 YY~ :5 1: S S ~ PURCHASES RETURNS PAYMENTS RAI.ANCE DUE S ~ ~ .:., sss:I SSS~ ~SS S S PAYMENTS S RECEIVED AND MERCHANDISE RETURNED AFTER BILl. CLOSiNG DATE WILL APPEAR ON YOUR NUT $TATEMENT OPTIONAL CHARGE ACCOUNTS UPON RECEIPT OF MILL. PAT OS MUCH OS YOU Silo SOT NOT WHEN YOUR MINIMUM BALANCE IS PAYMENT IS UP TO M6O.O0 $10.00 H 61.00 TO *100.00 10.00 101.00 TO 140.00 20.00 141.00 TO 170.00 30.00 171.00 TO 200.00 50.00 201.00 TO 200.00 50.00 251.00 000 OVER 4 OFSCLANCE. TOE ONLY COUPLE FOR TillS COEDIT iS lOOM. OF AMOUNTS 0015. S_~_~~ SS~ - SMPOOSTAPr'. "OUR ORIGINAL SALES CHECKS A! 0 RETURNS AR~ E'ICLOSED. PLE~4SE 0~AVO THEM A$THEY CANNOT BE DUPLK.*TED. PRESENTTHEM WITH THIS STATEMENT 1~ THERE IS ANY INOUIR., ~R IF TFL~PO1ONING, PLEASE A$i< FOR THE NILL ADJUSTMENT DEPARTMENT. MCO00~T~ ME 5~.IE UPOP~ P~ ~`A iO!~-A SERVICE ~ WILL R~ `IME ~M A PREVIOUS RALPtICE I'~~ CUR. Mr. KIMBALL. I have with me today Dr. James Wooley of the New York office of the accounting firm of Touche, Ross, Bailey & Smart. Dr. Wooley will explain to the. committee using a group of acco mis PAGENO="0093" CONSUMER CREDIT PROTECTION ACT 675 at random the results of a study to determine the actual percentage of service fee on revolving accounts over a 12-month period. Mrs. SULLIVAN. Thank you, M~i. Kimball. Mr. Keyserling, I don't believe you submitted a prepared statement. Do you think you can pick out the points of the bill that you would like to discuss in 10 to 15 minutes' time? STATEMENT OP LEON H. KEYSEBLING, WASHINGTON, ~.C., FORMER CHAIRMAN, COUNCIL OP ECONOMIC ADVISERS, CONSULTING ECONOMIST AND ATTORNEY, AND PRESIDENT, CONFERENCE ON ECONOMIC PROGRESS Mr. KEYSEELING. Madam Chairman and members of the subcom- mittee, I want to apologize for not having a prepared statement. This is the first time in 35 years of appearances before congressional com- mittees that I have not had one for the benefit of the committee I set aside some time last week to do this and was ~alled to Israel at the request of the Prime Minister for an economic conference, and just got back at the end of this week. So I am very sorry not to have a prepared statement. I can summarize my views within the prescribed time. I heartily favor the bill H.R. 11601 in all basic respects. I think if is long overdue. I think it is well considered, I think it is imperatively needed. I am not impressed with any of the objections to it that I have thus far heard. I ~bnM like to say that 1 am even more strongly in ~avor of the provision for a ceiling upon the rate charged than the provision for disclosure although I favoi~ both. The fact of the in~tter is, that the poor and the oppressed and deprived are in a position that impels them to borrow money at whRtever cost, because they have to. Dis- closing what the cost ts may help them, but taken alone, it doesn't help them enough The even more important thing is to see that they do not pay too much for a commodity that they have to use; that is, borrowed money. I think that the 18-percent rate is much too high, and is a sad com- mentary as to the extent to which all of our national credit policies, private and public, have tended to impose the smallest burdens upon those who need help least and the harshest burdens upon those who need help most. One defense which some may offer for the 18-percent rate may be that other interest rates have gotten so high, so unconscionably high, that a~ praètical spread must be maintained between other interest rates and these particular interest rates For this reason, liVonid like to call to the attention of the committee that, while this bill is essential and imperative, it is absolutely impos sible to accon~plish nearly enough in the way of making credit avail- able t~ low-incomb people at reasonable costs, unless and until the bro~tder problem ~hioh is aiso within the jurisdiction of this com- mittee is tackled I thmk it is in some respects and I do not ascribe this to this corn mittee; rather ironic alul ei~eu tragic, that we shOuld be attempting to PAGENO="0094" 676 CONSUMER CREDIT PROTECTION ACT impress upon private business the responsibility to be honorable and just and fair and socially minded in its credit policies, even while these characterizations, in my considered judgment, do not apply to the credit and monetary policies of our Federal Government, and above all, to the. policies of the Federal Reserve System. The policies of the Federal Reserve System have perpetrated a veritable outrage against low-income borrowers from 1952 to date. The wrongful attitude of the Federal Reserve people is well indicated by their unwillingness to assume the responsibilities that this legislation would impose upon them. I am not in favor of the protests against the abolition of garnish- ment, because I believe that garnishment is a clear example of people who are unable to protect themselves that are being subjected to much more rigorous penalties and procedures than others much higher up on the income scale who have many ways of avoiding analogous rem- edies: and for the same reason, I am against or I would be against legis- lative prohibition of assignments of wages. Goodness knows, the people who are affluent or rich have countless ways of assigning their income and property for legitimate and illegiti- mate reasons, and prohibition of assignment of wages would repre- sent the ten(leney of tightening up most on those who need help most. I would ]ike to say just a few words aboiit the relationship between the credit policies embodied iii this bill and the. more general question of credit and interest-rate burdens an(l 1)oliCieS, because I believe that this re.lationslilp is controlling in many respects. rll]).ere is naturally, under the very nature of our economic system, a spread between the interest rate chaigeci on Federal obligations, the interest, rate charged on State and local obligations~ the interest charged øn home mortgages, the interest rate cha~rg~d on business loans, and the interest rates charged on consumer credit. Consequently, so long as the Federal Gov- eminent persists deliberately in a long-range policy of tolerating an upward trend in the interest charges on its own borrowings, although it is sovereign and ultimately controls the money supply, it is a major cuTprit in the increased interest burden being imposed all along the line by everybody else. In order t.o show this more clearly, and how it relates to the specific problem now before the committee I am going to cite a few facts and computations that I have made in the course of studies I have under- taken over many years. First of all, today, looking at the increased interest, charges in the Federal budget alone., representing aplication to the actual debt of the interest~rate increases since 1952, when, in my view, the infamous "accord" between the Federal Reserve Board and the Treasury took phice, the annual interest charge against the Federal budget now in 1967 is about $6 billion higher than. if the 1952 level of interest rates ii ad been maintained. Applying the same method of computation, the increased iiuterest co~ts to State and local governments are flOW more than a billion dollars a year. The increased interest costs to au private borrowers, including borrowers on consumer credjt, are now running at an annual rate of $10 to $12 billion. Thus, the American people are now paying these in- creased interest, costs at an annual rate of from $17 to $19 billion. And PAGENO="0095" CONSUMER CREDIT ?RO~1~CTION ACT 677 all this represents, by deliberative national policies, a transfer of in- come mainly from those who have not to those who have, a transfer of income from those who borrow to those who lend, a transfer of in- come, from those who cannot protect themselves to those who can protect themselves. The increased interest rates, since 1952, on all one- to four-family, nonfarm, home mortgages are now imposing an additional cost upon homeowners of about $2 billion at an annual rate. And this in itself means that, on a $10,000 house which might be bought by a $5,000 family, the increased interest payout by that family over a 25-year mortgage is about $2,000, or about 40 percent of the family's annual income before taxes. The increased interest rates on total consumer credit, which is most directly within the scope of this hearing, may now be costing these types of borrowers as much as $2 billion at an annual rate. As I have said, the excess interest costs in the Federal budget alone are now at an annual rate of about $6 billion. Here we are, a nation with riots in the streets fiddling while Detroit burns, claiming that we are unable to afford adequate expenditures for slum rebuilding or education or health services or most Qther needs of high nationa] priority, or even for the kind of employment programs that might be created with the right kind of expenditures, and yet tolerating these fantastic interest tributes to those who lend money to the Government itself. The annual excess interest cost of $6 billion in the Federai budget alone is much more than twice the proposed fiscal 1968 Ferleral budget outlays for education; about 30 percent higher than outlays for health services and research; about twice outlays for public as- sistance; almost four times outlays for labor, manpower, apd other~ weif are services; about twice outlays for agriculture and agricultural resources; six times our outlays for housing and community develop- ment-even though we have proclaimed tIns lack as a source of ali& the trouble in our ~ities-80 percent higher than outlays for natural resources; and about 31/2 times outlays for the Office of Economic Opportunity.. Now, over the next 10 years, and I have estimated that as of now the nationwide increased interest costs are $17 to $19 billion at an annual rate-over the next 10 years, with the jncreases in interest rates which are still in process, but more importantly because more and more debts~ which were not covered by the rising interest rates will be refinanced at the higher rates, I estimate as a minimum, that over the next 10 years,. at least $25 billion a year, or $250 billion over the next 10 years, will be transferred from those who borrow to those who lend through the rising interest rate policy alone. This comes to estimates of about $80 billion over the next 10 years~ in the Federal budget, about $20 billion over the next 10 years on State and local budgets, and about $150 billion over the next 10 years on all private debts~ As I figure it on the interest-bearing consumer debt, it averages at $2 to $2',/2 billion annually, or $20 to $25 billon over the next 10 years, What does th~ average annual excess interest cost of $8 billion a year over the next decade in the Federal budget alone-which I estimate to be moDe than likely unless the prevalent monetary policy is drastically changed-really mean? This figure comes to about eight PAGENO="0096" ~78. cO~8I~~' C~EDIT ECPIO~(AC~ times the flsc~i 1968 Federal budget pr~posal for housing and cOrn- annuity development, about 21/3 times the pro~osaI for naturaire- sources, almost three times the proposal for education, about 80 percent higher than the proposal for health services and research, about five times the proposal for labor, manpower, and other welfare services, about 2% tim~s the proposal for agriculture and agricultural re- sources, and more than four times the proposal for the Office ot Economic OppOrtunity. And what does my estimate of a nationwide excess interest cost, public and prii~ate, in the neighborhood of $25 billion annually over the next decade really mean? This is roughly equivalent to $3,600 per year for every American family of four. Less than half this annual amount would measure the difference between the current incomes of all of the mOre than 30 million poor families in the United States and the incomes that all of these people would need to. rise above the poverty-income level. This shows dramatically how much we could ~easily affoTd to do, if only ~we redirected our efforts along lines ~ economic oolnmpnsense and social justice. Now, what a~'e the reasons given fe~r this monetary travestyd? The first reason given is that it stops inflation, I do not understand how it stops inflatioji to increase the cost of that precious commodity *hich ~everybody in need has to use, even theugh everybody does not have to~ use bread and sQme would be better ofF if'they do not use it. A se~~ond reason given is that it is necessary tO slow down the rate of economic growth. As a matter of fact, ~ur economy has been in ~ period of stagnation for `the last couple of years. And now we are in a fantastic position where we are asked to enact a 10-percent sur- charge, which *111 bear down excessively n~on th~ low~ and middle~. income famiiie~ *ho ha'~e already been so seriotisi3f hurt by these rising interest rates, o~ the alleged ground that `we need t~ increase ta~ès in ~ard~r to be abl~ to ~havelower,interest rates This is one df' the most `fanta~stic eeomdm-ic propositiohs e*~r cdnjiired out ~xf' the minds of nu.sguided peo~l~." ` " If a large portion of the American people are being burdeued too' `heavily, relative to their resources, and relative to the `wealth and power of the U.S. econom~y, how do we help them by taking one step for~vard and one step backward, by increasing the tax burden on tbem~ in exchange for lowering the interest rate burden on them, even as- `suming that `the Federal Reserve Board `in its constrm~tion of good conscience would respond to the increased taxes by lowering the inter-' best rates, whichit has not'done before? Actually, the~ dollar amounts by which the tax burden on the lower middle income ~people would be increased b~ the proposed 10' percent surcharge would `be much greater than the dollar amounts' by which, these same families would benefit from any conceivable redi~ction iii interest rates wiTch might follow in &~nse~ji1ence of the prqposed tax increase. ` ` `: ` ` 1 `The truth of the `mat~t~r is `that the ~Federál ROs~e' ~y~tem, ~Mch in rec,eiit years has proved itself unworthy of the trust, jmj*1secl upon it by the C'6ng~es~ t~ dé~i `with'~ ètary policy', i~ nb~v taking over fiscal `policy as ~ll., Having succeeded' i~1~ `disengaging its~lf from its appropriát~ dirty' to ~obperatO ~ith the" ~itrpds~s of the fiscal policies of the F~deral G~overmnent, the Federal' Reserve ~Systern has PAGENO="0097" C~~SUMER CREDIT PROTEC~CION ACT 679 now taken the addition~iJ step of pointing a pistol at the Federal Gov~ ermnent, and ~ threatethng to increase interest rates st ill more unless the Federal Government increases taxes. as quick and as much ana along such lines as are thought desirable by the Chairman of the Federal Reserve Board. A Federal Reserve System not responsible to the President, and not truly respoilsible to the Congress, and there- fore, not responsible to the people of the United States, although that system is a public instrumentality created by the Congress, has assumed the role of being the most ~pnwerful arbiter of the ecónbtnic ~poiiciès of the Nation. This is dangerous beyond description. There has hardly been a time during the last decade an.d a half when the Federal Reserve Board has not used the bogy of "inflation" to inflate the faf and starve the lean, to repress the rate of economic growth, and to hold the Jevel of unemployment, especially among the vunerable groups, to dangerously high levels~ Today, with our cities in turmoil, and our nationwide tranquility and domestic accord more seriously jeopardized than at any time during this century, and with a direct relationship between these troubles and the economic distress and unemployment ~chich afflicts scores of millions of our people, the Federal Reserve System, with a vengeance is again frustrating those national policies which might repair the situatiOn and' dedicate us to our great national purposes and priorities. I believe that we need to consider the~se varieties of problems care- fully. I cite them first in reenforcem~iit of the imperative need to take the small but important step toward helping these people in the ways provided in the proposed legislation. And even more important; I am firmly convinced that, unless we stop engaging in the dream of solving great national pioblems with extremely limited, though worthy pro grams, with programs which grab hold of only one-fiftieth or one~ one-hundredth of the real' problem, unless as part of this process we move toward a dust and American and fair and decent and honorable credit and interest rate policy for the Nation ~s a whole, which can be provided only through the action of the `Government and `the Federal Reserve System, we will not accomplish very much by dealing only with one specific aspect of the problem' `as represented by the proposed legislation, although I compliment this subcommittee for tackling this aspect of the problem so forthrightly, courageously, and constructively. Mrs. SULL1VAN~ Thank you very much, Mr. Keyserling. Every time you appear befoi~e us you give us food for th~ught. I think you have given us a lot this morning. Next we have Mr. John W. Edelman, president of the National Council of Senior Citizens. I think you are accompanied `by Mr. Hutton. Do you both have statements? STATEM~ENT OP JOHN W. EDELMAN, NATIONAL COUNCIL OP SENIOR C!~1ZENS, INC., AND WILLIAM ~ HUTTON, EXEOUTT~1~ DIRECTOR ,~ Mr. ED~JMAi~. Madam Chairman, as it happens, I am presiding officer of two, national organizations that are appearing here today. The Nationai `Consumers' League will be represen'ted by Mrs. Newman and the National `Council of Senior `Citizens by Mr. William Hutton. 83-340-67-pt. 2-7 PAGENO="0098" 680 CoNSUMER CR~PJT PROf~'ECTLON ACT The National qpnsume~s' I4eague is an. &ga~isation 70 years~ld-.--it is in effect, a lçipd of elite org~inization which l~as~een c~pi~cei~ecl with problems in this area fo~many,many y~ears while th~ National Ooi~acil of Senior Citiz~ns which is a n~ass orgauizatjoi3 representing many very poor elderly people ~ho~ai~ peculiarly oppressec~3 ~y the evils of i1l-ad~nini~tered~ ~r~ditr~ngement~ I. simply wish ~tohcomn~end these~ ~olleagues of mine to this com~ mittee ~nd I wil~I not take up a~y further tm~e,. (Ph~ pç~parQd st~t~nt of Mr. HUt~Q~I fol},ows:) ~~TEM5NT OF WXLLI ~ ~E1tYTTON, Ex 1~rv~ Dx~ncTo~t i~n NATxo~rAL or S~xo~ Oiriz~s, W~sux~roN, D.C. Má~dame ~hkirman, my na~ne is William R. 11~ifton, I am 1~xecuti~ Direet~ of the NatIoi*l Council o~ l~enior Citiz~i~ ~`iu an hthu~r ~1md a pr~viIege to b~ as1~ed\~with John Ede1~naivwho h~Js beez1~ sudb ~ stalw~t~t of the consumer rnoye~neut ~or so i~iany yea~~ As you. ha b~ard~, th~ National Councirs pos~tiou' on Trut~i-ln-I~ending calls for ~fuI1 and ~on~pleté disclosure o1~ the cGst of consumer credit as Président Jkthnson requeated* in h1~ ~onsumer i~iêssage to rC~ngress early this year. Men~ hers Of the Nati4nal Counethi of Seniors Citizerm are ~elidly behind H.R. 11601, the cousmuer pr~teetio~i ~I1J~ baeheid by the ~harmixrg ~zrd eo3i~ageous Subcom- mittee Chairman ~rid ~ve ~thpr sub~ommittee members., Cong~essmen~Henry B. Gonzalez of Texas, Joseph G. Miffisli of New Jersey, prank Annunzio of liii- riols, Jonathan BingbamM~d Seymoht' Halpern, both of New York. Members of the National Council of Senior Oltisens urge the House of Repre- sautatives to plug the ghpir~g bole~ in the Proxmnire truth-in-Lending theasure that has passed the Senate. Wø are particularly disturbed at the f~ilure of th~e Pro~mire bill to deal with chargé nceounts (revoWing credit), firtt mortgage loans and eredft transaétiO~t involving less than $10 and garnishments. Oid~er ~merieaos encounter all the consumer problems that plague the young and micidlo aged. in addition, they bavo special problems of their own. With few exce~ptions, incomes of the elderly are fixed~ The great majority of the 19,000,000 who are 65 or oVer live on social security. Approxixhately 15 per cent get industr~al ~pen.sión5 in addition to soc1a15~Ourittrbdt this ~ ii~eome is often pitifully small. More than .60 per cent et~ those 65 or over have ~ash or other asset~ ame~mnting to l~ss than$1F,000. The social sectirity recipi~en't getting $84 a month-a little over $20 a week-~- the averageold ag~e and adr~ivoj~s' benefit, or the couple getting $126 a month- or a meagrC $~1 a *èek, the average for recipient and spouse, must make ever~ penny count, They want the biggest bang for their buck When they go shopping; Mtliio~as of elderly frequently race the grim choi~e of getting enot1g~i to eat or paying for c~tly prescription drugs they need to stay alive. Those fortunate enough tO own `bdnie~ often have to choose between food purchases and spending for essential hothe maintenanCe. Many lonC~ome retirees must go Without food and other essentials so they can visit their children or close relatives. Our nation's accent on~ yor~tlt, ~bicb cons~gns even those 40 or 45 years old who become unc~~i~ployed to ~ie jadustrial scrap heap, forces the great majority 65 or Over to live on a razor's Odge of financial insecurity. Teday'~ retirees are the men and women who began their jrodtictive years during the ~reat~Depre~s10n ~o4~ the 1930's. For most o~ them, low wages and re- c~irring tunei.np1~oyment have macant scan'daioi~s1y ipadequate social security benefits. , . .~ , Unlike today's wage earners, whO can look forward t~ ~O years' uninter- rlipted eniployrnent and constantly risin~ wages promising top aoçl~l secuçlty a~ki money. in `the hank upon~reti~ment, ~re eidOrly are by~aud targe~withotlt anate 4ncomnes an~diaei~ sa~v~gs or other cash as~ts to see~ t1~e~n t~irou~li ~au emergency. . , Because the elderly are so often without cash, they are more andmore fotoed to rely on costl~r store credit. Every dollar exacted from them in exorbitant in- terest p~yrnen~, f4r credit pi~rc~jasqs leares ~dt~ witll on~ dollar ies~ for food or medicatiop. ~ ~ " , ` ~ ~. . ., ` ~he young l~ s~mndted and ont~marfed ~by conniving ~A{er~bants au4 ~ j imijlji ~ ~ .~ . : ~ ~ h~ . 7 ~ PAGENO="0099" CONSUMER CREDIT PROTECTION ACT 681 money lenders but what they lose can often be made up from future earnings. The vast majority of those 65 or over depend on infrequent social security In- creases for improvement of their economic situation. Social Security increases of 71/2 per cent in 1958 and 7 per cent in 1965 did not even keep up with the rise in living costs. The National Council of Senior Citizens is campaigning for the 20 per cent over-all social security increase recommended by President Johnson but with full knowledge that an increase in this amount would be but a step toward a level of payments sufficient to assure elderly poor a modest but adequate standard of living. The House Ways and Means Committee, which recently reported out a so~ia1 security bill, refused to go along even with the modest increase asked by the President. The National Council of Senior Citizens feels strongly that Oongress aini the nation owe older Americans, who helped make today's affluence possible, a great deal more than the inadequate social security package that has come out o~ the House Ways and Means Committee. Members of the National Council are well aware of the requirements of the Vietnam War and the additional cost of needed domestic impro~-einents, but they are saddened and angered at the spectacle of those who would play politics with human misery by using the Vietnam situation as an excuse to hold down needed social security benefits, Medicare and Medicaid improvements and to cripple or destroy the anti-poverty program and other much needed domestic programs. The leaders of the Senior Citizens clubs affiliated with the NCSO are abso- lutely astounded at those lawmakers who have even gone so far as to refuse, with whoops of hilarity that wUl haunt them, a modest appropriation for control of rats that spread disease and inflict injury in our city slums. We of the National Council would like to point out that the main opposition to truth-in-lending and other consumer protection legislation comes from those who obey the dictates of the business interests that insist they should decide the ethics of the marketplace regardless of the harm done the consumer. The National Council of Senior Citizens is a non-partisan organization enjoy- ing support of leading Senators and Congressmen of both major parties but we believe in calling a spade a spade. We invite those Senators ai~d Congressmen who have a sincere interest in ecouoiny and are not simply using this issue as a club to beat down all pro-public legislation, to consider the need for a strong Truth-in-Lending law, for here Is an area that involves absolutely no expenditure of Federal funds other than the comparatively insignificant amounts that might be required for enforcement. The National Council further points out that as a nation we may soon be called upon to pay more Federal taxes: By enacting a strong Truth-in-Lending measure and other needed ~ legislation. Congress could offset any tax increase that may be imposed on the taxpayer by helping him or her save by stretching their spending money. We are happy to note that the Subcommittee Chairman's bill duplicates the coverage of the original Truth-in-Lending bill sponsored by foruner Senator P'uil Douglas of Ihhii~ois for many years in the Senate and that it plugs the loopholes in the Proxmire Truth-in-Lending bill that recently passed the Senate. The h~rmful effect of costly revolving credit and garnishment on wage earners is expressed in many Jetters on these subjects received by the National Council Df Senior Citizens. Here is a letter from an Illinois member on revoliTlng credit: "I'm glad the Senate passed the Truth-in-Lending bill but I was surprised to uee there is nothing in it on store credit. I used to charge what I bought until I round out that I was paying 24 per cent a year on what I owed. That's four times :he amount of interest you pay on an ordinary bank loan. Not many people reai- .ze what they cost and that explains why there are so many charge accounts. Elere's hoping, when the Truth-th-Lending bill is finally passed it will have some- hing in it to control the interest people pay for store credit." A California member writes out garnishment: "I see where the Senate has passed a Truth-In-Lending bill. That's good. But. ~rom what I understand it hhs nothing in it about getting garnisheed. I'm retired, )ut, when I was ~iinger, I had my pay garnisheed just for getting a little behh~d ~n one installment payment. I nearly lost my job. Now, my son, who has a wife tnd five kids, is being garrisJwed. and it's murder. His take-home pay Is cut PAGENO="0100" 682 CON~IYMT~R CRIiDIT PROTECTION ACT in half and lila family Is having a real tough time. I think the Senate should have put the clanipa on garu1~heeii~~ a maWs ~a~t when it paosed the ~rutli~in-Lendlng bill." Memliers of the N~tioiial Coinicil of Senior Citisens, who have ~writteu on Truth-in-L~ndjng, agree with Congressman Jacob Gilbert of New York, who sold in a speech on theilotise floor that". . perhaps no proposal (before Crn~- gress) has i~iore to teo~aam4nd it than th~ Truth4n-Lendlng." They ask with Congressnian Øilbert "How can any Member of Congress dedkated~to~ the public iattinest~be against regulations designed to assure honesty in the marketplace?. . Oonsumere1~edltT as be~*re au area of theinioat severe exploitation o~'the ~*fror. It takes the form of do tion often Jeading to g~riaishment o~te~a with t~e los~of* jobs. Even w1~ien disaster does not result, exhorbitant interest charges ~f5~ a eonstant d~raIt~i'ot~ family lucerne. The lendor& profit from ecesumer credit 4s not peanuts. Consumers~nosti owe ,$95 billion of which $75 billion is fur lnstalhi~ent credit. The interest charge on this debt is a ~hopping $13 billion a year. The relationship bet~veen consumer credit and gnrnishmeflt*t highly huportaut. Even the thre~t~Otgnrnisbrne11t iS ~nongh to comp~ a wfigeearner to pay through the i~ose ~or a dc&pt1~teIy sold product because, frequently as not, garnisli~ meat can cause loss of eI~yment~ It is no accident that states with tM~ litrsitest garnishment'laWs usually 1u~ve thS moat ~oMuia~r baflk~n~tC1eS0? Fur nx~mple, California authorinedu garnish~- ment up to h~lf of a debtor's wages~ Ii~has a bankruptcy rate five tinie~ greater than New York which allows garnithment up to no more than 10 per ceut of ~ages. Increasingly, due to high pressure adve~tlsing, desperate dSbllors go to a srnall loan company to "eoasolldat&' their àebts~ Righest ~barges ~r eft~it are charged by these outfits. The peoplewho pay them can least aft~ortl to~pay tJae~e~hargeSri. Interest rates are set by state law at 2 to 31/2 percent a month on small loaus~ This is the equivalent of 24 to 42 percent Interest a year. Typical is the 3 per cent a month charge on loansxangillg from $150 to $300. Some of th~ most pitiable irictims of the burgeoning small loan industry, are the elderly oi~ whom some of these loan company blood-suckers sho~sae compas- sion whatS~ett The N~at1on~iI Oonncll of Senior Citizens jeii~s with Betty Furness, the recently named `~peeialc ~sslsttutt to the President for Ooxisnmer Affaif$, in insisting that: "At a tlm~ when one livos are run mere and more on credit, the least w~ can do is permit aborrowe~ totnow exnatly boW much be is paying for.a løa~ or ~red~it purchas&' Mrs~ Stm4uw~. Mrs, Ne~rnan, I think ~ou have, a st4temeflt. Can you summarize yours in 10 ~1BrnuteS? Mrs.. NEWMAN. I will be glad to try. sTAT~~$~4~Z ~t NZW~L~N, a~UL S~CB~T'ARY, RATIONAL CONSUM~S LF~AGU~ Mrs. Nn*MAN. Oms of the thi hat~h~ve impressed me is that we don't argue any loi~er ahQ~3lt iy1iet~er we. ought tQ h~ve~ truth in ~nd- ing ~ir ~et~ ~ppar~nIUy i h~strj 14as jo~iued cónsumëds in th~r rae- ogitition th~t this is a'ctua1ly~needed. , . The~imp~r~ant thing no~ is to decide hoW-Wli*~kiPd9f b~li.vve are goingt~ g~t~.oi~t ot the ~ I think `the heat way `tQ, *unmari~ my statement i~. ~ ind4te the ways in which we pmferH.R. 11601 over thn bill passed by theSenate~ S.~. Ou~ x~iaa~ ~Me~p~l to S ~ that it exempts a large part ô~ r~~v~lving e~iauf~u hanug to disclose the aiin~ia~ r~te.~'. One of t~Iae ni gun ts used to persuade the Senate coiumitteeto ex~ empt this s neM~f the indUstry was that rev~ilving cre~Thcóitstitutes PAGENO="0101" CONSt7MER CEEDIT PItOTECPION ACT 683 a very small per~ntag~ of ~ioIs erLcredit. WhTh~ this may be true, the picture is changing every day. Senator Douglas has pointed out earlier in ~th~se~ bearings that the amount of revolving credit jumped while the Proxmire bill *as wider consideration from $31/2 billion to ~5 billion, And a member of the banking industry has predicted that in 5 years re~to1ving credit will represent 50 pe~rcentof all censumer credit in this country. My prediction is that if we get S. 5 or IELR. 11602 instead of 1{.R. 11601, the rise, changeover to revolving credit will Be even more rapid, and you couldn't blame the merchants for~doing this be- cause they don't want to be discriminated against. I was glad to hear the representative of the Am~eridan Bankers A~- sociation say that "uniformity is essential if the consumers are to be given a means by which to compare costs of credit, and if the credit industry is to be permitted to operate without optimi~m ~effectiveness" and we agree with him completely, although we doklisagree with the ABA in their preference for the monthly rate. Another argument is that if revolving credit charges be disclosed by an annual rate it woudn't be telling the consumers the truth, I was not able to be present when Dr. Wooley presented his tables the other day but I have heard others trying to ~make this same pitch ;namely, that consumers charged at a one~and-a~haIf-percent monthly rate end up paying less than 18 pereent a year and, therefore, would not be getting the truth if they were told the annual rate was 18 percent. But none of these avid seekers of truth was able to prove that one and a half per~ent monthly rate was any truer than the 18-percent annual rate. Credit costs should be figured from the~ date the service charge begins and not from the date of purchase. If calculated in that way the annual rate i~ always 12 times the monthly rate. Actually, if you pay on the first day after the charge is imposed you may be paying not 18 percent~ but as high as ~S40 percent. Such ex- amples, of course, are never given. Of course, they don't show~ figures like that and most people wouldn't pay off that way. But it is just an indication that what we need is an annual rate which we can all under- stand. One of the witnesses today and also `the ABA witness said that the monthly rate would give the consumer all the information he needs for comparing credit costs because he could easily convert the monthly rate into an annual rate by multiplying by 12. It really is that easy and it shouldn't be any harder for the merchant or the extender of credit to do that multiplication than it is for the consumer to do it. We feel that the 11/2 percent monthly rate misleads the consumer into thinking he is getting a much lower rate charged him. I have here a bill which is issued by one of the stores-Klein's~---in this area using revolving credit and I would like to put this in with my statement for the record. It shows on the back of the biil-~--- You may at any time pay the entire biUance or more lilian payment due. No saPvic~e charge if payment in full received within 80 days of billing date. That's very clear and anybody who buys at this store knows `that within that 30-day period he can pay off the whole amount without paying any service charge. PAGENO="0102" 684 ~C0NSUM~R CREIOIT PROTECTION ACT Then on the rigiit-b?and side;. No~ 4, ~it dethies the service~ charge-~ 11/2 percent of the balance at the beginningS of the monthly billing `~period. Also indieat~t is a minimum charge and what the. monthly balance is. When I deal with this merchamt I have two choices. I can either pay~off durii~ that period wheni am not going to have `a charge im- posed or I can decide that I am going to take advantage of the credit plan. If I d&lahave the cash 1 have further choices to make. Should I use the ~merchan~t's eredit~plan ~r should I take the money out of the savings acQount or borrow the money from a credit union and pay bMore the~ bredit period starts? ~ ~- ~ Iii order to make an intelligent de~ion on these alternatives I have to know the relatlie cost of these procedure~. If I am getting only 4 percent'frorn my~avings and loan institutibn it wouldbe foolish to pay 18 ~erceut f~r the use of the: credit at this store. Eut how would the ordmary coitsumer compare 4 percent advertised ~by the savmn~ in- stitution witJtrIi/2 percent stated by the store. Here are 1~wo figures he looks at. What consumer could easily tell wheth~r itia cheaperito take a loan at an add-on rate of $5 per hun- dred `or pay 11/2 percent a month on thei revolving credit account? A `former vice presideot in charge of finahce for' `the Ford Motor Co~'testified once `at `a Senate hearing, audi quote: The ~rariety ax~d eothplex~i& of flftance and insurance arrangements, and the charges for them, are such as te almost defy `comprehension, lIt Is impossible for the average buyer to appraise the rates offered, as compared with alternatives available elsew'h~re. Members of ~the co imittee,~ there ai~ovet $5 billion of revol~ting credit now qutstanding~Tb give thef fastest growing seçaent of eon- sumer credit preferential tr~thieut woultUiotonly be thscriininatory 1legisiation-~incAuding a~ Moñtgoniery Ward and e~emptMg Sears, Roe- buck; including a b~tnk but exempting a department"store~-it would strike e~ blow at the v~'ry:heart of' the p~roteotion this legislation should be extending. D~sclosure must be on a uniform basis for all types of credit, so `that the consumer can make easy and accurate cothp'ariso'n between different types of credit available to him. `H.R. Th601~differs `from S. 5 ~als~ by iiicinding those transactions in which the ci~edit charge is. less than ~t0: The. Niational Consumers League is opposed to th~ o~emption of su~h tran~acti'ons.. We have~no figures `to sho*' what ~ró~ortion of `~r~dit sales would be included `in this `arbitMry e~empt'ion but, ashas~beem pointed o,ut already in these hearings,1 it wou~kd `be' very ~as~t td bi~eak down Iai~kei"purohases into a `series `of'co'ittraeteeach o'f'whicb would be exempt. " / Actually,' fairly large items would be exempt, up to about $100. For many consumers u large proportion' of their purchases would thus be exempted from the disclosure. For instance, take the purchase of a $50 chair ai~d a `$80 appliance bought for $10 down and 19 irionthJy payments of $6.69. The buyer will p~y $89.20-$1Q down plus $79.20 in monthiy~ payments. The finance charge is $9.90.J~he rate of interest on th~ $70 c~re4jtcome~ t,o ç,ve~ 2~ pere~nt, b~4 ~inee the total intq~est charge isle* th $i~O,~'t1~is ~atq~ro~ld not have to be d~sc1osed under ~the pro+iCions of S. 5.' ` ,",, . ` PAGENO="0103" CONSUMER CREDIT PROTECTION At~P 6S5 it is J~st as important for consumers to hav~ full informa~tiou in this type of~transaotion as it is for someone who bu~ an exp~nsive suite of furniture. It is specious to argue thatthe req~irément to give such information will either make credit unavailable to the poor, Or will cut down sigmficantly on purchases. A consumer needing the nier- chandise will still buy it. He may just look elsewhere for hi~ credit arrangements or decide to save up the money and buy for cash. If the poor need help in getting cheaper sources of credit, other Govern- ment programs are already working in this area. H.R. 11601 would also extend the disclosure requiFements to adver- tisement of oredit~ and the National Consumers League strongly en- dorses this provision. Just the other day, on my way to these hearings, I hcard a~ ad from a finance company urging those harassed by a multiplicity of credit payments to come to them for a loan which would ~be sufficient to pay off all other creditors. At no time was any mention made of how much the loan woula cOst, nor that the consumer would probably merely be adding onto his total indebtedness by the loan. Newspaper ad~ and store window signs con- stantly lure customers with so-called easy credit terms, but rarely, if ever, do they quote inter~st rates. Advertisements of credit should be required to give all the information required in the actual transaction so that consumers are not misled into beLieving what is~ not in fact true. By including revolving credit~and all transactMiis large and small, and providing for truth-in-credit adverti~1ng, !t~t.R. 11~01 provides for disclosure which will be meaningful, and of tremendOus value to the beleaguered consumer in the jungle of today's credit world. The National Consumers League is also in favor of including home mortgages in the disclosi.ire provisions of the act. While it has been the custoni to 4uote~ the intei~est rate on mortgages in terms of the simple annual rated on the outst~ndiiig balance, consumers rarely are aware of the total cost of the mortgage. For many home buyers, sw~h knowl- edge might well lead to larger down payments:~Nor are home buyers generally aware of the many ~harges they face at time of settlement. As was so eloquently urged by Mr. Barr earlier in these l~earrngs, it is high time some uniformity of disclosure in this area was Timposed on real estate transactions. On the provision to prohibit garnishments of wages, the league would r~commend a son~iewhat different approach.There is no question about the devastating effect of garnishment on the lives of many. I understand you were given some hair-raising testimony on this last Friday when I was, unfortunately, not able to be preseflt at the hear- ings. We feel that garnishments should be regul~ited i~i such a way a~ to act as a significant deterrent to the present unwise extension of credit. We have no exact figure to recommend but suggest that only a small percent~e of a wage earner's salary should ever be taken in garnish- xnent actiIa~ W~ ~ well aware of the tMnendous cost iii time ~nd per sonnel ~ Our ~o~iarLs taken up by garnishment procedures, a~d hope that this committee will be able to come up witlra provision, short of prohibition of garnishment whie~h would cut down on these c9~tS. ~1erchants should be required to pay the court costs. Havihg our conrts act as collection agencies for those who extend credit without any con- sideration of the~ability of~the buyer to pay is a costly burden on all of PAGENO="0104" CONSUMEB CREDIT PROTECTION ACT ps who do pay our debta. It is unfair competition to those who extend credit more carefu~ly. I have seen data ~whichshow that in some cities, one or two merchants are involved in most of the garnishment pro- ced~res. Restrictions on garnishment should be such as to make it unprofitable f~r merchants to extend credit too loosely. The league ~also endorses the provisions for establishment of a bi- partisan National Commission on Consumer FinanceA. We would hope that there wo~ild be adequate cousum~tr representation on the Commis- sion, and that It would look into many of the questions which have been raised at these hearings. The league has no position on the section of H.R~ 11601 which deals with the regulation of credit for commodity futures trading. This is a very technical question, which we have not looked into s ci~ut~y to formulate ap~licy. J4kewise,, we have no position on stanclb~ ~on~sumer credit control~, or on the provision for an 18-percent ceiling, M~ pcr~ sqnal feeling ~n the latter is that it might easily result in 18 percent b~ng a floor ~s whil as a ceiling, which would be most undesirable. I do want to comm~nd you, Mrs. Sulliya~, and all the members of the committee for the very serious attention that you are giving this vital problem for consumers ~and we are delighted to have a chance to present our point of view here. Mrs. SULL~yAN. Thank'you~ Mrs. Newman. I kaow y4nj iha~ be~ee, rn ~tte~ iioe at these hearings for the past 10 days, and a~very iñtee~t~d4istener. (The fu~i $ateriient o~ M~. Newman and S~ Klein card fellow:) STAPEME~rV QF ~ARAB g. ~5WM4~W, GaNERAL Srqn~nr~n~r, NATIONAI~ CONSUMERS LEAGUE ~Mr. Clutirman, my name Is Sarah H. Newman. I tun the Uene;ai~ Secretary of the National Oonsuiners League, an or~upization which sipce itS formation in 1899 has concerned itself beth with protection of the eotiSumer and with the resptthslbility of the cohsumer to those Who produce the goods and services which we purchase and use. `X'he ~beague has always operated by llrat investigating the facts, then e~cating i~ts membership and, when necessary, campaigning for solu- tions to the ~problems. Long before President ~emiedy announced as one ~f the four fundamimttti rights of the consumer the "right to be lufotmed", the League was convinced that only with full information could consumers be equi~pped to carry out their responsibility to themselves, to their families, and to the nation. We are, therefqre, very pleased to appear `before you tod~y in suppott of ILR. 1l&~l, a bill wbich would substantially improve the consanwr's right tø be in- formed of th~ cast of credit. I have been tremendously impressed during these hearitigs with the fact that there is hardly iany dissent as to the desirability and need for enactment of a credit disclosure bill. After long yes~rs of lengthy detailed hearings in which the opposition to P~uth-i~-Leading seemed adamant and almost monolithic, it is ~as if a fresh breath of spring has swept through the atmosphere, and we Can now all got down to working oht the details of a bill which will really do the job. So I will not take your time to list all the reasons which justify enactment by the Congres~ of a bill wh~cb will bring back mere effectiv~ cempetition in the lending industry and enable vonsumers `to ma~se ~ rational ~hOice in. this multi-billion dojlar area of e~pei~ditures. ~Enstead, I would like to l~res$ mySelf to the provisions of H.R. i1~O1 whidh di~er from S. ~ a's ~t passed the ~enate. ThO National ~onnumej~e li~ague does not i~slie~ve that 8. 5 will ~t'ovlde eou- sumers with th~ information they really need. Althon~h we are ipdeed pleased tiu~t the Senate has finally passed a ieredit bill, and although we understand why compromises wOre made in that bill, we are grateful ~to yoh, M?s. SullMtn, and to these other unembeis of the ~base, for in (Iuctng fl.i~. 11601 and giving us another opportunity ~ ob1~ain uhe kind of id~Incks~ure wh~fiz will ~1tmInate the confusing terminology and ~praetlces that have arisen in the credit Industry. PAGENO="0105" OON~UL~I~ CR~D~TT PROTECTION AC~ 687 Our main objection to S. 5 is that it exempts a large part of revolving credit transactions from having to disclose the annual rate. One of the arguments used to persuade the Senate Committee to exempt this segment of the industry was that revolving credit constitutes a very small percentage of all consumer credit. While this may still be true, the picture is ehai~g1ng every day. As Senator Douglas pointed out in his testimony before you, the amount of revolving credit jumped while the Proxmire Bill was under consideration from $3.5 billion to $5 billion. A member of the banking industry has predicted that in five years revolving credit will represent 50% of all consumer credit in this country, And if Congress passes credit legislation which gives revolving credit this special exemption, I predict it will rise even more r~pidly. Merchants will be changing over to revolving credit as fast as they possibly can. And they could not be blamed for it, because otherwise they would be forced to operate under a law which discriminated against them in favor of their competitors. I was glad to hear the representative of the American Bankers' Association say that "uniformity is essential if the consumer is to be given the means by which to compare costs of credit, and if the credit indu~try is to be permitted to operate with optimum effectiveness." And I join him in urging that you provide a "single, non-discriminatory system of time disclosure to be uniformly applied to all creditors and all types of ered~t," even though I disagrqe with the ABA in their preference for the monthly rate. Another oft-repeated argument against the provision tba~ revolving credit charges be disclosed by an annual rate is that to label a 1'/2% monthly rate an 18% annual rate would not be true. I was unfortunately not able to be present when Dr. Wooley presented his tables, but I have heard others who tried to make the same pitcb-~-nainely, that consumers charged at a 11/2% monthly rate end up paying less than 18% a year, and therefore would not be getting the truth if they were told the annual credit charge was 18%. But none of these avid seekers of truth was ever able to prove that a 11/2% monthly rate was any truer than the 18% annual rate. Credit costs should be calculated from the date the service charge begins, not from the date of purchase. If calculated in that way, the annual rate Is always 12 times the monthly rate. This is the true basis for the charge, and we don't have to worry about the fact that consumers do not all pay at the same time during the period. Actually, if you pay on the first day after the charge is imposed, you may be paying not 18% for a 1'/2% monthly charge, but as high as 540%, Such examples, of course, are never given. The important information for the con- sumer to know is the aanxal rate at which the charge is calculated, and when it begins. The ABA witness suggested that the monthly rate would give the con- sumer all the information he needed for comparing credit costs because "he could easily convert the monthly rate into an annual charge simply by multiplying by twelve" (p. 6). It really is that easy, and it should not be any harder for the extender of credit to make that multiplication than for the consumer to do it. Let's not mislead the consumer into thinking he is getting cheap credit by quoting a low niontbly rate. I have here a bill which is issued by one of the stores in this area which uses revolving credit. As you can see on the reserve side of the monthly statement, there is an explanation. In the lower left hand corner it states very clearly, "No service charge if pfiyment in full received within thirty days of billing date~" Item 4, on the right, states that the service charge is "1'/2% of the balance at the beginning of the monthly billing period." H.R. 11601 would require Only one change-~-viz., thht the Service Charge also be stated as 18% per year. It wettEd be very easy for this store to make this change, and the new figure would be just as true as the one they now use. We feel It is important that the charge be stated as an annual rate for precisely the same reason given by the ABA witness-viz., that the consumer could then compare credit costs from different sources of credit. When I deal with this merchant, I have two choices. I c~an pay eff the entire amount within 30 days of billing date and pay no service charge or I can elect to defer payment and incur the charge. If I do not have the cash, before I can make an intelligent decision as to whether I should use the merchant's credit plan, or take the money out of a savings account, or borrow the money from a credit union and pay before the credit period starts, I must know the relative costs of these procedores. If I'm setting only 4% fork my savings in a savings loan institution, it Would be foilisb to pay 18% for the use of credit at thO store. But how do you compare 4% advertised by the savings institution with F~% stated by the store? What consumer could easily tell whether it is cheaper to PAGENO="0106" 688 dOI'~S1XMEB ~it~i)fl' I'RO C~FIO~ ACT take a 1~an ~a~a~i ~idd~On rate of $5 ~er $100, orpaj~ ~`/~% ~ month on the revolv~ ing ère~ftt accotint~i A former Vice PreSident in charge of finance for the Ford Motor Ocaxipany te~tified aWn SeMte Hearing once, "TbC variety and complexity of fiinthce and insdrance ~trrangeinents, and the charges for them, are such as to aimost defy comp$hensiOn.~J~ is impossible for the average buyer to appraise the rates . . . offered, as com~ared with alternatives available elsewhere~" Meiflbere of the Committee, there arC over $5 billion of revolving eredit ~iow outstanding. To give the fastest growing segment of cOnsumer credit preferential treatment would not only be discriminatory legislation (incitiding u Mont- g&mery WM~d and exempting Sears Roebuck; including a bank but exempting a department store), It would strike a blOw ~at the very heart o1~ the protection this legi~lktion ~hbuId be ~xtetiding~ Disclosure ~iUtst be On a v~m~fOrm basis for all ty~es of CredIt~ so thai th~consumer'Can make easy and accurate comparison between different I~ypes of Credit available to him. H.R. 11601 dIffers froiti S. 5 also byincluding those trttnsactions in whith the credit charge is ]!eSs than $10. The National ConsumerS League is opposed to the exemption of ~uch transactions. W~e basre no figures to shoW what proportion of credit sSieg would be included In this arbitrary exeniption but, as has been pointed Out aireally in the~c hearings, it would be very easy to break down larger~urehases into a series o4~ obntracts each of which would be exempt. Actually, fairly large items would'be exempt, up to about $100: For many con- stin~Ors, a iarg~propert1on of their purchases would thus be exempted from the diSclosure. For instance, take the pt~rchase of a $50 chair and a $30 appliance bought for $10 down and 12 ihonthly payments of `$6.d0~ `The buyer will pay $80.20 ($10 down plus $79:20 in monthly payments). The finance charge is $9.20. The rate of interest on the $70 credit comes to over 26%, but since the total interest charge is less `than $10, this rate would not have to be disclosed under the provisions o~! S. 5. It is just as important for consumers to have full infor- mation in this type of transaction as it is for someone who buys an expensive suite of furniture. It is specious to argue that the requirement to give such in- formation will either make credit unavailable to the poor, or will cut down significantly on ~urcbases. A consumer needing the merchandise will still buy it. He may just look elsewhere for his credit arrangements or decide to save up the ~aoney and buy for cash. If the poor need help in getting cheaper sources of credit, other government programs are already working in this area. 11.11. 11601 woUld also `extend the' disclosure requirements to advertisement of credit, and the National Consumers League strongly endorses this provision: Just the other day, on my way to these hearings, I beard an ad from a finance company urging those harassed by a mtiltipiicity of credit payments to come to them for a loan which would be sufficient to pay off all other creditors. At no time was any mention made of how much the loan would cost, nor that the consumer would~probably merely be adding on to his total `indebtedness by the loan. Newspaper! ads and store window signs constantly lure customers with so- called easy credit terms, but rarely, if ever, do they quote interest rates. Adver~ tisements of credit should be required to give all the inforMation required ~ln the actual transaction so that consumers are not misled into believing what Is not In fact true. Ey including revolving credit, and all transactions large and small, and pro- viding for truth in credit advertising, H.R. 11601 provides for disclosure which will be meaningful, and of tremendous value to the beleaguered constimer in the jungle of today's credit world. The National ConsUmers League is also In favor of including borne mortgages In the disclosure provisions of the Act While it has been the~ctustOm to `quote the Interest rate on mortgages in terms of the simple annual rates on the outstand~ lug balance, conSumers rarely are aware of the total cost of the mortgage. For many home bu~ers, such knowledge might well lead to larger down payments. Nor are home thiyers generally aware of the many charges they face at time of settlement. As `~o eloquently urged b' Mr. Barr earlier in `these hearings, It is high tiMe some ~uniformity of disClosure In this area was imposed on real estate transactions. ~` On the provision to prohibit garnishments of w'ages~theLeague would recom- mend a' somewhat different approach. There is no question about the devastating effect of garnishment on the lives of many. I under~tand'you were given some bair~rals1ng testimony on this last Friday when 1 Was, unfortunately, not able to he~ present at the tearings. We feel that garnishments should be regulated in such a way as to act as a aignificant ~deterre1it to the present unwise extension PAGENO="0107" CONSUMER CREDIT PRcTRCnc!N `A~Jp 689 of credit. Wetave no exact figure to recommend but stiggest that only a small percentage of a wage-earner's salary should ever be taken in garnishment action. We are well aware of the tremendous cost in time and personnel ~f our courts taken up by garnishmer~t procedures, a~od hope that this Committee will be able to come up with a provision, short of prohibition of garnishment which would cut down on these costs. Having our courts act as collection agencies for those who extend credit without any consideration of the abi'lity of the buyer to pay is a costly burden on all of us who do pay our debts. It is unfair competition to those who extend credit more caref~illy. Restrictions on garnishment should be such as to make it unprofitable for merchants to extend credit too loosely. Phe League also endorses the provisions for establishment bf a bi-partisan National Commission on ConSumer Finance. We would hope that there would be adequate consumer representation on the Commission, and, that it wo~ild look into many of the questions which have been raised at these hearings. The League has no position on the section of H.R. 11601 which deals with the regulation of credit for commodity futures trading. This is a very technical ques- tion, which we have not looked into sufficiently to formulate a policy. Likewise, we have no position on stand-by consumer credit controls, or on the provision for an 18% ceiling. My personal feeling on the latter is that is might easily result in 18% being a floor as well as a ceiling. We wish to commend you, Mrs. Sullivan, and all the members of this Subcom- mittee, for your serious efforts to get an effective consumer ttredit bill. As Mrs. Dwyer said, your concern must be the welfare of the American consumer, his right to full information and to protection against what is deceptive and mis- leading. We feel that the provisions of II.R. 11601 which we have endorsed would achieve that objective. The National Consumers League thanks you for the opportunity to present its view on this legislation. ,SEE REVEFOSE stow- 3129 ~. 7 ~ RU~~ POE? EXPc,4N4r,oN P. 0. BOX 999, STAMFORD COMM. `Pa' meets and Purchases received after BILLING DATE wilt appear on next month's statement. Mail remittance with payment card in envelope provided. When paying in person prosent payment card with remIttance, Payments du~ on recmpt of statement and should be received no later than S N NEWMA N Li~516~Ei E~~67 ~ E4l1 HOPKINS NW AccouNrsur~mcs WASH DC 20036 312927 8102-'3' 82 (If address Is incorrect, please correct on payment card.) *E~!~1EE~TEEi~ ~cu _ AMOUNT PAID ..~..tL ~ PLEASE PAY THIS AMOUNT ~ EXPLANATION OF STATEMENT Q~NA1 PAYMENT SCHEDULE ITEM ~ 1. PREVIOUS BALANCE: Total balavcv as of Previous Billing Date. P BALANCE ~ MINIMUM PAYMENT 2. TOTAL PURCHASES: All merchandise purchased from the Priç ç Billing ~jite to the Presevt Billing Date. 0-$9.99 ENTIRE BALANCE 3. TOTAL CREDITS: All payments, adjustments, and merchandise returnAd? $10.00 TO $10000 $10.00 ` from the Pri'sc'B:lling Date t~ tie Present Billing date: $100.01 AND OVER 10', OF BALANCE 4. SERVICE CHARGE: 1 1/2C of the balance at tile beginning of [ho s'nnthly EVils,5 Pvrisd-Mjsimssn charge 50E, (The amount shown YOU MAY AT ANYTIME PAY THE EN- in theist column "PREVIOUS BALANCE".) TIRE BALANCE on MORE THAN PAY- talENT DUE ion MINIMUM PAYMENT). . Total Amount Owed. NO SERVICE CHAROE IF PAYMENT IN V FULL PECEIVED WITHIN THIRTY DAYS . moan se t is nnsn,h, OP BILLING DATE. PAGENO="0108" 690 CO~SUM~R CREDIT PROTECTION ACT Mrs. SuLLIv~t. Tb~ next witness is Dr. James Woole~y to discuss the approximat~ annual percentage rate on revolving charge. STAU*~T OP ~. 1W. W~OL~Y, NZW YORK, N.Y. Mr. W0OLEY. Thank you, Madam Chairman. First let me apologize for appearing again. My colleague who was due to appear was unable to come and I'm a last minute fill-in. There- fore, I do not have a prepared statewent and I am sorry for this. Mrs. SULLIVAN4 You are welcome to explain the chart, which is a different one fr~an the one you presented last week. Mr. WoonF~T. 1 would like to read a couple of paragraphs an~I sum-~ marize with it. My testimony is r~8tricted to the problems of calculating an annual effective percentage rate for service charges under the terms of the bill. In order to determine the applicability of this provision of the bill to actual customer transactions, a sample of 40 customer aecounts was drawn from a department store. The annual percentage rate under the bill was calculated on the basis of the cu~tomer's balances, periods of time covered and service charges imposed. A year's history was developed for each customer, covering transaptions from February 1, 1966, to January 31, 1967. The illustration which I used last week was drawn from one of these 40 accounts selepted from this sample. The sample ~as randomly selected, with about 20 customer records taken from the beginning of the alphabet and the remaining records chosen from th~ alphabetical segment beginning with the letter B. The initial sample included 42 records, one of which was eliminated because no transactions were conducted during the y~r and another was eliminated due to an apparent machine malfunction iii calculating service charges. This left 40 usable customer records. Finance charges are one and a half percent a month calculated on the opening monthly balance. The finding of the calculations were arranged by annual service charge rate. They reveal some interesting findings. For example, there is a wide "scatter" of rates, so that no single rate can be deemed "representative." The range is from 19-plus percent -for one account to zero finance charges for four accounts. The latter are due to the use of the 30-day option privilege to eliminate- finance charges. Looking at the annual service charge rate incurred most often, there is again no clear picture. Five customers paid 16-plus percent, while four customer~ paid 17-plus percent, fOur paid 14-pIus percent and four did not p~y any finance charges. The impossibility of pinpointmg one true annual service charge rate for all cu~tomers is reflected in this sample and snpported by the following points: Mrs. SULLIvAN. When people don't pay any rate at all, that is per~ fectly understandable-they pay their bill on time and don't have to pay a service charge. Mr. W00LEY. I would agree with you. Mrs. SULLIvAN. But if it is a charge of 1½ percent and it is for 1 of 12 months in a year it is still 18 percent. PAGENO="0109" *com~e~ ~~ii~r ~bt~cnoN ACT 691 Mr. Woor~sy. No, Madam; it is not. It is not 18 percent, because re- gardless of the fact that the individual pays this, it is not. The fact still remains he is making use of the store's money or funds until such time as he does pay his bill. The store is paying, carrying him in essence and so there is a charge to the store for letting him use it whether or not he pays it or not. Mrs. SVLLIVAN. That has been done forevermore-4he department stores have done this as long as they have been in business. It is to encourage the customer to come in and do more buymg, knowing they don't have to pay for it until the end of the month. Mr. WOOLEY. No queStion about it, but the fact still remains that the store is still carrying the individual. The rate as compared to an annual true rate, under H.R. 11601, this is the rate which would be required on the statementS of the retail es- tablishment as they issue. This charge shows you actual rates paid for by customers in the store, in this particular store. These are the 40 accounts. They range from zero to slightly above 19 percent. Let me emphasize: 1. No customer paid 18-plus percent, the presumed annual rate if the ~ percent monthly charge were to be multiplied by 12, as the bill suggests. 2. Nearly half of the accounts paid less than 10 percent. 3. Three-fourths of the accounts paid less than 1 percent. 4. Four persons, or 10 percent of those sampled, did not incur any finance charges, although transactions were made. If you insist on requiring people to say that they are charging 18 percent, these individuals who actually paid less than 18 pert~ent would be deceived if they went to other sources and paid charges at higher than the rate, that you would actually be doing a disservice to such a consumer rather than a service by telling him he is paying 18 percent when in reality he is paying a much lower percent. This is a randomly selected sample. It was not drawn out simply to illustrate our point. It was drawn out on an impartial basis and as a result of this drawing we calculated these percents. I think the illustration is very clear and points out again the impossibility of stating in advance the 18-percent figure. Thank you. Mrs. SULLIVAN. Mr. Fino? Mr. FINO. What is the highest figure you have there? Mr. WooLrx. 19.4. Mr F'n~o Can you give us an illustration of that type of account? Mr. WooL1~r. I think I could fail back to Mrs. Newman's comment where she said if an individuel happeied to pay the day after the service charge were imposed it could go as high as 540 percent. The fact is that this customer happened to pay just a little bit ahead of the billing cycle and as a result went slightly over 18 percent. What does happen, though, as illustrated by this chart, most people do not pay in that manner. Most people are around the 10-percent category. Mrs. SnLLn~!A~. Let us go back to Mr. Xinibali's charge account billing record. * Herehe gives an e~ampie on the monthly or 35-day stetement which PAGENO="0110" 692 ~ ~O~O~ON ACT says if. y~u~4~il1. ~`e4clies a cer~i ~aU1oluit you mus~t~ pay a c~rtam am~ii~4 ~t~h ik~oi4h; No~y, dc~lI of th~ ~tores~jfro~ni~vhich y~u took these 40 ~xamplçs that yo~ have ou the thart~-a~id I am not referring to Mr. Kimballl~ store, for lie 5h~s ~iJi~e~dy ~nswer~d this for his store-~-but do the others in their revolving charge accounts tell each customer how much.they have to pay a month? S Mij.. Wooi~. To the be~t of my knowledge, and Mr.. Cianca, who wa~n~t here is here now, he is probably better qualified to ~answer this quesbion than I am-~Jput~o the best of my knowledge most stores re- quire a e~i~tai4i miflimum ~payment as the balance reaches~ different dollar levels. ~i~he minimum paym~~ thnt II~we been fa~niiliar with is a $10 fliini~inux~i ~r~tç~i1~h. ` S ~. ~S S~ Mrs. ~S~xwç, ~1i~ve 5h~cl. pliarge ~cq~uts in every store ui,St. Louis and eyei~y5 r~ip herein Washington and Lhave never ha4 one of them tell me hp~w muc~i I ha~e ~ pay a month. Mr. K1MBw~. Madam Chairman? Mrs. SULLIVAN. `Mr. Kimball. Mr. KIMBALL. The purpos~ of ~his--.- S Mrs, SuLLwA~. I ~ee your purpose. You are tellthg the people what they have to do. Mr. KIMBALL No~hi~ is to encourage them to bring the total amount outstanding 44wn. Most retailers, when they allow credit to different people put ce~1ings on what th~ir abi1i~y tq, pay is. We don't want them to get overindebtecl3to us. If a person, should, say, start cb~rging $100 a month and, making $15 payments and eonti~iu~ to ,eh~rge $100 amonth, at the end. of 5 or 6 mp~ths `J~e would be up to $400 or $500. lie would be extended over 24 months, maqybe, and we do&t want to get involved with our accounts and most rBpntab1e~merchan~ts don't want to get involved with their aceounts~ s~ ~ balau~e go~s~ up we encourage them to pay thore so they will be more open to buy and come back and do more shopping.. ,, S Themain p~ps~ ~ the service charge is to encourage them to pay faster and~ we IhLd ~h~i~actua1 -practice. ` S Mrs. SULLI . .~rethe~e any other retail men in the audience whd have any knowledge about' the practice of other stores in telling cus- tomers how much they should pay each mouth ~ S (No response.) , Mr. -S~rnrHENs. I am not a retail man but in the years I have been paying this money, I know ~that ev~erypne that I have received-~a bill like one from ~Seaq~s, Roebuek carries `that on the backand I believe most of them carry the wirdmu,m ~mount ~nd tell you exactly what you are required t~ pay in Ørder to sta~y in `business. Most of the bills that I havehad do give that ~nformation. Mrs~Sni~L -N. 1 aitenever-seen it on a Sears or Montgomery Ward bill, ` S S Mr~ KIMBALL. `You had a witness here from ,the discount depart- ment store in Boston recently, and in their credit application-~ they have someth~ig `Very similar tO this~ only their ~equirementi~a 1Q~to 1 ratio where my minimum is 6 to 1. ` S ~ This ,form that ~e have i~ ~pied from ~iu~bel's~~in N~e~ York. PAGENO="0111" CONSUMER. CREDIT ~RQ~ECTIQ~, AC~ 6~ Mr~s, Su~LIvA~ is that on the monthly iiivoi~or is that just ~n the form the customer~il outwlien the~y sign up? Mr. KIMBALL. The discount department store that testified here at your committee has it on their application ~nd also has it on the forms like this, that they have it throughout the store a~nd give it to custom~ ers. As a matter of fa~t, 1 took the time to go into this store in Boston and tried to apply for a charge account and this is the information they. ga'vE~ me. They spoke nothing of an annual rate at all. They just told me what my monthly rate would be ~nd how much the payment would be required if I bought a sewing machine or radio or television~and it varies. Some stores have a 10-to-i ratio, some have a i24o-1 ratio. Ours happens to be 6-to-i ratio. ~Mrs, SULLIvAN. Did you~go inthere before- Mr. KIMBALL. This was a month or so ago. Mrs. ~SnLLIVAN. Mr. Willet~ Smith was in here Monday from Lech- mere's in Cambridge. Mr. KIMBALL. This is the store that I am referring to. Mrs. SULLIVAN. He showed us where they do sh~w an 18-percent annual percentage rate on their statements. Mr. KIMBALL. It is on their application but 1 went in as a dus- tomer. I didn't go in as Mr. Smith; I went in as a customer for the purpose of buying an appliance and the clerk told me to go to the credit department which I did. They gave me a form, an application form which in very condensed type on the left-hand side did state, not in numbers but in letters the words "18 percent" spelled out. On the right-hand side of the application was this information, similar to what we have done here and the girl taking my credit ap- plication told me that my payments should be at this rate which wa~ one and a half percent Of the unpaid balance. She said nothing about 18 percent. Mr. WmIE. Will the Chairman yield? Mrs. SULLIVAN. Mr~ Wylie. Mr. Wyt.ii~. I have a question for anyone. Perhaps Dr1 Wooley should respond ~because he ha~ been referring to it. It might be more appro- priate. Could not each seller using revolving credit;state an average annual rate? Mr. W00LEY. I think~-~ Mr. WmIE. What I am thinking here is, the Chairman has indicated that revolving accounts set up on the basis of 1½ percent p~r month should state interest~rates on the basis of an annual rate of 18 percent. You say that is not possible. Is it possible to show an average annual rate in each store? Mr. WOOLEY. This could be calculated for prior year periods. I have no doubt about that. We do have some slight samples of this and it comes out around 10 to ii percent as the actual rate'that is i?aid. Some~ thing that oould~ be worked out but it would have to be historical. It would not tell a customer in advance what he had paid. Mr. WYLIE. I was thinking it might be done from the previous year's accounts. Would it be possible for a member of this committee oi~ a member of the staff of this committee to go into a store to dhèck accounts tO demonstrate this is not a stacked deck? PAGENO="0112" ~94 CONSU~IER ~iR1~1MT PROTECTION ACT Mr. KtMB~r~L. I Iiv~ii~ Pdrtsim~uth, N.H. We are~ on thsNe~ Hamp- shire seacoast; we have ch~lktions lobsters; I wo~Ed be most happy to invite you a.~ our guests to Portsmouth to a nice shore dinner and I ~wonld take you iiito my store. We have 7,000 charge accounts. They make 200 payments per day; they have 4,000 charges per day, entries made. We cannot tell prior to anybody's account when they are going t~ come in to buy anything, make a charge. We cannot tell when they are going to make a payment. They can make it on the 23d day or 32d day. We tieve~r know when the collections are going~to come in. It is impo~eibIe prior, as your bill requires, the explanation, and I note also yô~fr dethiition on page 6 of `4annual.pereoutage rate"---says U.S. rule by ~n actuarial method. I assume that is what we learned in grammar school. That means on the ~per ~liem, basis. If the customer makes five payments during the course of a month--they pay b~ the week~-~-it is impossible for me to know whether they are going to pay me $2, $5, or $10 and tell them any percentage rate according to the way this bill reads and, as a matter of fact, in thy~ store it wouldn't be 18 percent anyway. Mrs. SULLIVAN. I am going to let Mr. Wylie have his time now; we will all have tAme to question. I woirld ~u~t like to reply to what yo~u said though, by pointing out that we don't know how much interest we are going to get when we put money in a bank, either, because we don't know at that time how long we are going to ii~ave it in. They tell us they are going to pay us so much but it all dependson what we do. Mr. KIMBALL. If you take your money out of the bank you don't get any interest. J3utif you do put it in the bank on a certain ~cbay they tell you if you put it in by the 10th of the month or by the let they will pay you 4% p~reent ~i±~oviding ydu leave it in for 3 months or 6 months. This is somet~iing they tell you you are going to do. But it is impos- sible-I have been down to the Dduglas hearings and Prozmire hear- ings and I asked the committee-I am most ~wfluing to explain ~to my oustdrners in~he~1ianguag~tbey can understati~ and di~c1ose all of the information if yo~ will iust tell me how to d~o it. Nobody has~ been able to tell me or ~ny other merchant how to compute it. Mrs~ SULLIVAN. Mr. Wylie? Mr. WYLIE. Would you have objection to stating in dollars. and cents in cash how much a customer has paid out ovet a year's period in interest and/or servi~e charges? The point of my question is this: I doubt if stating an interest rate on a monthly basis or an annual basis is very mea~iimgful to most cus- tou~iers. AncF sihowing charges in dollars and cents, in cash, how much they have pai4 out is much more meaningful. What wouk~ beycur feeling thout that ~ Mr. Kr~~ I think the consumers, when they are trying to buy e~aethiag, they are~tryi --rlCt~~5 say they are baying a dress-they are primarily interested in wbether~ the dress fits, whether the material is what they want, how g~oodI$t looks on them, and then they are going to buy the dress. They are not interested in the rate of interest at that point. They are buying the dress which they like. However, when they ~et the bill~at~hôtheint the end of the month they want to be able to figare~omtwh$:bhe Service charge of &~ oenttswas on their bill. PAGENO="0113" OONS~U~B ~G~F4~IT FROTFiCTJON A~ 695 Why was the 38 cents? And the average coi~umer can multiply the ending balance by one and a half~-~-if they owed us $25, multiply that by 1½ and it conies out to 38 cents and they know they haven't been gypped at all. This is what they want to 1~norw. Mr. Wn~re. But the point is they want to know the amount-~--38 cents. Mr. KIMB~w~. `J~hat's why on our invoice we tell them this. Mr. Wrt.IE. They want to know how much they paid out, not the pereen~age. Mr. KIMe~tL~. On the invoice we say balance due, $25, seivice çharg& 38 ç~nts, new purse, something else~ Anal ~tJae new euclin~g balance. Mr. WYLn~ I have just been handed a U.S. savings bond, a series~ E bond and on the back of it it says if you hold it to maturity you get $100. It is a $75 `bond which returns an interest of 445 perce~nt. But if you cash it at the end of the first hwlf~year you get $75; no intei~est, in other words if you cash the bond between the first half of the year to~ the first year, $75.84 is pnid. That is meaningful. This amounts to I per- cent, approximately. I don't think it would have much meaning if they just said 1 percent.. I think we are getting more actual knowledge if we say how much you're actually receiving or how much you pay out in dollars and. cents. Mr. BIIMBALL. We state to the customer what the service charge is~ each month and we tell them how we compute it. Mr. WmIE. Thank you, Madam Chairman. Mrs. SnLLIVAN. Mr. Bingham? Mr. BINauA~i. Thank you, Madam Chairman. First of all, I would like to join in complimenting tim witnesses.. I have great respect an4 admiration for Mr. Key~erling and have known him for many years and I think he is one of the m~st provoca- tive and imaginative commentators on economics of our time. I am also glad to see Mr, Edelman and M~r. Hutton here. They do a. splendid $ob, and I have enjoyed working with them on varioits~ matters I would like to direct my questions to Dr. Wooley, hov~rever. Dr. Wooley, I take it your position essentially Is that iS percent is not an accurate statement of an annual applied rate, but, if that Is so, why isn't it just as inaccurate to say 1½ percent a month? Mr. Woo1~EY. W~ oover&1 this in quite ~ bit of detail when I was here. J3cut the point is, when you try to annualize a ~g~uie you are assuming a percentage rate on an~ annualized basis, tim servi~ee charge is simply a charge applied at a point of time. It does not ta1~e into ac- count what has occurred before or after that time-only as it applies t~ tim balance at that pQint in time. Ozm and a half percent on the beginning bala~ae does not take into aeeount what has ~oceurred before that got to that balance or in ~nost eases what ox~rred after it got to~ that balance. That is an entirely different thing than statingi8 pe~ceM~ Mr. Biwcnu~. I nncJer~tat~d what you say. `But the fact is that some o~ the stores refer to it as ai½-per~ent monthly charge. 1 presume you would have to agree that 1~4 per tdc~esn~trepresent the earnel interest or the yield but it is the applied charge. 83-340-67-pt. 2-8 PAGENO="0114" ?ROTECTION Act Mr. WoOlE*. It is an ~tpplied charge,~ yes. `Mr. Hanna ~broi1ght this point out last week. Mr. BINGHA~. It is not the yield. In the same way,. 12' tines 11/2 percent is the applied charge on an annual basis Mr. WOOLE~. I-think Mr. Bingham, the problem comes in the other areas where you have an installment contract What you are stating is an effeotiire~interé rate and this is what you are after. If you want to be con~istent you have got to be able' to apply an effective rate ~for the revolving credit account, too. You ean't state to the retailer, you have to state yourself on an applied rate while the `others ~re1 establishing theirs on an effective rate This will con- ftis~ the consitmer, won't help him. Mr BiwoHA1~ This is what you want to do You want to state the charge as an applied rate on a monthly basis but you don't want to multiply that by 12 because 18 percent looks a lot higher than 11/2 percent. Mr W00LEY I am not saying that at all We are using the applied rate, not an effective rate and if you make it appear that it is an effec- `tive t~ate- rather than an applied you are going to confuse people, not going to help them. * Mr. BIi~anAt&t. The bill can indicate that it is-the applied `rate that is required to be stated and I think it should and it shouldn't indicate nnything about the actual yield. That is quite unpredictable-I agree with you there. You can't possibly state that either beforehand or after. But you can state accurately what the applied rate is. Mr. W00LEY. In that case Mr. Bingham, how is a consumer to com- pare interest rates ~ What possible chance can he have if he is applying in applied rate versus an effectr~e rate on another contract ~ Mr. BtNGiIA' . Between stores he can compare what he is go~tig tp be paying. - Mr KmrnAr~L `What is my rat&Z Mr BINGIIAII~X As you indicated it is 11/2 perCent on a 35 day period I don't know ~if that comes out eqtially or evenly for a year Mr KIMBAXiL There are 52 weeks in a year and we send out bills ~every 5 weeks. Mr. BINGITAM. Why do you use a 35-day period? Mr. KIMBAI~L. The principal reason we went into this was when -the 3 cent stamp went into the 4 cent stamp and the 4 cent stamp went to the 5 cent stamp and now you people are taking it up to 6 cents Our billing costs are going up constantly When you think how much it costs' for the piece of paper and envelope and the girls' time to make the statement and do her pdsting, if I can send out 10 state- ments instead kf 12 statements a year I think I have made a savings of almost 16 percent in billing costs and now you want to pass a law `to make me tell -my customers something that isn't true ~t all. Mr. BINOHAM. My time h~s expired. * - Mrs StTLLIVAN Mr Halpern ~ Mr HALrER~ Madam Oha~irman First, I would like to compliment our distinguished panel this morn- ing on their valuable presentations which I am sure will contribute greatly to this committee's efforts to come up with meaningful legisla- tion. - ` - - - - PAGENO="0115" PAGENO="0116" .CON&~MER CREDIT p )TEE~N ACT Th h eceive ood ~u to est~Lbiish a norn~a~ cre edit standing completely, but they ~ ~ able~to establish a normal credit account with Sears,, )UCk. I like to have the answer. Ir. ( ANOA. I don't outhe documentetion of it. The whole Mr. ~, IDNAI4i. I will furnis~~ ~ account or not? question is, Ar~ you going to nay an option account whereby you h the op to use the revohrmg credit or pay off in 30 days a~r OU~Xeg1V43~II credit to use either the revolvmg WIDNAL~. Do you have any kind of normal credit account that ~besn't end up as a r~plving account ~ W~c4~Itis po&sible to delay payment beyond 30 days with out b~rn~f ~a~ged intt,ere,st ~ 1 M~ Gi~oA 4Lti Sears, particulaily, I don t know ~Mr K~fMBAL4 Madam Chairman Mr tTALPBR~ I will yield further Mr KIMBALL In Kimball's store when they come in and apply for a credit account we ask them to fill out the application, we give them this form We tell thejw~there is only one type ot charge account we have It is kn~.w1(as an optional credit account They can do what they w~-4ith it. They can pay in 35 days, we give them 5 days of grace over most stores and theie is no service charge ever put ththr accoukjt.,,," If they want jto extend it into 6 months or 12 months payment plan, th~tt is thefr option We do tell them, as Mr Cianca said, we do put a ceiling on theirl account. We tell them they can go to $200, $500, $100, and when they ~et up there and start going over it our credit manager will call them and tell them they will have to make bigger payments. to get their ou~tstanding amount down. We only have one account and tø Tiny kno~vledge Sears, Roebuck has only one type of account, eai~t that is the optional. So, if you wapt the option of paying in 30 days you pay in 30 days. Mr. WInNALr~. I would certainly think that a person who ~ppiies: for credit at a ~tore fills out a formal credit application, and does it twice, two ditlefrent times over a period of months, would at least be entitled to a4 answer from the store at one point or ait~ther Mr. KTMBALL4 I agree with you. They are entitled to an answer' a~uld be explained clearly. My girls are instructed to explain to' ~.ae~ch and 6very customer who applies just exactly how this works As far as I khow they ch a satisfactory job because we don't get many complaints There are human beings and individuals working in large corporations like Sears, Roebuck and the hum'a~ factors Coines in and if they get-just like the girl at Lechmere Sales-she did~n't tell me and yet the law requires in Massachusetts that she should tell me 18 percent. Mrs SULLIVA~T Mr Cianca, there is some eonJ~isiou here about your affiliation. ~We thought you were from S~a~ but, appartnt1y,~ PAGENO="0117" CONStMER CREDIT PROTECTION ACT 699 you are not. Would you introduce yourself for the record, and tell us who you represent? Mr. OTANCA. I am a partner in the New York oflice of Touche, Ross, Bailey & Smart. Mr. }IALPERN. Mr. Cianca, if this customer was stopped at $100 and she is paying 1½ percent, isn't that 18 percent a year? Mr. CIANOA. You are going to get me involved in the applied and effective rate. It is applied at 18 percent. The effective rate would be something different. All I say is, you take my 11/2 percent on the $100, :at that period-my billing is usually on the 17th of a month. When I get my bill on the 1th of the month, that 1½ percent is applied to the balance. That is an applied rate, that 11/2 percent. Mr. JIALPERN. I would like to go back to Dr. Wooley if I may. Dr. Wooley, I listened to your presentation and it may be that no one customer paid 18 per~cent per annum on their revolving accOunts. How many of those customers actually paid 11/2 percent per month? Mr. WOOLEY. I don't have that answer-I'/2 percent on their monthly balance? All of those but four who paid zero percent `had some service charge account attached. Exactly how many payments I don't know. I can't recall. There are 40 records with a multiplicity of items. Mr. HALPERN. Mr. Kimball, I would like-incidentally, I would like to thank Mrs. Newman for her emphasis on what is probably the major point to bear in mind in terms of annual rate on revolving credit accounts; that is, whatever arguments can be mustered against a statement of an 18-percent annual rate would apply equally to the 1i/2-percent monthly rate. Now, Mr. Kimball, first, on what grounds can you suggest that tl,/2 percent is more accurate when the validity of this rate will also depend completely on the time limit of purchases and payments and is it not true that if the purchaser is paying 11/2 percent a month he is also paying 18 percent a year? If he is not paying 18 percent a year neither is he paying 11/2 percent per month. Mr. KIMEALL. In answer to the first question, I think what we `tried `to `do as merchants is to serve our customers and explain to them in the language they can understand. Now, we have many customers each `day in our store and so does every store in the country, and they can find fault with the paper bags, they can find fault with the way zippers `are put in, they can find fault with the w~y certain things last or gar- ments wear, and we try to make every operation with our customer so that we don't get into any arguments with them. By saying 11/2 percent per month, a customer can understand this. We tell them we are going to put a service charge on their account and whatever their ending balance is, we multiply that by 1% percent `and we say service charge, 38 cents on a $25 balance. This a customer can understand. Secretary Barr came to the Senate hearing with a table like this. I don't think any of the Senate committee could ever understand it Mrs. SULLIvAN. Mr. Kimball, he didn't apply that to revolving charges. I want to keep the record straight. Mr. KIMBALL. How can you explain to a customer that you are charging him 18 percent when you are not charging him 18 percent PAGENO="0118" 700 CONSUMER CREDIT PROTECTION AOV and the majority of t1te"câ~es this chart shows that 39 out of 40 cases never even reached 18 percent? Mrs.. SULLIVAN. Mr. Keyserling, I wonder if you, as a distinguished economist, would want to get into this and comment on the 1%-percent monthly rate as against 1i8 percent a years Mr. KEYSER1~ING. I would likeS to comment on it,: although I don't know whether~J am annoyed or confused by some of the stateme~its just putifoith.' It `seeirns to the that a very simple and elem~ntary proposition is in- volved in the proposed legislation. If I buy a Government bond or if I deposit money in the bank and they tell me they are going to pay me 3 percent per annum, corn- poui,~cled semiannually, they can also tell me how much I will get if' I leave itthere a yea,rk Nor, it is p~rfectl~ true, that neither the~ nor 1 J~~ow what I am going to get, b~cause I might cash it in earlie~, or I iuight miss out on a semiannual qompounding by 1 or 2 days, and so foith. It is simply true they have-they are `tel~mg me on a yearly basis what this will earn. Now, if I borrow money in the form of getting consumer goods on credit, and I start out at a 1%-percent monthly interest rate, I am starting ont. at an 18-percent annual rate~ and not all the spinning of hairs around all the needle points in the world can destroy that fact. And this plain truth has nothing tc~ do with. the fact that very few cl4storners may pay the 18 percent, because most of them liquidate the debt before the year is out. That has nothing to do'~ith it. 1f they were charged 8 percent a month, they ought to be told they are~being charged at the h~rrend~us rate of 96 percent a year, ançl it woujd be'no answer to that to say, they might i~t haye to pay the 96 perceiit because they might pay off in 6 months or 3 mqnths. That is a simple, elementary thing. I understand the questioning of the, committee-I don't equally understand the answers. I would say a word on service charges. It is very easy to get into a c~n~usion by semantics. Let me~.call attention to the fact that the Government of the' United Stat~s pays interest on the national debt. What Fdo they. call it? They call it servicing the national debt. So~ ii~ reality, the ka~i~ economic concept is how much it costs to borrow money-~.--~wheth~r they borrow it~to fin'ai~ce~overnment programs or to build a ~plai~t or whether they borrow &t `to finance consumer pur~ chases. What l4its them ecQnomically, what takes money out of their pocket, is how much it k~osts them. You can have all `kinds of refine~ ments and divisions between service costs and interests costs, but the fact remains that it is the cost of borrowing the money that counts~ And ~if you have a system where it costs 1% percent a manth-~just to take an arbitrary case-if you pay it back in 1 month, `and if you hold it a second month you pay 11/2 percent the second month plus a service cJ~arge, and if you hold it 3 months you pay 1% percent for 3 m~i~4ii~, ~ius another serVice charge, the fact is that it is not unfair. tc~ acM ~the w~1a~1e thing up `a~iad say `that this is th~ cast of borrowing over 3 months, and by `the same token it `can be translated mt0 an anutiah basis. , ,, ` , PAGENO="0119" CONSUMER CJ~ED1T PROTECTION ACT 701, I think it fair, ~pund, aud right that the purcimsers should know hypothetically what it will cost them to buy something on credit if they pay ~it back over a year, regardless o~ whether they may pay it back in 3 months, 6 months, and regardless of the fact that there may be a difference !in the cost per month if they pay it back over different periods of time. I don't see all the complexity. Maybe I don't understand it. Furthermore, the regulatory agency, if it be the Federal 1i~eserve Board or any other, will have the brains, if it has the will, to work out the details of the question of exactly what is the correct coin- putation on an `annuai basis, and if 18 isn't the right computation, then there is nothing in the legislation `that conflicts with that. All the legislation says, as I understand it,. is that there shall be a proper translation of the shorter period charge to an annual basis; 1½ comes to 18, as I seeit. If it comes to 171/2, I take it that it would equitably meet the purpose of `the proposed legislation to tell the customer that it is 171/2 on an annual basis. So, I don't really understand what all the excitement is about. Mrs. SULLIVAN. Thank you, Mr. Keyserling. This is exactly what. we have been trying to do-to stop the confusion for the people' who borrow the money or use somebody else's money for the things they would like to purchase. They have gone over this argument again and again for 7 full years in the other body. There is never going to `be any meeting of the minds among `those who are going to use the figures in a different manner from that in which they are customarily applied. We have gone into this numerous times in the last 10 days and we have gotten no closer to changing the minds of the retailers on this, nor have they come any closer to changing the minds of those of us who feel as Mr. Keyserling does. So, I would like to go on to some other aspeets~ Mr. HALPERN. Madam Chairman. I had the time and I certainly welcome the point that you raised with Mr. Keyserling. My time is~ up. But I had some questions that I did want to propose to Mr. Key~ serling. I received the answers in the expressions of views that. `he iust made and I certainly want to thank you for your very forthright a~id most welco~ne and valuable expression that you have~just made.. Mrs. SULLIVAN. Mr. Stephens? Mr. STEPHENS. ~[ have one question I would like to ask and, of course~ Mr. Kimball, I do not anticipate that you can answer it now but you might supply it for the record. I have mentioned this to some other witnesses, too. We are trying to get a comparative kind of figure so the consumer can see what he is paying for his money. That's the purpose of the legislation. Why would it be too much of a burden upon you to supply the historical account of the figures like Mr. Wooley has provided? Would it be excessively burdensome costwise for you to provide at the' end cvf the `year what the customer actually paid otit in the form of service charges? If we had this charge in retrospect? if the average was roughly 10 percent? How much extra charges would it cost to you? What would the cost to you be if you gave the consumer that information? The reason I asked `that question ~s because `if~ we~tre going to consider the fact that we are' secking~ to educate. the con- sumei in the thiugs that he should know, we doñrt hwve to do it by PAGENO="0120" ~7O2 CONSUMER CEEDIT PROTECTION ACT au ~chu~ationa1 proc~ss of t~11ing him ahead of times we can begin the ~educatio~ n~w by saying at the end of the year, "We will let you know whether you paid 10 per~nt or 18 percent ?" I would like to know ho~v burdensdme you would consider that? You might not want to go into it now but would want to think about it a lit~le~ bit and provide it for the record. Mr. KIMBAI~L. I have an answer. The majority of stdres in this country are small stores. They are stores that do anywhere from $75,000 to a million dollars annual vol- iime. We don't have computers, we don't have i~rge staffs. Our margin of profit is very minute when compared to the total volume of business we have to do. Just as I have to control my billing costs and saving on postage stamps and envelOpes, any additional inform~~ation such as you sug- gest-our much nes do not have totals-could give us the total service ~har~e~. Our e~rd has no space and Kimball's is a modern store. There are little "Pop and Mom" stores that don't have any machines at all. Mr. SmPHENS. How many of the kind of stores that you have talked about use revolving credit? Mr. KIMBALL. A great deal of them. This is becoming more and more prevalent because people are asking for extended terms. In other words, if they would pay their bills in 35 days or 60 days it wouldn't be too burdensome. But when they want the credit extended over 6 months or 10 months or a year we have to put a servio~ charge on to ~encourage them to pay their bills faster. But for me Ito keep a record, I have 7,000 accounts and then to take a total of each customer's purchases for a year and the total service ~charges and ~dhem figure that out and everyone would be a different answer, believe me-simpie~ annual r~ate. If you came up with a for- mula-it would be complicated. Mr. STEPHENS. Let me point thisout. Mr. KIMBALL. It would be very burdensome to the small stores of the óouiatry. Mr. SmEHEN5. I agree personally that you can't tell a man ahead of time how much he IS going to pay I agree with the thoughts of Mr. Wooie~'. I~ also would liketo comment~on the fact that 1 agree with `what Mr. Ke~serling says, too. That sounds like it is a p~iradox but it is not. We ~ not' going to tell the customer the truth in the sense of what the retail merchant would consider a fair competitive interest rate if we tell him what you would have if you let his account go for the entire year and paid 11/2 percent-it will amOunt to 18 percent if you go the whole year. I can see the merchant's standpoint on it. Because the man looks at that and says if I am going to pay 18 percent I am going to borrow the money someplace else. But what you are saying is, he is not going to pay 18 pe$ent if you have these other factors and I think that the answer to the thought that I bad and the purpose that I have in mind in supporting any truth in lending proposition was to give the man an opportunit~ to compare, but I don't think it has to be in prospect. It can be in retrospect. To conclude what I have to say, and pertinent to our inquiry, is the story I heard which concerned a man that had a country store. He gave credit to a farmer for his food and fertilizer as well as all the items PAGENO="0121" CONSUMER CREDIT PROTECTION ACT 703 that he needed for his crop. At the end of the year the farner didn't pay and he came and got a year's extension of his time. At the end of 2 years the farmer came in and paid in cash for all he owed Then he went across the road to his creditor's ~ömpetit~r and loaded up his entire wagon with all kinds of goods and paid the competitor cash for everything. The first merchant accosted the farmer and told him he couldn't understand it. He said he carried him for 2 years and now when he had some cash money he went to his competitor to trade. The farmer looked at him in surprise and said, "I didn't know you sold for cash." Mr~ K~~I~BALL. This is true with cu~tomers. If they don't have the money they sometimes go to a stor~e which loads the credit charge into the price of their merchandise and4hey say they don't put any service charge on their accounts at all but they have loaded the price and the customer, so long as he needs the credit will go to that store. When he has cash he will go to a cash discount store, let's say, and he will do his purchasing there because he can buy it cheaper Mr. STEPHENS. To conclude, I wish you would give a little more thought to providing an answer. If you could, breakS it down into an annual cost to you in money as to what this would be. If you can do that, I could see what we are requiring if that is the method we should devise. Mr. KiMBALL. I will see if our association can gather some figures for you. Mrs. SULLIVAN. We. are not quite finished with you, gentlemen. You have all so much to give us on this legislation that it is a shame that we can't ask all the questions we would like. However, if we can submit further questions to you in the next few days I hope that you will be able to give us written answers for the record when you correct your transcript. In the meantime, please stay where you are seated and I will ask our afternoon witnesses to join you. We have learned that we can't meet this afternoom~ The two witnesses that we were going to hear then are here in the audiences so we will call them now-Prof. Vern Coun- tryman and Mr. Charles S. Stapp. I wonder if you two gentlemen would come up to the table. Mr. Countryman, if you can summarize your statement in 10 min- utes, we will then start the questioning with Mr. Fino and Mrs. DwYer who haven't had a chance to do any questioning. We will keep on going until the bells ring, calling us to the House floor. Mrs. Dwyer, would you like to introduce your constituent, Mr. Stapp? Mrs. DWYER. Madam Chairman and members of the subcommittee, it is a special pleasure for me to welcome our next witness, Mr. Charles D. Stapp, president of the National Retail Furniture Association. Mr. Stapp is from Westfield, N.J., a valued constituent, and one of my con- gressional district's most outstanding citizens and civic leaders. Mr. Stapp has distinguished himself greatly in his chosen field. President of Koos Bros. of Rahway., N.J., one of the East's great retail furniture establishments, Mr. Stapp has also served as chair- man of the board and, for three terms, as president of the New Jersey Furniture Association In recognition of his leadership in the indus try; he was presented the New Jersey association's annual award and PAGENO="0122" 104 C0NS~JMI~R CEE~T~ C1~!O~ ACT the has ~iso mceived ~the :"All American ~Merch~nt Aiwar&" añd~the ~Airnual Achievethent Award for I~tadling in New `Jerseys" But~ Mr. St~app 1~ also apjffied his talents~and leadership to the bi~oader prob1~ems o~f ~good citizenship. Heis a director of the New J~er- sey region of the National Conference of Christians and Jews, chair- man of its fir~ance committee, and a member of its advisoi~y board ~o1i police trainii~g. On twd occasions, he has received that organization's Brotherhood ~Award-in 1966 for distinguished service in the field of human relations, and in 1964 forcommunity organization. Mr. Stapp's credentials both as citizen and industry leader ~tre ex- ~cellent, and I am sure the subcommittee will benefit greatly by his testimony today on an issue that affects all Americans so very di~ectly. We appreciate your being with us,'Mr. Stapp~ Mrs. SULLZVAN. Mr. :Stapp, will: you sttmmarize your statement~ ~STAflMENT OP OBARL1~S D4 STAPP, PB,]~SIDENT, KOOS `BROS., BAHWAY,~ N.J., AND PRESIDENT, NATIONAL RETAIL PlJ~ENITURE ASSOOIATIO~ Mr. Sm~r. Madam chairman `and members of the committee, I am Oharle~ D. ~tapp, pi%sident of Koos Bros., of Rahwa3t, ~J. I am a retail furniture dealer and president of the National Retail Furniture Association whose members operate more than 9,000 indepei~dent home furni~hings speciality stores throughout the United States. I i~i1l not rea~1 our full ~written statement, but with the help of a few charts, I will summaHze our position. Today, I am appearing on behalf oj~ the National Retail Furniture Association and five other national as~bthations: The Natio~ial Appli- anc~ Radio & TV Dealers Association, the National As~o~iation of House to I~ouse Installment Companies~ the National Association of Music M~rchants,~Ine., the National Retail Hardware Association; and the National Sporting Goods Association. ~ Accompanying ~me there today ar~: Spencer A. Johnson, dir~ctor of governthent relations for the National Rotail Furniture A~sociatibn, Riohard P4 Heuser, credit sales managth~, if~Dnff & Repp, Içansas City, Mt., representing the National Rethil Furniture~ Association; A. P. Raithey, comptroller, Campbell Music Co., Washington, D.C., representing the National Association of Music Merchants; James Fulford, president of Fulford's-Colony Radio & Television Co., W~ish- ington, TiC., representing the National Appliance Radio & TV Deal- ers Asso~Fa~tion, and Hardy Rickbeil, chairman of the~board. of 1~ick- bells, of Worthington, Minn., representing the National Retail Hard- ware Association. I am sp~aking for a group of independent retail merchants who er~te~m~re than 4,000 ~to~t*sup and down the main streets of cities and ~tow~ throughout the United States. They are the hometown merchft~nts~who~ stq~port the local littlelcague baseball teams, and who serve ~s b~Iock captains for the TJniUed Fund Campaigns, and who buy the adts in the high school yearbOok. Most of these 45,000 stores are and ai*ays have been famil~-oi*ned businesses. Our associations agree with the idea of full di~cl~suro of credit service chargos. We support the basiu objectives of the tkuth-in.l~nd- lug bill~. ~We enoour~ige our members to p~fovidO a~detailed ~exprèssIon of credit charges to all customers. PAGENO="0123" CONSUMER CREDIT PROTECTION ACT 705 We have joined together. as a group to represent the moncomputer retail stores who are conc~rued about the unfair treatmeht that would be arbitrarily thrust upon them under the provisions of the truth~in- lending bill passed by the U,S~. Senate, S. 5. Because we are presenting the common views of six associations, we are prepared to discuss only the features of the bills that concern credit disclosure. We have not had time to fully study and reach inter- associab~n agreement on the other provisions of H.R. 11601. Our noncomputer stores are~ concerned about the revolving credit compromise which is a spee~aI formula that gives those who offer revolving credit a competitive advantage over those who selL on installment credit. In effect, S. 5 is a regulation of installment credit only and does not offer customers the opportunity to compare credit service charges offered under different credit plans. Our noncomputer stores are concerned about the way that S. 5 discriminates between ~two types of revolving credit. In passing S. 5, the Senate defined three different types of credit and has given special treatment to one type of revolving credit plan-~- the plan used principally by our giant chainstöre competitors. Most of our specialty stores, however, use installment credit and are forced to disclose an annual rate under the terms of'S. 5. Even those of our specialty stores that do use revolving credit plans face a competitive disadvantage in that they typically retain title and have to discldse the annual rate while their large store competitors who do not retain `title, are free to disclose the monthly rate of 1½ percent. We agree with the statement Secretary Barr gave earlier in these hearings, that the special exemption given to revolving credit does discriminate against, our small independent speciadty stores.' In the minds of customers, rates of 1~/2' `percent a month and 18 percent a year are not identical. The difficulty of explaining th~ two different rates to customers is a practical one. Mr. A. G. Bas~harn in his testimony before the Senate in~behalf of the National Retail Furniture Association ielated his firm's experience in explaining credit rates to about 200 new customers. In the study done in his ~Store, some customers were told the credit service charge on the new account they were about to opefi would be 1½ percent a month, while other customers opening new accounts under the same terms were told the credit service charge would be 18 percent a year. Each time the store's credit counselor quoted the 18 percent rate he was involved in a, 80- to 45-minute dis- cussion of what it was going to cost the customer, `but when the credit counselor quoted the 1½ percent rate it was quite readily understood and accepted by the customer. ` We are convinced, therefore, that' the definition o~f three di1~erent types of credit in S~ 5 does not aid easy consumer und~rstandmg and does not permit the customer to readily understand, compare~ and determine which credit plan is the cheapest. In fact, S. 5 does just the opposite. It really makes it more difficult for customers to coftipare credit coste. ` ` In addition to the need for provisions in a truth-in-lending bill thait will permit ~ g'bf e~it~charges, a~y le~is- lation ~ shed e'uvs1~ttp~hcation ~ `all consumer credit transactions. S. 5 would require annual rate disclosure for nearly all credit sales made in our smaller specialty stores but would barely touch the credit PAGENO="0124" 706 CONSTJMER CREDIT PROTEcTION ACT s&tle~ of our big competitors. Mr~ William~M. Batten of J. C~ Penney (Dog disclosed this when he testified in the Senate that his company had $400 million o~i their revolving ~r dit~accbTtmts but only $4~0 million on their time paytinent or installment-type accounts., On page 18 of our written statement there is ~a chart that compares two similar tr~nsactions of $400-one on a revolving credit plan with- out title retention~ the other on an installment credit plan. On the revolving plan where the credit ser~ioe charge would be $13.50, the store could quote a rate of 1½ percent But, on the installment plan with the 90 days of free time that is ~ general and widely used prac-~ tice in many ~maJl independent specialty stores particul~rl~r those in the furniture industry, there wo'ul~ be no credit service charge at all- ~et the store ~votiid be required to quote:a rate of 18 percent merely because the store retains title to the merchandise until it is paid for. Problems li~ke this would be eliminated by any bill that provides for the universal application of an identical rate for all consumer credit transactions. Universal application of an identical rate would auto- matically e.lhiiinate the false standards such as title retention, length of terms, and method of repayment that have been established in S. 5 to separate the various types of credit plans. Although we want topoint out the discrimination contained in S. 5, we did not caine here today merely to talk about what we don't iike~ We are here to suggest solutions `to the problem of discrimination within revdWdng credit itself. There are four basic~metho'ds for elimi- nating the d~scrirnination. Each thethod provides for the universal application ~f a single disclosure method for all consumer credit transactions. One solution is dollars and cents disclosure, or a variation in the form of dollars per hundred per year or cents per $10 per mouth. The Governor of Illinois has recently signed into law a bill that requires disclasnre in dollars and centè. A s~ond solution is a monthly percentage rate for all transactions. A. monthly rate can be computed for installment credit merely by dividing the s~nnuai rate by 12. The third solution is a combination ~of both monthly and annual disclosure for all transactions. This is the type of disclosure that S. 5' now requires for the so-called "installment open credit plans," the revolving credit plans with title retention. The annual rate is deter- mined by multiplying the monthly rate by 12. The fourth solution shown in the one least understood by customers. It is an annualpercentage rate for all transactions. No segmei~t of retailing should be given by law a competitive' merchandising advantage over any other segment sclliiig'similar goods by being alloiwed to disclose credit service charges in a more favorable' manner. If knigress really wants consumer understanding ~f credit terms- If Congress really wants meaningful disclosure- If Congress really wants to eliminate discrimination in the market- place~-~ If Congress reall~r~ wants to' provide equitable tr~atment for small independent merchants as well as' for the g~aut mercantile establish- ments- PAGENO="0125" CONStTh~ER CREDIT PROTECTION ACT 707 Then, we believe, this committee will not accept the discriminatory provisions of S. ~, but will require all consumer credit transactions to disclose cre4i~ service charges ~n a similar basis. Our six as~ociations, and the more than 45,OOO~ members we repre- sent, will support aily of the* four credit disclosure proposals that is given univ~rsal application 1~. all consumer credit transactions. We urge the committee te suppQrt our recommendations for fair- play and to put all stores~ both the giant merchantile establishments and the small i1t~ependent noncomputer specialtl store~, on an. ~n~l footing in the method o~ di~closing etedit service charges~ ]~ this way, customers can ~ giventa basis to compare and determine which is the cheapestrate availab]1e in the marketplace. (The full statement of ~r.Stapp follo~ws:) SPAPEME*T or OIIARLES T~. SrA~?, PRESIDENT, I(oos fln&, R~nw4Y, N.J., AND~ P~E5IDENT, NATIONAL RETAIL FtjRNITURE 4ssocrArroN I am ~h~ries D. Stapp, Ptesident of Koos Brothers of Rahway,~ Ne~kr J~rsey. I am a retail furniture dealer and President of the National Retail ~urniture Association whose members operate m~or~ than 9,000 independent home furnish- ings specialty stores throu.ghoift the trnited ~tat~. Ttday, I ath appearing in behalf of the National Retail Furniture Association and' frsre other national Associations: the National Appliance Radio & TV Dealers Assoclathth, the National Association Of House to House Installment c~mpanies, the National Association of Music Merchants, Inc., the National Retail Hard- ware Association, and the National Sporting Goods Assocjatlon. I ~m speaking for ~ group ~f indei~endent retail merchants who operate mOre than 45,000 s'tores up ahd down the main streets of cities `anti tOwns throughout tbe United States. They are the home-town merchants who support the local little 1eagu~ base~ba11 teams,' who èerve as block captains for the TJnit~d Fund ca~mpaigns, and `who buy the ads in the High School yearbook. Most of th~me 45,000 stores are and always have been family-owned businesses. Our Assoc i9p~ agree witli the idea of full disclQsure of credit service c~~rg~s. We support the basic ob~jectives o~ the Truth In L~uçliug bills. We encourag~ our members to provide a detailed e~cpressio~i p~ credit charges to all c~ustcwers. We have joined togetbe~ to represent ~w non-computer retail stores who are concerned about the unfair treatment that would be arbitrarily thrust upon thezu under ~the provisions of the ~ri~th In Leud~ng bill passed b~ lhe U.S. Senne, S~5. Bec~use we are presenting the common views of SIN Associations, we are prepared to discuss only the features of the `bills that concern credit disclosure. We have not bad time to fully study awl reach in'ter~~association agreement on the other provisioEs of ILR. il~01~ Our non-co~pnter stores are concerned about the revolving credit compromise which built into `S. 5 a special formula that gives those who' offer re~volvjn~ credit a cornpetitisre advantage' over thçsc who sell ~on inata~inent `credit, ~n effect, S. ~ is a ~gulati~ of instalment credit only an4 does n'ot offe~ customers the oppor~pnity to coiup~re~eqeUit service charges offered under'~cTifferent credit plans. Our `non'.c'omnuter stores are also concerned about `the way that S. ~5 dis-~ criminates i~etween two types of revolving credit. And so we are here today to do three things. First~ to ask the committee to put all consumer ~credit transactions on an equal footing by requiring stores using credit service eharges of any type `to' disclose these cbnrge~ on a~i identical basis. 4 conunon denominator applied to all forms of credit is the o'n~y standard which will `enable consumers to compare `and determine whi'chis cheape~t. ~eqand, we are here to s~ggest methods for eli~natin.g the discriminatio~ contained in 5, 5. 4ud `third, we ~ here `to offer the support of `tbe~m'ore than 45,000 indepeud~nt retafl'stores for a con~umer credit disclosure bill that aijplles ppiver- sally to all consumer credit transactions. During `the' past seven years, there has been ~umcb `discussion `about the need to give the customer information about consumer credit charges that will let her compare credit cost's so she can make wise use of credit~ Any bill tc~ assist the customer to do this should be based on two `underlying eharacter1~tic~: Consumer Understanding and Universal Application. PAGENO="0126" 708 CONStMER CREDIT PROTECTION ACT CONSUMEE UNDERSTANDING Both `the Consumer Credit Protection bill (H.R. 11601) and Truth in Lendi1i~ bill (S. 5) state that the informed use of credit, particularly instalment cedit, will enhance economic stabilization, increase sound competition between firms providing credit facilities, and give consumers a simple and clear inetho~l of comparing credit costs, particularly, between competitive offers. To analyze these two bills and to report on their effect on consumers, we em- ployed the services of Dr. Albert Haring, Prdfessor of Marketing, Graduate School of Business, Indiana University. Dr. Harh~g, a specialist in the field of consumer credit, has served as a consultant to many business firms and to several national associations. In 1960, and again in 1961, Dr. flaring testified on the Truth In Lending bill before the Senate subcommittee. Dr. Haring converted `the purposes of H.R. 11601 and S. 5 into more specific language and suggested the following approach as a practical method for evaluat- ing the particular provisions of the proposed bills: 1. Consumers are to be protected through disclosure of details of credit transactions and proposals; such disclosure should be in the form or forms best understood by consumers. 2. To make it possible for consumers to shop effectively for credit, all competitive offers should be stated in identical terms or in an identical manner. 3. Stabilization of the economy means more stability at high levels of output, employment and gross national product. If 10,000,000 units of product X ~ crc marketed annually prior to such legislation, the goal would be to have 10,000,000 units (or more) marketed annually after the legisla- tion, presumably at a lower credit cost to the public or, at a minimum, a more intelligent use of credit by the public. 4. Stabilization of the economy also means relatively constant prices or ~ minimum of inflation. Since all costs must eventually be paid by the con- sumer or public, changes caused by the proposed statutes should handicap business and increase costs as little as possible. Hopefully, once adjustments have been made, costs will be no greater than those of the earlier time before such legislatiOn. Consumer Understanding Varies with Size of Credit Transaction 1. Small sized transaction. Where the amount of credit extended is small and the installment repayment period short-a battery or tire In the case of cars, or a toaster or iron in the case of minor appliances-the most helpful informa- tion to the consumer is the total dollar and cents cost of the credit and the dates of repayment. The "annual percentage rate" is likely to be very high, its calcula- tion is difficult, and there is some reason to believe that consumer confusion may occur in a considerable number of cases. Here, however, the small Independent businessinnn faces a difficult and expensive problem which, it is believed, has greater economic costs than the possible gains for the consumer. In my testimony before the Senate Subcommittee on Production and Stabillza- tion in 1960, 1 gave the illustration of the factory worker who had to buy a new battery to start his car to get to work. The breakdown is on Monday and h~ agrees to pay the service station manager every payday. Paydays are every other Friday. The cash price of the battery is $20; the time price is $22. five dollars each paycheck for four paychecks and then two dollars. What is the annual interest rate? To the worker, on this small purchase, the important thing is not the percentage rate but the $2 time price differential-having the battery today is or is not worth it. T he fact that the annual rate is soñiewhere between 110% and 130% is not important to the customer and may be quite confusing to both customer and service station. In sñulll transactions the consumer is most interested in knowing the credit cost hi dollars and ceiits, and such information is about all that many smftl~1 retatlei's can accurately furnish. 2. Very large transactiora. Where the credit involved is very large and the repayment ~e~riod lcmg-a 110w ear or a home--the ~nost lielpihil information ~0 the consumt~r is the total cost of credit (all costS which would have been avoided if the pur(lla~e had `Iee~i made for ea~li) in te'rm~ of anneal flerecflt(1fJC rate stated in l)er(ellt and/or in (lolhii's 1)01' hundred. `The e(m~umer iieeds such' infor- mation he~1ari~e loth sellerA tad iinallcial agenciOs compete ii~ this area : u less tei1Th~ ~r( quo~ I ide it lli\ t p ihh ii Ii (1 liii iii ii ti ( flip in or- `P(Itttl (loflar co 1~s of credit, ~artieulai'ly in thc~ ~`a.~e of ~) `dia~ng homes, may create consumer confusion. A $21,000 hu~e ~~ith 10 r)ei'(ent (Ica' a. S1,000' c1osing~ PAGENO="0127" CONStMER cREDIr PROTECTION ACT 7O~ costs, and a 30 year 1ILort~age CaiC11]at(~1.i at 61/I percent (not neces~ari1y the annual rate a~ pre~erib~c1 by the 1r(;po~e(l statutes) involves an interest cost of $::~3,wJ3.oO (S. 5 Senate 11earing~ 19G7. p. 5~3). This total dollar iiiterest assumes that the family involved can avoid such a charge by not purchasing the home. This is unrealisth. if t1it~ £ainily coiitinue~ to rent a lionie or au apartment, a significant portion of the inonthly aiid annual rental is comparable interest" on the landlord's thve~tnient. Since the Congress, thrOugh FHA and many other statute~, has endeavored to increase home ownership by individual families, total dollar interest charges on mortgages may, without detailed explanation, create substantial consumer misinforniation. The annual interest rate alone would appear to be most helpful to the public, in comparing alternate sources of credit and whether to continue renting or to buy. 3. Intermediate sized transactions. Where the credit involi ed is intermediate in size-major appliances, clothing. home furnisnh igs, musical instruments, and the like-there is mnaximum competition between cre~lit grantors, both retail and financial agency, and the consumer has the greatest variety of alternate credit plans available. Full disclosure of all details which distinguish the credit service charge from the cash price are essential. Two questions of major impor- tance then arise: (a) what niethod of stating credit service charges is most useful to the public; (Jj) what method of stating credit service charges main- tains effective competition best and discriminates least between competitors? Where a large group of items falling in the intermediate classification are purchased at one time, the credit is commonly multi-year and the likelihood of substantial prepayment small; such might be the complete furnishing of of a new home. Here the most appropriate statement of the credit service charge would appear to be some sort of rate. Percentages mean more to some people; dollars-per-hundred appear to mean more to others. And this technique does not appear to upset the competitive situations between retail credit grantors and financial institutions. For the convenience of both customer and credit grantor, various types of revolving or "open-end" credit have been developed and have grown rapidly during the last twenty years. Characteristically, these give the customer a "free ride" or limited period after purchase without credit service charge; up to a credit limit, the customer can add-on purchases at her discretion; credit charges are calculated currently each month or billing period; the customer can pay in full during any month without credit charge for the month of liquidation. In the ease of the individual consumer, the monthly cost is vital because the consumer can avoid further finance charges during any nmonth by paying in full before the next billing date. The annual equivalent rate may be helpful in some comparisons but is believed to be definitely secondary in this particular consideration. When competitioui between credit grantors is considered, the major consider- ation is that each competitor (retailer or financial institution) be required to quote the consumer identically for the same credit offer. In dealing with people, In addition, identical offers have both factual and psychological sameness and dif- ferences. Rates of 1% percent a month and 18 percent a year are not psycho- logical]y Identical to consumers. As Dr. flaring has pointed out, the difficulty of explainhig the two different rates to customers is a practical one. Mr. A. G. Bnssham in testimony on S. S In behalf of the National Retail Furniture Association related his firm's experience is explaining credit rates to about 200 new customers. He told the ~onimnittee that some of his store's more experienced credit counselors were asked to alternate their method of disclosing the cost of their credit plan to customers. Soipe customers were told the credit service charge on the new account they were about to open would be 1~ percent a month, while other custome~'s opening new accounts under the same terms were told the credit service charge would he 18 percent a year. Each time the credit counselor quoted the 18 percent rate he was involved in a 30 to 45 minute discussion of what It was going to cost the caslonmer, I twijen the credit counselor quoted the l~ percent rate It was quite re~.dily understOod a~id accepted by the customer. Another furniture store using a revolving credit plan has developed a small ~~hart (attached as Exhibit A) designed to illustrate to the clistonmer the amount of the credit service charge and how it Is computed. The chau~t is a copy of a customer account card that shows the amount of the purchase. the monthly pay- mnents, and the amount of the credit service chargc' nd9ed eh~1~ month by. the ~tore on a typical revolving charge account; ~y ~ cm tl~me monthly credit serview~harges, which are listed in a special columfi; the ~ demoastrates that PAGENO="0128" 710 CONSUMER CREDIT PROTECTION ACT the 1~ monthlyi service charge amounts to $8.40 for a year on an original balance of $100. This provides the store credit personnel a convenient way to explain to the customer that this credit charge is less than the $10 per $100 per year on the original balance charged by competing stores on Instalment credit sales. To meet the purposes stated for both H.R. 11601 and S. 5, therefore, it is im- portant that credit service charges be disclosed in an equitable atid identical man- ner that will meet the one basic test: consumer understanding. UNIVERSAL APPLICATION In addition to the need for provisions in a Truth In Lending bill that will per- mit easier consumer `understanding of credit charges, any legislation enacted by Congress should have universal application to all consumer credit transactions. If disclosure of the credit service charge as a monthly percentage rate is to be re- quired for one type of revolving credit plan, then all consumer credit tran~ac- tions-including other types of revolving credit ilans and instalment credit plans-should be required to disclose the credit service charge ai~ a monthly per- centage rate. The Senate passed bill S. 5, however, does not have universal application to all types of credit, but discrhninates against the small non-computer stores. S. 5 permits the large stores using revolving credit to quote their credit service charge as a monthly rate, but forces small stores using installment credit to quote an aimual rate. As a result, the effect of S. 5 is one of regulating installment credit solely, while permitting certain types of revolving credit to disclose their credit service charge in monthly terms that the customer cannot conveniently compare with alternative sources of credit that are required to be disclosed in ~nuual percentage rates. COMPARISON OF CREDIT SERVICE CHARGE DISCLOSURE REQUIREMENTS 1~NDER TUE 5. 5 "COMPROMISE" Type of credit plan: InstaThiwnt Credit-with oi' without title retention, 18 percent a year. Revolving Credit-without title retention, 11/2 percent a iiionth. Installment çrec~it-with or without title retention. 18 percent a year, The Senate itself recognized the discrimination contained in the bill, hut he- cause of the delioate political "balance" that had been arranged to get the bill out of committee au~l to the Senate floor, the Senate was not able to make dianges in the bill. However, several Senators, including some members of the Senate Banking and Currency Committee Pointed out the discrimination , during the Senate floor debate. One of them, senator Thomas J. McIntyre of New Hampshire pointed out the discrimination in S. 5 by saying: ". . . almost every witness before the ~ommnittee indicated that credito~'s dis- closing in monthly terms will be given a competitive advantage over the others I think that it is unfortunate that those merchants generally able to qualify for monthly disclosure will be the large, well-financed enterprises who will be directly competing, in some, product lines, with the small, poorly financed, local small businesses such as furniture stores, auto accessory dealers, amid others who will be required to disclose In annual terms. I think that this is truly u~ufortu- nate consequence of the present bill." Another member of the Senate Banking and Currency Committee, Senator Charles H. Percy of Illinois, called attention to the discrimination within the two types of revolving credit "in the hope that some solution will ulti~a'tely be worked out, as the bill proceeds through the legislative process." The Senator pointed out that S. 5 defines two ~ifterent types of revolving credit-revolving credit plans in which the title to the. ~ier~handise pa~es to the buyer at the time of the purc~iwse, and revolving ~credit plans in which the seller retains title to the merchandise until the, customer hits made the final payment for it. Under the provisions of S. 5, the seller using a revolving plan without title retention is pern~itted to disclose a monthly percentage rate, while in an identical transac- tion under the same repayment terms, the seller using a revolving plan with title retention will h~ve to disclose an annual percentage rate. Senator Percy gave this illustration: "This is an area in which,the custo~mer will have great difficulty trying to compare credit charges. On one side of . the street, for example, a . . . (large merchantile) .. . store could state~ that the finance charge on a $300 sofa would be 1% percent per month, while across the street a . . . (specialty) . . . atore selling the same $300 sofa on the same repayment terms with the identical PAGENO="0129" CONSUMER CREDIT PROTECTION ACT 711 finance charge would have to tell the customer the finance charge would be 18 percent a year." "The two disclosure requirements result from the fact that in one case the seller retains title to the merchandise until it is paid for and in the other case he does not. This kind of discrimination is to be regretted, despite the fact that the committee worked diligently to find a way to work out the most equitable answer to a truth-in-lending bill that is aimed at giving consumers the kind of protection that experience has found is required in our present economy." The inequity of the use of title retention (security interest) as a characteris- tic in determining the method of disclosure is also pointed out by our economic consultant Dr. Albert Haring: "Nothing about open-end credit plans or revolving credit plans, as methods of granting and administering credit, appear to be tied to passing title to the buyer immediately, to the size of the credit, or to the amount of the minimum monthly payment. Although certain stores commonly pass title immediately under their revolving credit plans, certain other types of retailers, mainly independent specialty stores do this less frequently. The same problems of "fre~ ride" and monthly consumer choice about payment (above minimum) affect * the equivalent annual interest rate. Regardless of what decision the Congress may reach about these problems, avoiding serious discrimination between credit grantors offering the public comparable credit arrangements should, it is be- lieved, have a high priority. "Large stores and smaller specialty stores are direct competitors in both mer- chandise and services, and credit is an important service. Customers who make frequent purchases in a store, because of the many departments within the store, have a high degree of interest in maintaining their credit rating with that store and, therefore, the need for title retention is greatly lessened. On the other hand, in specialty stores with a single line of merchandise, where customers purchase less frequently, there is a greater need for title retention. Stores with many departments often include a furniture department, an appliance depart- ment, a musical instrument department, a sporting goods department, a hardware department; each of these major departments can be considered as a specialty store within the large store (and sometimes such departments are leased to specialty store operators). The consumer knows this and shops at both the special departments of these stores and at the specialty stores. Should not both be required to quote identical credit terms for the same credit offer to the public ?" The economic `advantage that the discriminatory provisions of S. 5 will give to large stores using revolving credit plans is confirmed in a recently completed study by a research firm that analyzed why the consumer buys where she does. The $120,000 study, commissioned by the National Retail Furniture Association and 17 other organizations in the home furnishings field, was conducted by three research firms: National Family Opinion, Inc., Toledo, Ohio; Social Research, Inc., Chicago, Ill.; and Arthur P. Little, Inc., Cambridge, Massachusetts. The results of the study-reported at a special conference here in Washington, D.C., this week-demonstrate that the customer makes her decision on where to shop for home furnishings largely on the basis of store reputation. The study reveals that home furnishings shoppers will not visit a store that does not have a "good" reputation in the community. Thus, S. 5, which would permit large stores selling home furnishings to quote a monthly rate of 1% percent would give furni- ture stores quoting an annual rate of 18% a reputation of being "bandits" who charge a high credit service charge, even though the actual credit charges are the same in both stores. Retailers for many years have been divided into two groups, large mercantile stores and smaller specialty stores. The stores our Associations represent here today are in the smaller specialty group. Yet, both groups carry many of the same items for sale. Of the many competitive services offered, credit is high on the list. More and more specialty retailers are responding to customer demand by switching to revolving credit. If Congress permits stores to continue to respond to customers desires-and does not establish road-blocks to hinder this move- ment-I am sure that there will be even more progress in this direction in the years ahead. Years ago the 30-day charge account was beset with the problem of payins in full each month and out of this problem grew the option to pay in full or monthly. So it took on aspects of the time payment instalment plan. The main difference was that the service charge was computed monthly, At the same time, the instalment sales plan moved toward an open-end plan with the service charge computed monthly. 83-340-67-Pt. 2-9 PAGENO="0130" 712 CONSUMER CREDIT PROTECTION A~T Today the tw~ plans are essentially the same. The principle difference between our specialty stores and the large mercantile stores is the size of the transac- tions, and In some eases, title retention. SPECIALTY STORE REVOLVING CREDIT Specialty store revolving credit plans (with title retention) today have all the payment characteristics of typical large mercantile store revolving credit without title retention. Specialty store plans require an initial revolving credit account agreement to be signed the same as on a large mercantile store revolv- ing account. The customer has a free time period or "free ride" during which the account can be paid in full with no credit service charge applied. This free time can run from 30 days up to 59 days, ~r even longer. As in typical revolving credit plans, th~ credit service charge is payable and applied after the free time has expired, at! a rate of typically 1'/2% a month. The customer may pay any amount she wishes each month, either the agreed minimum payment, which often is as low, as $5.00, or any larger amount. Many customers pay their ac- counts up well ahead of time, thus reducing their credit service charges. The store sets only minimum payments. These specialty store open-end revolving ac- counts are identical with large mercantile store open-end revolving credit with the single exception that they retain title untIl the goods are paid for. Otherwise, there is no distinction between them, and it is discriminatory to' require disclo- sure of the credit service charge at an annual rate on a revolving account which has title retention, and permit disclosure at a monthly rate if the revolving ac- count does not involve title retention. Title retention has nothing to do' wih disclosure of tl4e cost of credit. Therefore, we recommend that any bill aj~proved by your Cammjttee have universal application to' all credit transactions without regard for whether or not title (or any security interest) is retained until the merchandise is paid for. Any treatmeflt that is universally applied to all consumer credit transactions wil eliminate the need for establishing false standards such as title retention, length of terms, and method of repayment; and at the same time will accomplish the goal of helping customers determine which credit plan Is the cheapest. Attached to this statement as Exhibit B is a copy of a monthly account state- ment used by one of our member stores, Breuner's, of Sacramento, California. The statement form has all of the characteristics of a statement of a typical large mercantije store open-end revolving account statement-except that under the Breuner lttevo'lv-A-Count, the title to the merchandise remains with the store until it Is paid fo'r. WHY SPECIALTY STORES RETAIN TITLE Many questions have been asked about why our specialty stores do not just give up title retention and offer a revolving credit plan without title retention. This, we are told, would permit specialty stores to compete with large mercantile store revolving credit plans under the provisions of S. 5. It would be impractical for us to do so. We are in no position to compete in this way with the ret'ail giants who have the sales volume and financial resources to offer two or three types of credit plan. Our non-computer stores are essentially small independent family-owned busi- nesses that could not afford to install the kind of expensive bookkeeping and computer equipment needed to operate several kinds of accounts. Our stores operate in a much smaller universe of credit than do the retail giants. Many large stores with `open-end credit, some with large national chain operations, are able to "sp'read the risk" of their credit operation over a wide universe and Into many various types of merchandise. Our stores, on the other hand, have a much smaller number of customers and a limited line of merchan- dise. Therefore, there is a much smaller universe of credit over which to spread the risk. As a result, our stores must maintain a more direct security interest in the merchandise until it is paid for. In addition, if title retention was `dropped many "marginal credit risks", the very people the Truth In Lending bi]ls are designed to help, would be screened out and denied credit which is now available to them under title retention credit plans. In general, the stores we represent have over a long period of time established a method of fIoing business that fits their type of merchandise and satisfies the customer `by giving her what she wants. Such methods of `doing business, carc- fully worked out in an industry, `are not changed instantly merely by the enact. ment of a nest federal law. PAGENO="0131" CONSUMER CREDIT PROTECTION ACT 713 CONSUMER COMPARISON The difficulty the customer will face in comparing the costs of credit under the provisions of S. 5 can be illustrated by a comparison of similar transactions. For example, take a sale of $400 to be repaid in 4 regular payments. On a typical revolving account, the customer would get the first month as "free time" with no credit service charge. The second month the credit service charge would be $6.00, the third month $4.50, and the fourth month $3.00, for a total credit service charge of $13.50. Under the provisions of 5. 5, the customer would be told the credit service charge is 11/2 percent a month. On the same sale on an instalment account at a typical specialty store, the customer would get 90 day$ "free time". A "free time" period of 90 days is a general and widely used practice in inde~ pendent furniture and other specialty stores. Therefore, by making four pay- ments of $100 each, one at the time of the transaction and one each 30 days thereafter, the customer would pay no credit service charge at all. Yet under the provisions of 5. 5, the customer would have to be told that the credit service charge is 18 percent a year-merely because the store retains title (security interest) in the merchandise until it is paid for. Revolving, l3-~ percent, Installment, 18 percent, 30 days free time 90 days free time Amount Credit charge Amount Credit charge 1st payment 2d payment 3d payment Final payment $100. 00 106. 00 104.50 103. 00 0 $6. 00 4.50 3. 00 $100. 00 100. 00 100.00 100. 00 0 0 0 0 Total 13.50 0 There is no basic difference in the specialty store open-end revolving account and the large store open-end revolving account. What minor differences there are certainly do not warrant putting a whole new restrictive provision on this type of consumer credit. The distinction between these two types of credit is not in the area of title retention. The difference between them is in whether the entire credit service charge is computed at the time of the transaction and applied as an "add-on" to the amount to be financed, or whether the credit service charge is computed monthly and billed to the customer on her monthly statement. To provide for truly universal application, not only should the two types of revolving credit be required to disclose their credit service charges in similar terms, bitt similar disclosure terms should apply as well to retailers who sell under conventional instalment credit plans. DISCRIMINATION BETWEEN INSTALMENT AND REVOLVING CREDIT PLANS It would be most unfair and confusing to customers to require retailers who sell on conventional installment plans to state an 18% annual percentage rate, while at the same time permitting retailers selling the same goods on an open- end revolving credit plan to state a monthly rate of 11/a % even though they amount to the same thing. This would be a severe form of discrimination against retailers selling on conventional instalment sales contracts, particularly the smaller retailers who have not yet changed over to revolving credit. A store using an open-end credit plan is not limited as to the type of merchan- dise that may be charged to it. All kinds of items can be charged, big ticket items as well as small ticket items. The big difference is that 80 or 90% of the goods sold in our specialty stores are durable goods whereas 80 or 90% of those sold in the large stores are consumable goods. For example, Mr. William M. Batten of J. C. Penney Company testified in the Senate that they had $400 million on their regular revolving credit accounts and only $40 million on their time-pay- ment accounts. The stated objective of the legislation has long been to enable consumers1 to shop for credit and to make meaningful comparisons of the cost of credit offered by competitors. Requiring one merchant to state an annual percentage rate on a mattress and box spring set, for example, and allowing his competitor across the street selling the same mattress and box spring set to quote only a monthly rate, is not the way to make it easier for consumers to shop for credit and make meaningful comparisons of the cost of credit. PAGENO="0132" 714 CONSUMER CREDIT PROTECTION ACT To the uninitiated, the wide difference between 11/2% and 18% would cause decisions to be ~nade in favor of large mercantile stores over principal competi- tors. The end cost to the customer is the same. To the small business man, the independent specialty store owner, the result could be disastrous. He has neither the personnel nor the time nor the technical knowledge to convince customers that the annual percentage rate and the monthly percentage rate result in the same cost. Even more seriously, the different forms of disclosure could actually mislead the customer who is denied the information she needs for making a wise choice of credit terms. We urge you to abandon this approach. SOLUTIONS TO THE PROBLEMS OF DISCRIMINATION Although we want to point out the discrimination contained in 5. 5, we did not come here today merely to talk about what we don't like. We are here to suggest solutions to the problem of discrimination between revolving and instalment cred- it and discrimination within revolving credit itself. There are four basic methods for elminating the discrimination between revolvng and instalment credit and, at the same time, eliminating the discrimination between the various types of re- volving credit. Each method provides for the universal application of a single disclosure method for all consumer credit transactions. One solution Is dollars and cents disclosure, or a variation in the form of dollars per hundred or cents per $10 per month. Customers readily understand credit service charges that are expressed in dollars and cents. It has been demonstrated that disclosure in dollars and cents can be written into a credit disclosure bill. In Illinois, for 4~xample, the Governor recently signed into law a bill that requires disclosure of credit service charges in dollars and cents. Section 27 of the new Illinois statute stipulates the amount in dollars per hundred per year that can be charged on various dollar levels of credit. Section 28 specifies the amount in cents per ten dollars a month that can be applied as a credit service charge on revolv- ing charge accounts. If the Committee decides that a percentage rate should be disclosed, in addi- tion to dollars and cents, our second suggested solution is a monthly percentage rate for all transactions. A monthly rate can be computed for instalment credit simply by divUZin~J the annual rate by 12. The third solution we suggest is a combination of monthly and annual disclosure for all transactions. This is the type of disclosure that S. 5 now requires for the so-called "instalment open-end credit plans"-the revolving credit plans with title retention. Here, the annual rate is determined by multiplying the monthly rate by 12. Our fourth solution is the one least understood by customers-an annual per- centage rate fo~ all transactions. SUPPORT UNIVERSAL APPLICATION OF DISCLOSURE As I stated at the opening of my sitatement, the non-computer stores represented by the Associations I speak for today are sympathetic to full disclosure of credit service charges on consumer credit transactions. There should be no discrimination in disclosure requirements against retailers who sell under conventional instalment plans and in favor of retailers selling the same goods under various forms of revolving credit plans. No segment of retailing should be given by law a competitive merchandising advantage over any other segment selling similar goods by being allowed to disclose credit serviCe charges in a more favorable manner. If Congress really wants consumer understanding of credit terms . If Congress really wants meaningful disclosure . If Congress really wants to eliminate discrimination in the marketplace . If Congress really wants to provide equitable treatment for small independent merchants as well as for the huge national mercantile establishments. then, we believe, this Committee will not accept the discriminatory provisions of S. 5, but will require all consumer credit transactions to disclose credit service charges on a similar basis. Our six Associations, and the more than 45,000 members we represent, will support any credit service charge disclosure proposal that requires the universal application of either dollars and cents or an identical rate for all credit grantors whether it be monthly, monthly and annual, annual, or any other rate that will enable customers to compare and determine which is the cheapest rate available in the marketplace. PAGENO="0133" CONSUMER CREDIT PROTECTION ACT 715 We urge the Committee to support our recommendations for "fair play" and to put all stores, both large and small, on an equal footing in the method of disclosing credit service charges on consumer credit transactions. In this way customers ~an best be assured of a sound basis for comparing credit costs whether it be in dollars and cents or as a percentage rate. ADDRESS~~~ TERMS: ~ ~ATr~ 1 ~f. DATE PURCHASES PAYMENTS CREDIT BALANCE J ~ugJ~66 U3~31) 2S~~6 J.L3Q 9.00 ~`Qfl~QQ~ -~ ! ~ ff4~/~ O~i~ ~jji~ ~&~iiv. - ~ ~pj~Jj~ J1~ c~ts~r~v. xr~. 83~j6 6Nov 1~66 ~?: ~ LII14~ ~ j~, ~r~/ c ft. ! 10 Jan 3.~67 z~v. 9.00 67 ~ ~ j4~ ~ERV~C W.__ S9.76 ~eb1.~67 !~ 2Jth~ C~ !~ !~ ~! ~/6/b~z ~i~z CF~ERV. - ~ ~j43 ~ -~ ~iSZ . -~ Hg .___ .~2~6.6o ~! ~ c/~,&z ~W1 -~ ~ c~z~v. i~. 18.00 ~! /~/i~i. ~j -c-&~v. CK$. / ~ IU11~1 , /~ ~±~ug 1~6~7~ Cfl.SERV. CHg 9.2j 9, ~ GOOD CREtf'~T !S YOUR MOST VALUABLE ASSET PLEASE NOTI T1:co..ATf~10~~ DRS *11, IT IS AGREED THAT ANY AND ALL. PAYMENTS MADE HEREIN SHALL BE APPLIED AS A CREDIT AGAINST MY GENERAL ACCOUNT AS A WHOLE. 9 % o~j ~ SAL~q~,~,j PAGENO="0134" 716 CONSUMER CREDIT PROTECTION ACT h ~ ~ REVOLY~A-COUt9T ® PIrur. thou, Droutt to b, .ppllud ott ~OUtt 3D Dty Moothly Ch~gt 5..... Irutollturot $ 604 K STREET SACRAM~NTO CALIFORNI~ 95514 YPRÔO9E ~ PLEASE DETACH AND MAIL WITH YOUR PAYMENT, OR IF PAYING IN PERSON, BRING ENTIRE STATEMENT FROM YOU~ DATE PREVIOUS BALANCE WE HAVE PAYMENTS op DEDUCTED DOWN PAYMENT, RETURNS OR CREDIT SERVICE AND ADDED CHARGES LEAVING A NEW BALANCE MONTHLY PAYMENT. PLEASE PAY THIS AMOUNT PAYMENTS, PURCHASES OR RETURNS MATE AFTER THE ABOVE BILLING DATE WILL APPEAR ON YOUR NEXT STATEMENT, DO NOT DESTROY THESE PAPERS THEY TELL HOW WE HANDLED YOUR ORDER 1F YOU WRITE OR COME IN ABOUT URIS STATEMENT, PLEASE BE SURE TO SEND,OR BRINGALL THESE PAPERS. WE SHALL NEED ALL OF THEM TO ANSWER YOUR QUESTIONS. BREUNERS SACRAMENTO lit ~ ru ors .dto trr~~ oh dt. ott to try p.r*otM ttttttiot. B. A. DRIUNER, 05030 3000CCUTOt ` *ItI13030.*.CQ3rfl PHONE 4444051 PLEASE MAKE PAYMENTS ON OR DEPORT AGREEMENT DUE DATE This A,rro~I ThisAtroo0r? YOU MAY AT ANT TIME PAY YOUR BALANCE IN FUU.. PAGENO="0135" CONSUMER CREDIT PROTECTION ACT 717 USE BREUNER'S Revo1v~a~count One "All PURPOSE" account. One low monthly payment bUys anything that Breuner's sell. You can add on a purchase any time. Credit service charges are only for the time used no extras. -OR- Use it as a regular 30 day charge account, with no credit service charges. EXAMPLE OF PAYMENTS With monthly paymentof * $10 $15 I I $20 $30 $40 $50 you purchase 200 300 400 I 6001800 I 600 800 . 1000 1000 andoddamounts equal to payments made 200 I 300 400 Thus your total purchases in 24 months could amountto I 1 400 I 600 800 1200 1600 2000 8 BREUNER STORES TO SERVE YOU: SACRAMENTO, OAKLAND, CAMPBELL, STOCKTON. SAN CARLOS VALLEJO. RICHMOND AND SAN FRANCISCO PAGENO="0136" 718 CONSUMER CREDIT PROTECTION ACT Mrs. SULLIVAN. Thank you, Mr. Stapp. You have given a very thorough yet concise picture of your position on this issue. Mr. Vern Countryman is a professor of law at Harvard University Law School. Mr. Countryman, please summarize your statement and bring out the important points that you would like to share with us. STATEMENT OP VERN COUNTRYMAN, PROFESSOR OP LAW, HARVARD LAW SCHOOL Mr. COUNTRYMAN. I do not appear here to testify on all aspects of H.R. 11601. I am not an expert on consumer credit-a subject I have just begun, to study. I have gotten only far enough in my efforts to know that reliable information on the subject is scarce and that there is a real need for the sort of investigation which title III of H.R. 11601 would authorize. I appear to testify in general support of title II of H.R. 11601, which would prohibit the garnishment of wages, although I have several suggestions to make for changes in the proposal. The problem with which title II would deal is a nationwide one because nearly all States permit wage garnishment. Some limit the remedy to creditors who have first reduced their claims to judgment, but most permit the creditor to garnishee the employer when suit is initiated. In some States a separate levy is required each payday; in others, the initial levy is a continuing one until the creditor's judgment is paid. All States exempt some portion of the debtor's wages from garnish- ment, but th~ exemptions vary drastically. In some States they are expressed in dollar amounts and they range from $350 for married debtors and $~00 for single debtors in Alaska to $50 for all debtors in Rhode Island. In other States they are expressed in percentages and range from 50 percent in Arizona to 100 percent in Florida, Pennsyl- vania, and T~xas. Most exemption laws, also, are confined to residents and afford no protection to the many debtors whose employers can be served with garnishment process outside the State of the debtor's residence. The best and most recent survey of this bewildering pattern of State wage garnishment laws is an article by Mr. George Brunn, pub- lished in volume 53 of the California Law Review in 1965. I have a copy of that article with me and would be happy to submit it to the com- mittee if you would care to have it. Mrs. SULLIVAN. We will be glad to receive it. We may already have that in record-we will check that later. (The article referred to may be found in the appendix, p. 1102.) Mr. COUNTI~YMAN. The Consequences of wage garnishment are prin- cipally three: 1. If garnishment of the employer is effected outside the State of the debtor's residence, he may find his wages shut off entirely. If it is effected in the State of his residence, he may find himself left to support his family on $50 a month in Rhode Island, $67.50 a month in Ken- tucky, $20 a ~veek in New Hampshire, or half of his $75 a week wage in Arizona, Or 50 percent of his wage or $25, whichever is less, in Vermont. PAGENO="0137" CONSUMER CREDIT PROTECTION ACT 719 2. Without regard to the amount of the exemption, the debtor may find himself unemployed. Many employers do not take kindly to the extra bookkeeping required by garnishment levies, particularly if they are repeated. Labor unions have been largely ineffective in protecting their members against such employer retaliation although some col- lective bargaining contracts give the employee one or two free garnish- ments before discharge. 3. To save his job and support his family, the debtor may be driven to resort to bankruptcy in many cases where he would not otherwise do so in order to dissolve the garnishment levy or prevent threatened levies. As the number of nonbusiness bankrupticies has increased more than twentyfold, from 8,500 to almost 176,000, between 1946 and 1966, this is a matter of some consequence to the Federal bankruptcy courts. Precise information on the relationship of wage garnishment to bankruptcy is, of course, not available. But there is enough evidence to support a recent statement of the Bureau of Labor Standards that "There seems to be a direct connection between the number of garnish~ ments and the number of personal bankruptcies." (Debt Pooling and Garnishment in Relation to Consumer Indebtedness, fact sheet Noc 4-F (1966).) Mr. Brunn, in his California Law Review article, made a study of the 10 States with the highest and the 10 States with the lowest per capita personal bankruptcy rates in 1962. The results are so interesting that I reproduce them here. Personal ba~&kruptcies per 100,000 population Alabama 279 North Carolina 1 Oregon 200 Texas 2 Tennessee 184 South Carolina 3 Maine 153 Pennsylvania 4 Georgia 149 Maryland 5 Arizona 147 Florida California 145 Delaware 10 Illinois 134 South Dakota 11 Ohio 132 New Jersey 11 Colorado 131 Alaska 13 Of the States with the lowest personal bankruptcy filings, Florida, Pennsylvania, and Texas had a 100-percent wage exemption; North Carolina, South Carolina, and South Dakota authorized exemptions up to 100 percent if needed to support the debtor's family; New Jersey had a 90-percent exemption, and Alaska exempted $350 for married and $200 for single debtors. Maryland exempted only 75 percent in some counties and $100 in others, but wage garnishments were little used there because of the necessity of a separate levy every payday. Of the States with the highest personal bankruptcy filings: Alabama had a 75-percent exemption. Oregon exempted $175. Tennessee exempted $17 per week for the head of a family plus $2.50 per week for each dependent under 16, and $12 per week for debtors who were not heads of families. Maine allowed garnishment of not to exceed $30 per month but pro- vided that at least $10 should be exempt. Georgia exempted $3 per day plus 50 percent of the excess. Arizona had a 50-percent exemption. PAGENO="0138" 720 CONSUMER CREDIT PROTECTION ACT California exempted 50 percent but authorized more, up to 100 per- cent, if needed to support the debtor's family and if the creditor's claim was not for necessaries. Ohio exempted 80 percent of the first $300 per month and 60 per- cent of the balance (with a minimum of $150), and $100 for debtors who were not heads of families. Colorado exempted 70 percent for heads of families and 35 percent for others. Illinois had 1~he highest exemption in this group-85 percent or $45 per week, whichever was more, with a maximum of $200 per week. But the Illinois experience is instructive further. Until a 1961 amendment to its law, its exemption was only $45 per week. Between 1961 and 1964 Mr. Brunn found that personal bankruptcies in Illinois declined 9 per- cent, while they were increasing 18 percent nationally. And I find that they have declined another 4 percent in Illinois from 1964 to 1966 while they have increased another 2 percent nationally. Mr. Brunn also studied the experience of Iowa, which moved in the opposite direct~o'n in 1957 by abolishing its 100-percent wage exemp- tion and substituting $35 per week plus $3 per dependent. Since 1957 personal bankruptcies have multiplied 3.6 times in Iowa while multi- plying 2.8 times nationally. It may be said that these figures alone do not prove that wage garnishment is a contributing cause of bankruptcy. It may merely be a series of remarkable coincidences. Or it may be that the financial difficulties which led to garnishment would have led to bankruptcy had there been no garnishment. But we need not rely on the figures alone. Last week you heard the tcstimony of three able and experienced referees in bankruptcy from States where wage garnishment is heavily employed (Oregon, Ten- nessee, and California). They were unanimously of the view that wage garnishments caused bankruptcy filings by many debtors who would not otherwise have filed. That view is supported also by studies of personal bankruptcies in which the bankrupts were interviewed. In one such study, involving 84 bankrupts in Michigan, 75 percent indicated that garnishment or the threat of garnishment was the reason for their filing in bankruptcy. (Dolphin, "An Analysis of Economic and Personal Factors Leading to Consumer Bankruptcy" (1965), page 18.) In another study in Illinois in which 73 bankrup&were interviewed, 35 said that threat of garnish~ ment or fear of job loss was what caused them to go into bankruptcy. (Stabler, "The Experience of Bankruptcy" (1966), page 7.) Other sim- lar studies which did not include personal interviews with the bank- rupts reveal: Out of 300 cases in Seattle, 69 debtors had suffered one garnishment in the 4 months preceding bankruptcy, 14 more had experienced two garnishments in that period, and four had been garnished three or more times. (Brosky, "A Study of Personal Bankruptcy in the Seattle Metropolitan Area" (1965), page 39.) Interviews with bankruptcy attorneys in Utah revealed their opin- ion that most personal bankrupts have either had their wages gar- nished or have been threatened with garnishment. (Misbach, "Per- sonal Bankruptcy in the United States and Utah" (1964), page 33.) PAGENO="0139" CONSUMER CREDIT PROTECTION ACT 721 To this I would like to add my own opinion, based on discussions with many referees in bankruptcy and bankruptcy attorneys, and on the examination of the files in hundreds of bankruptcy cases, that wage garnishment, either `actual or threatened, is a precipitating cause in a very substantial number of the personal bankruptcy cases. I have previously estimated, based on my studies of the official bank- ruptcy `statistics published by the Administrative Office of the U.S~ Courts, that over a billion dollars in creditors claims per year is being discharged in bankruptcy cases and more than 90 percent of these cases are personal bankruptcies. (Countryman, "The Bankruptcy Boom"-77 IETarv. L. Rev. 1452 (1964).) A more recent analysis of the statistics has persuaded me that my prior estimate was far too low and that the amount of creditors claims discharged is now approaching $2 billion per year. This figure may not reflect serious damage to the bankers, loan com- panies, and finance companies whose losses probably do not exceed one~ half of 1 percent of loans outstanding, nor to the installment seller operating on a 100 percent markup who breaks even whenever he loses only one-half of his claim. After all, they can shift half of their rela- tively small loss to the Federal fisc when they make out their tax re- turns. But there are other small-volume, low-margin creditors for whom the bankruptcy of a debtor is a painful blow. Moreover, bankruptcy is a catastrophe for the debtor. As one ob- server has said: Although uniformed people may minimize the gravity of the consumer bank- ruptcy problem by staying that only one-tenth of one per cent of the population goes bankrupt, there is a qualitative dimension in human distress that Is under- stated by such `statistics. (Myers, "Noi~business Bankruptcies, in Proceedings of 10th Annual Contfetrence, Council on Constumetr Information," page 9.) I would agree, and would add that the studies referred to above, and others, indicate that the typical bankrupt has three or four de- penden'ts, so that the human distress is felt not merely by the 176,000 personal bankrupts, but by families whose members number from 700,000 to 880,000. My conclusions about the relationship of wage garnishments to bankruptcy lead me to my first suggested change in H.R. 11601. I would suggest that the finding in section 201 of the bill be not confined to the effect of wage garnishment on interstate commerce, but that it take account also of the effect of wage garnishment on the Federal bankruptcy system. It is ludicrous, unseemly, and uneconomic to have most `of the States providing creditors with a remedy for collection and the Federal bankruptcy system providing debtors with a countervailing remedy to undo what State law has allowed the creditor to do. It's well within the power of Congress to do directly what it now authorizes in- directly and to relieve the Federal bankruptcy system of the burden of cases where bankruptcy petitions are filed only to avoid garnishment. Second, I would suggest that the term "wages" in the title of title II and in section 201 is probably too restrictive, and that the same is true of "wages or salary" in section 202 (a). The compensation of many o'f those you would want to protect from garnishment is derived, wholly or in part, `from commissions and bonuses. I would suggest, instead, that the reference in the title and in section 201 be `changed from "wages" to "personal earnings" and that in section 202(a), the opera- PAGENO="0140" 722 CONSuMER CREDIT PROTECTION ACT tive section "earnings in the form of wages, salary, commission, or bonus as compensation for personal service" be substituted for "wages or salary due an employee." I would delete the `second reference to "employee" in section 202(a) because of experience with the wage priority under section 64a (2) of the Bankruptcy Act where it three times became necessary to amend the original language, "wages due to workmen, clerks, or servants," once by adding "traveling or city salesmen," again by adding "on a `sal- ary or a `commission basi's, whole or part time," and finally by adding "whether or not they are independent contractors * * * with or with- out a drawing account." If this suggestion were followed in its entirety, section 202(a) might read: No person may' attach or garnish o'r by any similar legal or equitable process or order stop or divert the payment of earnings in the form of wages, salary, commission or bonus as compenisation for personal service. Third, I amsure it is not the intent of ELR. 11601 to disrupt theoper- ation of wage earner plan's under chapter XIII of the Bankruptcy Act. These are purely voluntary proceedings, initiated on the debtor's peti- tion only, by which a wage earner debtor may pay off his debts from future earnings over a 3-year period. But section 611 of the Bank- ruptcy Act does give the chapter XIII court exclusive jurisdiction over the deb'tor's earnings during the period of consummation of the plan, section 64b does require that the plan include provisions for the sub- mission of future earnings of the debtor to the supervision and control of the court, and section 658 does authorize the court to order the em- ployer of the debtor to make payments from his earnings directly into court. It would be prudent to indicate, either by a proviso to section 202(a) of the bill or by a `statement in the `committee report, that `sec- tion 202(a) was not intended to affect these sections of chapter XIII of the Bankruptcy Act. Fourth, I doubt the necessity of prohibiting garnishment of all earnings, regardless of size. I see no necessity for immunizing all the income of entertainers, corporate executives, and others whose incomes approach or run into six figures. I realize the difficulty of fixing a limit. One recent proposal sug- gests a poverty-level limit of $3,600, which I regard as much too low (Karlen, Exemptions from Execution, 22 Bus. Law. 1167, 1171 (1967). The present working draft of the Uniform Consumer Credit Code, a project of the National Conference of Commissioners on Uni- form State Laws which is not yet in final form, would put the limit at $100 per week for debtors with dependents and $65 per week for others (and would limit the protection to consumer credit claims.) This seems too low to me, also, but I have attached to my state- ment a copy of the pertinent sections of the present draft of the code so that the committee can examine them. (See p. 729.) The studies o'f personal bankruptcies to which I have previously referred indieate that the typical bankrupt has an income of about $5,000 per year. I would take that figure as an indication that the protection aguinst garnishment should extend considerably `higher. Figures compiled by John A. Gorman, Associate Chief, National Income Division, Office of Business Economics, U.S. Department of PAGENO="0141" CONSUMER CREDIT PROTECTION ACT 723 Commerce, and reported in the Wall Street Journal, May 31, 1967, part 1, column 6, show the following average family incomes, Year Amount, actual Amount, revised 1949 1952 1955 1958 1961 1964 1965 1966 $3,860 4,570 5,000 5,670 6,220 7,325 7,780 8,300 ($3,945) (4,747) (5,275) (5,839) (6,360) I have been in touch with Mr. Gorman and he advises me that be- cause of a revision in national income accounts the figures for earlier years should be revised as I have indicated in parentheses. I should suppose that protection against garnishment should also extend well beyond the income of the average family. It therefore seems to me that a figure in the neighborhood of about $15,000, trans- lated into $285 per week, would be appropriate. Mr. Gorman's figures illustrate another problem, however. That is a problem of obsolescence, since laws like these tend not to get periodic revision-the Connecticut exemption law still saves to a debtor 10 bushels of Indian corn. Obsoleteness accounts for the inadequacy of many of the State wage exemption laws which employ dollar amounts. But the percentage exemption laws produce excessive exemptions for large income debtors and inadequate ones for small income debtors, regardless of the percentage used. The present working draft of the Uniform Consumer Credit Code would solve this problem by using dollar amounts and authorizing an administrator to change them whenever there is a change of 10 percent or more in the U.S. Bureau of Labor Statistics Consumer Price Index for Urban Wage Earners and Clerical Workers. Under }I.R. 11601 the same function might well be assigned to the Federal Reserve Board. An alternative method of handling this problem would be to tie the exemption to a legislatively fixed figure which does seem to receive periodic revision-the amount of earnings subject to tax under section 209 of the Social Security Act. Currently, that figure is $6,000, al- though H.R. 5710, as reported out by the House Committee on Ways and Means, would raise the figure to $7,600. An exemption in H.R. 11601 for twice the amount of earnings taxed under the Social Security Act would come very close to the $15,000 exemption I have suggested. Fourth, `and finally, if you go no further than to protect wages from garnishment, you may not accomplish much. In many States the credi- tor still will be able to reach the debtor's income by taking an advance assignment of future wages at the time of extending credit. And since employers find wage assignments as annoying as garnishments, there will be the same jeopardy to the debtor's job. Again the debtor will be driven into bankruptcy-this time to get the debt discharged so as to free his postbankruptcy earnings from the lien of the wage assignment. Mr. Justice Fortas, while still a law student, made an exhaustive study of the use of wage assignments in Chicago (Fortas, "Wage Assignments in Chicago," State Street F~rniture Co. v. Armour ~ Co., PAGENO="0142" 724 CONSuMER CREDIT PROTECTION ACT 42 Yale L. J. 526 (1933)). That was followed in 1935 by a statute limiting assignable wages to 25 percent and limiting the effectiveness of the assignment to 3 years. Later reports indicated that the situation was not much improved-see Satter, "Wage Assignments and Garnish- ment Cited as Major Cause of Bankruptcy in Illinois," 15 Per. Fin. L. Q. Rep. 50 (1961-and in 1961, when Illinois liberalized its exemp- tion from garnishment, it also amended the wage assignment law to limit assignable wages to 15 percent. As previously indicated, the rate of personal bankruptcies in Illinois has consistently declined since 1961. A few States have by statute prohibited such wage assign- ments and others, like Illinois, limit the amount of wages assignable and the period of time the assignment may cover-see Annctations, 137 A.L.R. 788(1942) ; 37 A.L.R. 872(1925)-but in many States they are valid and enforceable in the courts. Hence, to complete the job, I would suggest a new subsection (b) of section 202 reading: No person shall take any assignment of the future earnings of another in the form of wages, salary, commission or bonus as compensation for personal service, and all such assignments shall be void and unenforceable. If the committee were to adopt my suggestion of a limit on earnings protected from garnishment, and considered a similar limit appro- priate for wage assignments, the new subsection (b) might read: No person shall take any assignment of the future earnings of another in the form of wages, salary, commission or bonus as compensation for personal service save for the amount in excess of $285 per week, and no such assignment shall be valid and enforceable save for such excess. If either of these proposals were adopted, present subsection (b) of section 202 should be redesignated subsection (c) and amended to cover violations of either subsection (a) or subsection (b). In conclusion let me anticipate that there will doubtless be testimony that the abolition or restriction of wage garnishments and assignments will bring ruin to the institution of consumer credit. Any witness tak- ing this position should be invited to explain data presented to a Cali- fornia legislative committee by the Associated Credit Bureaus of Cali- fornia, and ~ummarizecl by Mr. Brunn at pages 1239L~~1243 of volume 53 of the California Law Review, which indicates that installment credit thrives as well in Alabama where 75 percent of wages are exempt from execution, in California where as a practical matter only 50 percent is exempt, and in Colorado which exempts 70 percent for heads of families and 35 percent for single persons, as it does in Texas and New Jersey with 100 percent exemptions, or in New York with a 90- percent exemption, or in North Carolina which exempts up to 100 percent where needed for support of the debtor's family. Thank you. Mrs. SULLIVAN. Thank you very much, Mr. Countryman. (The full statement of Mr. Countryman and a draft of a uniform consumer credit code provision on garnishment follow:) STATE1~1ENT OF VERN COUNTRYMAN ON H.R. 11601 My name is Vern Countryman. I am Professor of Law at Harvard Law School. I have been teaching the law of creditors' rights and bankruptcy since 1946, save for a four~year period, 1955-1959, when I practiced law in Washington, D.C. I do not appear here to testify on all aspects of H.R. 11601. I am not an ex- pert on conEulner credit-a subject I have just begun to study. I have gotten only far enough in my efforts to know that reliable information on the subject is PAGENO="0143" CONSUMER CREDIT PROTECTION ACT 725 scarce and that where is a real need for the sort of investigation which Title III of HR. 11601 would authorize. I appear to testify in general support of Title II of 1111. ~t1601, which would prohibit the garnishment of wages, although I have several suggestions to make for changes in the proposal. The problem with which Title II would deal is a nationwide ones because nearly all states permit wage garnishments. Some limit the remedy to creditors who have first reduced their claims to judgment but most permit the creditor to garnishee the employer when suit is initiated. In some states a separate levy is required each payday; in others, the initial levy is a continuing one pntil the creditor's judgment is paid. All states exempt some portion of the debtor's wages from garnishment, but the exemptions vary drastically. In some states they are expressed in dollar amounts and they range from $350 for married debtors and $200 for single debtors in Alaska to $50 for all debtors in Rhode Island. In other states they are expressed in percentages and range from 50% in Arizona to 100% in Florida, Pennsylvania and Texas. Most exelpption laws, also, are confined to residents and afford no protection to the many debtors whose employers can be served with garnishment process outside the state of the debtor's residence, The best and most recent survey of this bewildering pattern ~f state wage gar- nishment laws is an article by Mr. George Brunn, published in volume 53 of the California Law Review in 1965. I have a copy of that article with me and would be happy to submit it to the Committee if you would care to have it. The consequences of wage garnishment are principally three: (1) If garnishment of the employer is effected outside the state of the debtor's residence, he may find his wages shut off entirely. If it is effected in the state of his residence, he may find himself left to support Jils family on $50 a month in Rhode Island, $67.50 a month in Kentucky, $20 a week in New Hampshire, or half of his $75 a week wage in Arizona, or 50% of his wage or $25, whichever is less, in Vermont. (2) Without regard to the amount of the exemption, the debtor may find himself unemployed. Many employers do not take kindly to the extra book- keeping required by garnishment levies, particularly if they are repented. Labor unions have been largely ineffective in protecting their members against such employer retaliation although some collective bargaining con- tracts give the employee one or two free garnishments before disc1~arge. (3) To save his job and support his family, the debtor may be driven to resort to bankruptcy in many cases where he would not otherwise do so in order to dissolve the garnishment levy ~r prevent threatened levies. As the number of non-business bankruptcies has increased more than twenty fold, from 8,500 to almost 176,000, between 1946 and 1966, this is a matter of some consequence to the federal bankruptcy courts. Precise information on the relationship of wage garnishment to bankruptcy is, of course, not available. But there is enough evidence to support a recent statement of the Bureau of Labor Standards that "There seems to be a direct connection between the number of ~ and the number of personal bankruptcies." Debt Pooling and Garnishment in Relation to Consumer Indebted- ness, Fact Sheet No. 4-F (1966). Mr. Brunn, in his California Law Review article, made a study of the 10 states with the highest and the 10 states with the lowest per capita personal bankruptcy rates in 19'62. The results are so interesting that I reproduce them here. Personal ba~ikruptcies per 100,000 population Alabama 279 North Carolina 1 Oregon 200 Texas 2 Tennessee 184 South Carolina 3 Maine 1513 Pennsylvania 4 Georgia 149 Maryland 5 California 145 Florida 7 Arizona 147 Delaware 10 Illinois 134 South Dakota 11 Ohio 132 New Jersey 11 Colorado 131 Alaska 13 Of the states with the lowest personal bankruptcy filings, Florida, Pennsylvania and Texas had a 100% wage exemption, North Carolina, South Carolina and South Dakota authorized exemptions up to 100% if needed to support the debtor's PAGENO="0144" 726 CONSUMER CREDIT PR0TECTr0N ACT family. New Jersey had a 90% exemption, and Alaska exempted $350 for married and $200 for single debtors. Maryland exempted only 75% in some counties and $100 in others, ~ut wage garnishments were little used there because of the necessity of a se~arate levy every payday. Of the states Nvith the highest personal bankruptcy filings: Alahan~a had a 75% exemption. Oregon exempted $175. Tennessee exe~npted $17 per week for the head of a family plus $2.50 per week for each dependent under 16, and $12 per week for debtors who were not heads of families. Maine allowed garnishment of not to exceed $30 per month but provided that at least $10 should be exempt. Georgia exempted $3 per clay plus 50% of the excess. Arizon~a had a 50% exemption. California exempted 50% but authorized more, up to 100%, if needed to sup- port the debtor's family and if the creditor~s claim was not for necessaries. Ohio exempted 80% of the first $300 per month and 60% of the balance (with a minimum of $150), and $100 for debtors' who were not beads of families. Oolorado exen~pted 70% for heads of families and 35% for others. Illinois had tl~e highest exemption in this group-85% or $45 per week, which- erer was more, with a maximum of $200 per week. But the Illinois experience is instructive further. Until a 1961 amendment to its law, its exemption was only $45 per week. BetwE~en 1961 and 1964 Mr. Brunn found that personal bankruptices in Illinois declined 9% while they were increasing 18% nationally. [And I find that they have declined another 4% in Illinois from 1964 and 1966 while they have in- creased another 2% nationally.1 Mr. Brunu also studied the experience of Iowa, which moved in the opposite direction in 195(1 by abolishing its 100% wage exemption and substituting $5 per we'ek plus $3 per dependent. Since 1957 personal bankruptcies have multiplied 3.6 timéslin Iowa while multiplying 2.8 times nationally. It may be saia that these figures aloue do not prove that wage garnishment is a contributing eause of bankruptcy. It may merely be `a series of remarkable coincidences. 0± it may be that the financial difficulties which led to' garnish- ment would bai~e led to bankruptcy had there been no garnishment. But we need not rely on the figures alone. Last week you heard the testimony of three `able and experienced Referees in Bankruptcy from states where wage garnishment is heavily employed (Oregon, Tennessee and Oalifornia). They were unanimously of the view that wage garnishments caused bankruptcy filings by many debtors who would not otherwise have filed. That view is supported also by studies of personal bankruptcies in which the bankrupts were interviewed, In one such study, involving 84 bankrupts in Michi- gan, `75% indicated that garnishment or the threat of garnishment was the reason for tbei~ filing in bankruptcy. Dolphin, An Analysis of Ecoraoinic and Personal Factors Leading to Consumer Bankruptcy (1965), p. 18. In another study in Illinois in which 73 bankruptS were interviewed, 35 said that threat of garnishment or fear of job loss was what caused them to go into bankruptcy. Stabler, The Ea~perience of Bankruptcy (1966), p. 7. Other similar studies which did not include personal interviews with the bankrupts reveal: Out of 300 cases in Seattle, 69 debtors bad suffered one garnishment in the four months preceding bankruptcy, 14 more had experienced two garnishments in that period, and 4 bad been garnished 3 or more times. Brosky, A study of Per- sonal Bankruptcy in the Seattle Metropolitan Area (1965), p. 39. Interviews with bankruptcy attorneys in Utah revealed their opinion that most personal bankrupts have either bad their wages garnished or have been threatened with garnishment. Misbach, Personal Bankruptcy in the United States and Utah (1964), p. 33. To this I would like to add my own opinion, based on discussions with many Referees in Bankruptcy and bankruptcy attorneys, and on the examination of the files in hundreds of bankruptcy cases, that wage garnishment, either actual or threatened, is a precipitating cause in a very substantial number of personal bankruptcy case~. I have previously estimated, based on my studies of the official bankruptcy statistics published by the Administrative Office of the United States Courts, that over a billion dollars in creditors claims per year is being discharged in ~ankruptcy cases and more than 90% of these cases are personal bankruptcies. Countryman, The Bankruptcy Booifl, 77 Ilarv. L~ Rev. 1452 (1964). A more recent PAGENO="0145" CONSUMER CREDIT PROTECTION ACT 727 analysis of the statistics has persuaded me that my prior estimate was far too low and that the amount of creditors claims discharged is now approaching two billion dollars per year. This figure may not reflect serious damage to the bankers, loan companle,s and finance companies whose losses probably do not exceed one-half of one percent of loans outstanding, nor to the installment seller operating on a 100% markup who break even whenever he loses only one-half of his claim. After all, they can shift half of their relatively small loss to the federal flsc when they make out their tax returns. But there are other small volume, low margin creditors for whom bankruptcy of a debtor is a painful blow. Moreover, `bankruptcy is a catastrophe for the debtor. As one observer has said, "Although uninformed people may minimize the gravity of the consumer bank- ruptcy problem by saying that only one-tenth of one per cent of the population goes bankrupt, there is a qualitative dimension in human distr~ss that is under- stated by such statistics." Myers, Non-Busi~'tess Bcvn~kruptok's, in Proceedings' of Tenth Annual Conference, Council on Consumer Information, page 9. I would agree, and would add that the studies referred to above, and others indicate that ~the typical bankrupt has three or four dependents, so that the human distress is felt not merely by the 176,000 personal bankrupts, but families whose members num'ber from 700,000 to 880,000. My conclusions about `the relationship of wage garnishments to bankruptcy lead me t'o my first suggested change in H.R. 11601. I would suggest that the finding in Section 201 of the bill `be not confined to the effect of wage garnishment on interstate commerce, but that it take account also of the effect of wage gar- nishment on the federal bankruptcy system. It `is ludicrous, unseemly and un- economic to have most of the states providing creditors with a remedy for col- lecti'on and the federal bankruptcy system providing debtors with a countervailing remedy to undo what state law's has allowed the creditor `to do. It is well within the power of Congress to d'o directly what it now authorizes `indirectly and to relieve the federal bankruptcy system of the burden of cases where bankruptcy petitions are filed only `to avoid garnishment. Second, I would suggest that the term "wages" in the Title of Title II and in Section 201 is probably too restrictive, and that the same is true of "wages or salary" in Section 202(a). The compensation of many of those you w'o'uld want to pro'tect from garnishment is derived, wholly or in part, from commissions and bonuses. I would suggest, instead, that the reference in the Title and in Section 201 be changed from "wages" to "personal earnings" and that in Section 202(a), the operative Section "earnings in the form of wages, salary, commission or bonus as compensation for personal s'ervice" be substituted for "wages or salary due an employee." I would delete the second reference to "employee" In Section 202(a) because of experience with the wage priority under section 64a (2) of the Bank- ruptcy Act where it three times became necessary to amend the original language, "wages due to workmen, clerks, or servants," once by adding "traveling or city salesmen," again by adding "on a salary or a commission basis, whole or part- time," and finally by adding "whether or not they are independent contractors with or without a drawing account." If this suggestion were followed in its entirety, section 202(a) might read: "No person may attach or garnish or by any similar legal or equitable process or order stop or divert the payment of earnings in the form of wages, salary, commission or bonus as compensation for personal `service." Third, I doubt the necessity of prohibiting garnishment o'f all earnings, re- gardless of size. I see no necessity for immunizing all the income of entertainers, corporate executives, etc. whose inco'mes approach or run into six figures. I realize the difficulty of fixing a limit. One recent proposal suggests a poverty- level limit of $3,600, which I regard as much too low. Karlen, Eceeniptf one from Eceecution, 22 Bus. Law. 1167, 1171 (1907). The present working d'raft of the Uniform Consumer Credit Code, a project of the National Conference of Com- missioners on Uniform State Laws which is not yet in final form, would put the limit at $100 per week for debtors with dependents and $05 per week for others [and would limit the protection to consumer credit claims.]. This seem's too low to me also, but I have attached to my statement a copy of the pertinent sections of the present draft of the Code so that the Committee can examine them. The studies of personal bankruptcies to which I have previously referred Indi- cate that the typical bankrupt has an income of about $5,000 per year. I would take that figure as an indication that the protection against garnishment should extend considerably higher. 83-340-67-pt. 2-10 PAGENO="0146" 728 CONSUMER CREDIT PROTECTION ACT Figures compiled by John A. Gorinan, Associate Chief, National Income Divi- sion, Office of Business Economics, U.S. Department of Commerce, and reported In the Wall Street Journal, May 31, 1967, p. 1, eel. 6, show the following average family incomes. Year Amount, actual Amount, revised 1949 1952 1955 1958 1961 1964 1965 1966 $3,860 4,570 5,000 5,670 6,220 7,325 7,780 8,300 ($3,945) (4,747) (5,275 (~,839 (6,360) (I have been in touch with Mr. German and he advises me that because of a revision ii~ national income accounts the figures for earlier yearsi should be revised as I have indicated in parentheses.) I should suppose that protection against garnishment should also extend well beyond the income of the average family. It therefore seems to me that a figure in the neighborhood of about $15,000, translated into $285 per week, would be appropriate. Mr. Gorman's figures illustrate another problem, however. That is a problem of obsolescence, since laws like these tend not to get periodic revision-the Con- necticut exemption law still saves to a debtor ten bushels of Indian corn. Obso- leteness accounts for the inadequacy of many of the state wage exemption laws which emplo~r dollar amounts. ]3ut the percentage exemption laws produce ex- cessive exemptions for large income debtors and inadequate ones for small in- come debtors, regardless of the percentage used. The present working draft of the Uniform Consumer Credit Code would solve this problem by using dollar amounts and authorizing an administrator to change them whenever there is a change of 10% or more in the U.S. Bureau of Labor Statistics Consi~mer Price Index for Urban Wage earners and Clerical Work- ers. Under H.R. 11601 the same function might well be assigned to the Federal Reserve Board. An alternative method of handling this problem would be to tie the exemption to a legislatively-fixed figure which does seem to receive periodic revision-the amount of earnings subject to tax under Section 209 of the Social Security Ac~t. Currently, that figure is $6,000, although H.R. 5710, as reported out by the House Committee on Ways and Means, would raise the figure to $7,600. An exemption in KR. 11601 for twice the amount of earnings taxed under the Social Security Act would come very close to the $15,000 exemption I have suggested. Fourth, and finally, if you go no further than to protect wages from garnish- ment, you may not accomplish much. In many states the creditor will be able to reach tile debtor's income by taking an advance assignment of future wages at the time of extending credit. And since employers find wage assign- ment~ as annoying as garnishments, there will be the same jeopardy to the debtor's job. Again the debtor will be driven into bankruptcy-this time to get the debt discharged so as to free his post-bankruptcy earnings from the lien of the wage assignment. Mr. Justice Fortas, while still a law student, made an exhaustive study of the use of wage assignments in Chicago. Fortas, Wage A&~ siguments in Chicago-S~tate Street Furniture Co. v. Armour ~ Co., 42 Yale L. J. 526(1933). Phat was followed in 1935 by a statute limiting assignable wages to 25% and limiting the effectiveness of the assignment to three years. Later reports indicate~t that the situation was not much improved [see Satter, Wage As- signments and Ga'rnishment Cited as Major Case of Bankruptcy in Illinois, 15 Per. Fin. L. Q. Rep. 50 (1961)], and in 1961, when Illinois liberalized its exemption from garnishment, it also amended the Wage Assignment Law to limit assign- able wages to 15%. As previously indicated, the rate of personal bankruptcies in Illinois has consistently declined since 1961. A few states have by statute pro- hibited such wage assignments and others, like Illinois, limit the amount of wages assignable and the period of time the assignment may cover [See Anno- tations, 137 A.L.R. 738(1942); 37 A.L.R. 872(1925)], but in many states they PAGENO="0147" CONSUMER CREDIT PROTECTION ACT 729 are valid and enforceable in the courts. Hence, to complete the job, I would nuggesit a new subsection (b) of Section 202 reading: "No person shall take any assignment of the future earnings of another in the form of wages, salary, commission or bonus as compensation for personal service, and all such assignments shall be void and unenforceable." If the Committee were to adopt my suggestion of a limit on earnings protected from garnishment, and considered a similar limit appropriate for wage assign- ments, the new subsection (b) might read: "No person shall take any assignment of the future earnings of another in the form of wages, salary, commission or bonus as compensation for personal service save for the amount in excess; of $285 per week, and no such assignment shall be valid and enforceable save for such excess." If either of these proposals were adopted, present subsection (b) of Section 202 should be redesignated subsection (c) and amended to cover violations of either subsection (a) or subsection (b). In conclusion let me anticipate that there will doubtless be testimony that the abolition or restriction of wage garnishments and assignments will bring ruin to the institution of consumer credit. Any witness taking this position should be invited to explain data presented to a California legislative committee by the Associated Credit Bureaus of California, and summarized by Mr. Brunn at pages 1239-1243 of volume 53 of the California Law Review, which indicates that in stailment credit thrives as well in Alabama where 75% of wages are exempt from execution, in California where as a practical matter only 50% is exempt, and in Colorado which exempts 70% for heads of families and 35% for single persons, as it does in Texas and New Jersey with 100% exemptions, or in New York with a 90% exemption, or in North Carolina which exempts up to 100% where needed for support of the debtor's family. NATIONAL CONFERENCE or COMMISSIONERS ON UNIFORM STATE LAWS UNIFORM CONSUMER CREDIT CODE (Working Draft No. 4) Section 1.106. [Escalation.] [Certain dollar amounts in this Act which are designated as subject to escala- tion pursuant to this section shall be changed from time to time by action of the Administrator in accordance with changes in the United States Bureau of Labor Statistics Consumer Price Index for Urban Wage Earners and Clerical Workers. On or before April 30 of each even-numbered year the Administrator shall com- pare the index at the end of the preceding calendar year and at [December 31, 1967] and shall calculate the percentage by which the Index has changed. If the change is 10 per cent or more, he shall promulgate a rule changing the dollar amounts in this Act which are designated as subject to escalation pursuant to this section, unless any change required by this section has already been made by the Administrator in a prior rule pursuant to this section. These dollar amounts shall be changed to the extent of the change in the Index, except that they shall be changed only in integral multiples of 10 per cent of the dollar amounts appear- ing in this Act at the time of its enactment. If the percentage change in the Index is more than an integral multiple of 10 per cent, the fractional portion of the change shall be disregarded. The changes made by the Administrator shall become effective on the July 1 immediately following promulgation of the rule.] Section 5.105. [Limitation on Garnishment of Unpaid Earnings.] (1) A creditor may not receive in payment of a judgment arising out of a consumer credit sale, a consumer lease or a consumer loan unpaid earnings of the debtor through garnishment or like proceedings directed to a person other than the debtor, except to the extent that the amount received by the creditor repre- sents earnings of the debtor earned from all sources in excess of $100* in any calendar week in the case of a debtor with dependents, and $65* in any calendar week in the case of a debtor without dependents. For the purpose of determining a debtor's weekly earnings, any amounts paid or payable to another creditor because of a previous garnishment or like proceedings directed to a person other than the debtor, or irrevocable assignment of earnings, is not included in the amount earned. (2) This section does not subject either the levying officer or the person to whom garnishment proceedings are directed to any liability if earnings are paid to the creditor in violation of this section. PAGENO="0148" 730 CONSUMER CREDIT PROTECTION ACT (3) Figures itt this section marked with an asterisk are subject to escalatiQn pursuant to Section 1.106. Mrs. SULLIVAN. I want to thank every one of you witnesses for giv- ing us your time and your knowledge this morning. The bells have rung once and are going to ring again and at that point we will have to go to the floor. I just can't tell you how much I appreciate the patience and cooperation of everyone of these outstanding witnesses. I think all of you have shed light on this legislation. Unfortunately, we have no time for extended questioning. I promised Mr. Fino, who gave up his time before, that I would call on, him. What I am going to ask all of you is, if we have some specific questions to put to you-and I think our committee counsel will certainly want to submit some questions to Mr. Country- man for our further information on the points that you brought out, professor-if we can give these to you quickly, could you get them back to us when you go over your part of the transcript? We would appre- ciate it very much. With that I am going to call on Mr. Fino because I promised him an opportunity to question and then we will adjourn. Mr. FIN0. I just wanted to ask Mr. Keyserhng one question. Do you think that the credit unions in this country are doing a good job in supplying loans to members for consumer items? Mr. KEYSEItLING. I think they are helping. I don't think they are completely meeting the unmet need by any means. I thinj~ they are a helpful instrumentality. Mr. FIN0. You know for a fact that the credit unions do charge 12 percent per annum interest rates; is that right? Mr. KEYSERLING. I am not aware of the details of what they charge. Mr. FINO. You have, if I understood your testimony, expressed some fears about an 18-percent national usury limit. What i~ouid you suggest? Mr. KEYSERLING. Well, let me explain myself a little bit on that. I don't want to sound extremist, but our whole national conscience on the `subject of interest rates has gone absolutely wild, and this `is one aspect of it~ Our great corporations get money for their investment purposes without paying anything for the cost of the money, because they finance it out of retained earnings and `out of the consumer through the price structure. Furthermore, they are supplied with extravagant tax bonanzas like depletion and depreciation allowances, which are neither needed nor merited. So, in effect they are paying a zero or a minus rate of interest. I read in the papers recently that one of our biggest business cor- porations-I read this-~one of `the big corporations, `I cannot recall the name, recently `obtained money at the rate of 6 or 7' percent, which is the `highest they ever paid on record. I could carry this all up and down the line. The point is, it is personally repugnant to me, if no more, that we should regard 18 percent as a proper ceiling for the interest' rate-and I won't quibble about the differences between the interest rate and service charges; I have already expressed myself on that- for the poorest and most lowly and most unable to protect themselves, who are under the greatest compulsion to borrow because they other- PAGENO="0149" CONSUMER CREDIT PROTECTION ACT 731 wise simply cannot make ends meet, even for necessities. Almost half of the people in `our country dissave on net balance-they spend more every year than they earn. So I find it deplorable that we feel bound to set an 18 percent interest rate cei'lin~ for these people, which is three times the rate at which (as I have cited) a powerful corporation can borrow money `on bonds while many of our greatest corporations finance themselves and do not have interest costs o'f large significance. I think the ceiling should be very much lower. I don't put much stock in the idea that they should pay a higher interest rate because they are a greater risk. They may be a greater risk for profound rea- sons which should require that they get moneys at lower rates of interest, not higher. Indeed, I don't know that they are a greater risk because in general the records don't show tha't poor people don't meet their obligations as well as those higher up. It may be the reverse. I can't suggest a part~icu1ar figure, because it goes to the question of other interest rates. There was a time in my recollection when some of `the most conservative Members of the House and Senate joined with me in the idea of setting maximum interest rates on housing loans that were 50- to 75-percent lower than the effective rates now. The whole trend at that time was toward bringing interest rates down- ward. This was not only socially desirable; it was good fo'r the coun- try, for reasons that I can't elaborate here, due to the shortage of time. The whole trend since 1952 has been moving in the opposite direc- tion. If I had to pick a figure out of a hat, I would risk it and say that 15 percent or 12 percent would be better t'han 18. Now, you will get a lot of objection to this on various grounds, and I couldn't support a precise figure at this moment. But 18 percent seems to me very much too high. Mr. FIN0. Are you telling this committee that at least 12 percent is the necessary figure? Mr. KEYSERLING. No, sir. I am not saying that. I am saying that 12 percent or 15 percent would be better than 18. I am not going to take the position that even 12 percelTt is a conscionable interest rate for the kind of people borrowing money for these kinds of purpo'ses. They ought to be able to borrow for much less, even if this requires new public programs. Mr. FIN0. Thank you. Mrs. SULLIVAN. If any of the witnesses this morning have any other comments that yoi~ would like to add to cover `the points rai'sed today, please attach them to your transcript w'hen it comes to you. We would be most happy to have them as part of the record. With that the subcommittee is recessed until tomorrow at 10 when we meet with Secretary Wirtz, Mr. Farris Bryant of the Office of Emergency Planning, and Mr. I. W. Abel, president of the United Steelworkers of America. (Whereupon, at 12:30 p.m., the si~bcommittee recessed, to reconvene at 10 a.m., Thursday, August 17, 1967.) PAGENO="0150" PAGENO="0151" CONSUMER CREDIT PROTECTION ACT THURSDAY, AUGUST 17, 1967 HoUSE OF REFRE5ENTATIVE~, SUBCOMMITTEE ON CONSUMER AFFAIRS, OF THE COMMITTEE ON BANKING AND CURRENCY, Wa~Mngton, D.C. The subcommittee met, pursuant to recess, at 10 a.m. in room 2128, Rayburn House Office Building, Hon. Leonor K. Sullivan (chair- man of the subcommittee) presiding. Members of the subcommittees present: Representatives Sullivan, Stephens, Annunzio, Bingham, Dwyer, Fino, Halpern, and Wylie. Also present: Representative Widnall. Mrs. SULLTVAN. The Subcommittee on Consumer Affairs will please come to order. We are approaching the end of 2 long weeks of hearings on H.R. 11601 and H.R. 11602, two very different bills dealing with consumer credit, and we can look back now from this vantage point to see a tremendous amount of progress in delineating the issues involved in the Senate-passed truth in lending bill compared to the Consumer Credit Protection Act. Again, I want to pay tribute to the faithful attendance of so many members of the subcommittee and the hard work and thought they have devoted during these past 2 weeks to this most important legislation. Today, we will hear from the last two administration witnesses scheduled to testify on this legislation. We have already heard testi- mony from an imposing. array of top administration leadership-the Secretaries of Commerce and of Housing and Urban Development, the Under Secretary of the Treasury, the Director of the Office of Eco. nomic Opportunity, the Administrator of Small Business Administra- tion, the Special Assistant to the President for Consumer Affairs, the Chairman of the Federal Trade Commision, the Vice Chairman of the Federal Reserve Board of Governors, and the Commissioner of the Federal Housing Administration. Today, we are privileged to have as our first witness the Honorable IV. Willard Wirtz, Secretary of Labor, whose eloquence and wit and good hard sense make him one of the best witnesses any congressional committee could ever ask for. He is the only man I know in public life who could possibly have written some of the late Adlai Stevenson's speeches, for he has the same skill with words and concepts which made Mr. Stevenson's prose so delightful to hear. Following Mr. Wirtz, we will hear from Mr. I. W. Abel, president of the United Steelworkers of America, one of the outstanding leaders of the American labor movement and one who has worked diligently 733 PAGENO="0152" 734 CONSUMER CREDIT PROTECTION A~T for the improvement of the conditions of living of all Americans. Then, later in the morning, Gov. Farris Bryant, of the Office of Emergency Planning, will testify on the section of ET.R. 11601 dealing directly with the question of wartime or national emergency standby credit controls-section 208. The House ~s going to meet at 11 o'clock this morning. We have been assured, informally at least, that we could get permission to sit while the House was debating the social security bill. But all of us are very anxious to know the details about that bill, which is so important to our constituents. So, what we are going to try to do this morning is to hear all of our witnesses before 12 o'clock, if possible. We will di- vide most of the time up between Secretary Wirtz and Mr. Abel, with Governor Bryant coming in about 11 ;15 or 11:30. We have made ar- rangements fOr other witnesses who are coming in to present their state- ments for the record. I think it might be best, Mr. Secretary, if you would try to summarize your statement and then we will cut down the time for questioning by the members to about 3 minutes apiece instead of the usual 5 minutes so that we can make sure everyone has an opportunity to question. We are particularly interested in your views and those of your De- partment on title II of H.R. 11601 dealing with the odious and cruel use of wage garnishment by unscrupulous credit or loan companies as a selling tool in extending credit without any attempt at a:ssessing the applicant's ability to repay the debt except through the garnish- ment of his wages. Of course, we welcome your views on any and all provisions of the legislation. Again, I want to say how pleased we are that you have accepted our invitation to appear. If you will proceed, Mr. Secretary, we will be very happy to have you start out this morning. STATEMEN~ OF HON. W. WILlARD WIRTZ, SECRETARY OP LABOR; ACCO1\~PANIED BY ESTHER PETERSON, ASSISTANT SECRETARY FOR LABQR STANDARDS Secretary WIRTZ. I understand the statement I filed will be made part of the record if that is agreeable, and I can summarize very quickly. Mrs. SULLIVAN. The entire statement will be put in the record. Secretary WIRTZ. In going over the record of these hearings I have come to two conclusions, (1) that they are very closely related to the proposals at hand, and (2) that they have been eminently construc- tive as far as the illumination of this subject, indeed so that there is very little h~ft for me to say. I dOn't want to burden this record. I don't want to be misunder- stood. I incorporate by reference all that has been said by the other witnesses in support of this legislation and really, only add two other things. First, to point out that my particular reason for being here is that under the Department of Labor's organic law the Secretary of Labor is identified as having responsibility with respect to the interest of wage earners, and I know of no interest of a wage earner which is larger than the interest in the protection of his credit. Because, when you think about it, there is as much importance to him in what his money buys as there is in the money that he gets be- cause he spends most of it and I have pointed out in this statement PAGENO="0153" CONSUMER CREDIT PROTECTION ACT 735 that some abuse of credit can have exactly the same effect on a wage earner as a reduction in his wages or a layoff. It is just the other side of earning it. I pointed out, too, that we try, in our imperfect way, in this society to balance up the odds on the two sides of most `bargains that are made in our capacity as producers. As a producer, the wage earnQr is typically organized. As a con- sumer he is not organized. He bargains collectively on his wages but he buys alone. He buys without the advantage of advice of counsel which the other side has and he does it without knowledge of the fine print. I think that this legislation is an important vehicle to try tç even up the odds as much as we can. I would have preferred, as you know, to be testifying in support of even broader provisions than some of those included here. I respect greatly your statement on the floor that your purpose is to introduce some matters that go beyond the iinniediate prospects of passage. I should be happy to be testifying in support of all of them. But because of the dictates of practicality, our interests center on the truth-in-lending provisions at this point so it is with respect to those provisions that my testimony is developed. I have in the statement made reference to some of the other things which were in the original form of S. 5-some of the things which are in H.R. 11601. But I have noted too, that it does not seem to be a a compromise of principle to give reasonable recognition-and by reasonable I mean no more than is practically necessary-to the part which time plays whenever there is a change to be made. I urge as strongly as I can the enactment of the truth-in-lending provisions, but. I also urge that we keep on the agenda the other points that are raised in H.R. 11601. I would like to say something about garnishment because it has played so large a part in your hearings these last several days, that not to say something about it would be to be misconstrued. I expect I have a personal bias about garnishment. I grew up in a small town where my family ran one of the two furniture stores in that town. That furniture store was run by a man who simply refused to bring the authority of the law to bear on his customers. Now, I expect that there was a little of the small town morality in that, and I expect it was not untinged by the realization that in a town that size you do business with people more than once and you just don't hit them the minute they leave the store. He would never garnish a customer's wage. There was another store in town which advertised easy credit. I don't remember the name of the competitor, but I remember what we called him around the supper table-it was "easy"-that was the term that was used. He was out of business in about 4 or 5 years, but he had quite an influence on the furniture business in that town and, frankly, I will be very happy to be here when "easy" and all his suc- cessors are caught up with because I don't like that way of doing business. As Secretary of Labor, I know there are a great many people in this country who are denied employment because their wages have been garnished. It is just that simple, just that direct. And whenever there is anything which has the effect of denying employment to those who need it most I don't like it, and I think it is something we must at- tend to. PAGENO="0154" 736 CONSUMER CREDIT PROTECTION ACT It was, therefore, with very great satisfaction that I saw the Presi- dent's statement, as you did, in his March 14 poverty message in which he set out very clearly the necessity of doing something about garnish- ment and asked that a study be made by the Attorney General, the Secretary of Labor, and the Director of the Office of Economic Op- portunity. The study is being made and it isn't completed. I think probably it should be completed before there is definitive action in this par- ticular area. Strongly as I feel about the necessity of correcting this situation, I feel equally strongly we have to do the right thing about it, and by the right thir~g I mean whatever will be most effective. We know enough of the law on this subject to know that garnishment developed after we had prohibited imprisonment for debt. We left an opening and we don't want to do that again. This is not a simple subject. There are some hard questions. As an illustration, there is the question of whether there should be exemptions to any prohibition, of garnish- ment in the case of family debts-obligations such as alimony, child care, and so forth. That is not an easy one. The experience of the States, of course, has been very extensive on this subject. 1~t presents the question of whether there should be a pro- hibition or whether there should be a protection of a minimum wage. The experience in the States also presents the question of whether another effective remedy would be to prohibit discharge of an employee for having his wage garnished. I originally thought the later was perhaps the answer. But now I don't think it is. I think that that puts the employer into an impos- sible position. So, I doubt that that's the answer. I think there is a serious question of what we do about wage assignments if we are go- ing to prohibit garnishment, and I have listed some of those matters in my statement. I only say this, Madam Chairman and members of the committee, I think it is constructive counsel to suggest that there is still some more information to be obtained and some debate to take place with respect to how we may most effectively deal with the gar- nishment problem. I suggest that, not as a counsel of delay, but as a counsel of doing the thing right. I come to the conclusion that there is more consideration which should be given to this matter than we can give now. In concluding this summary, Madam Chairman and members of the committee, I think the country is in your debt for these last 2 weeks of illumination of this subject. When I look back over the record of these hearings I realize that it is just almost incredible that we have waited this long to be this frank about something so important as this whole credit business. I wish I could add more to it, and I stop only out of respect for what has already been developed and invite, with Mrs. Peterson, who is experienced in this area, I hardly need mention, whatever questions you have. (The Secretary's full statement follows:) SPATEMENP OF W. WiLLARD WIRTZ, SRORETARY OF LABOR Madam Chairman and members of the subcommittee, there is legitimate ques- tion at this point whether much more can be said, without burdening the record unduly, about HR. 11601. PAGENO="0155" CONSUMER CREDIT PROTECTION ACT 737 The appearance here during the past two weeks of representatives of eight Government agenciesi and the Special Assistant to the President for Consumer Affairs attests the broad significance of this legislation and the full recognition of its importance. So I shall be brief even to the potut of risking misunderstanding. The organic law of the Department identifies in the Secretary of Labor, how- ever, a particular responsibility for "the interests of the wage earner," and few such interests are larger than that in protecting against abuse of his-or-her use of credit. For what is earned is useful principally for what it buys, and the effect of an unfair credit charge on a wage earner is indistinguishable from the effect of a wage reduction or a temporary layoff. Wage earners are organized, to a considerable extent, in their capacity as producers; but not in their capacity as consumers. They bargainS with em-S ployers collectively; but they buy alone, and at the disadvantage of unfamiliarity with the hazards of fine print. When they make purchase contracts, only the other party has the advantage of advice of counsel. They are entitled, at the very least, to have plainly stated truth as an ally when they go into the market- place to buy the fruit of their own labor. I make only the point that we try, in a variety of ways, to even up the odds between those who do business with each other and to prevent, so far as is practicable, undue advantage to either side in bargains that have to be made. The legislation under consideration contributes to this purpose in an area where It has been too little served. Disclosure of the rates charged for consumer credit is an essential and im- portant step toward more rational and fair consumer credit practices. Oertainly, it is basic in deciding whether to borrow to buy. Without intelligible information on the cost of consumer credit, good management of family income is virtually impossible. The buyer has every right to be told the price in words and figures he can understand-in terms which enable him to compare the rates offered by one seller or lender with those of another. And he should have th.e facts to permit him to decide whether be might not better wait and pay cash. Both H.R. 11601 and HR. 11602 contain workable disclosure provisions re- quiring the disclosure, in advance, of the terms of a consumer loan. They also require an itemized account of the cost of credit including all relevant charges, In dollars and cents, and the finance charges expressed as an annual percentage rate. This means that the thoughtful buyer can gauge whether he will be able to meet the payments in dollars, and then-armed with an annual percentage rate-can make comparisons of charges between lenders or sellers. Without that calculated annual rate he is lost in a maze of confusing calculations. I would prefer, frankly, to testify in support of the original provisions of S. 5, covering -"open end" or "revolving credit," -transactions where finance charges are less than $10, -first mortgages on homes. Revolving credit-while still small in volume compared to automobile loans, for example-is the most rapidly growing type of consumer credit. Department stores, mail order houses, furniture stores, jewelry stores, all advertise credit arrangements, many of them "revolving" or open-end. One has only to look at the advertisements in the Sunday paper to see how universal this has become. Accounts are invited, and indeed are urged on everyone strongly! Without a statement of the annual rate on such accounts, consumers will fre- quently not know what they are really paying for the credit they use. The exemption of credit transactions involving a $10 annual credit charge or less, leaves out a great many credit purchases, especially those of the poor. As a general rule, the rate of interest on most first mortgages is clearly stated and the various charges are itemized. But with the recent scarcity of first mort- gage money and the prevailing practice of charging "points" for financing, some home buyers may not realize that they are in fact paying a higher rate on the total charge. Home buyers should be entitled to credit charge information, as are other borrowers. There is a great deal to be said, too, for required disclosure of credit terms in advertising. If credit is offered this way, the offer is the place to apply the rule of whole truth-where less than that may mislead. PAGENO="0156" 738 CONSUMER CREDIT PROTECTION ACT I note, too, the great service the Subcommittee has performed by bringing forward for public debate the other proposals contained in H.R. 11601, including An 18% limitation on credit charges; A prohibition against "confession of judgment" clauses; Authority to regulate credit for commodity futures contracts; Authority to restrict consumer credit during national emergeticies; Establishment of a National Commission on Consumer Finance; and A prohibition against garnishment of wages. It ~s no compromise of principle, howbver, to give reasonable recognition (which means no more than is practically necessary) to the part which time insists on playing wherever there is change to be made. I accordingly kirge the enactment now of the truth-in-lending provisions of -H.R, 11601, with consideration of further safeguards given its separate timing. A decent regard for a companion principle of truth-in-testifying prompts my saying a little more, however, about one of these further safeguards which has become the subject of particular attention in these bearings. Perhaps my personal attitude about garnishment is influenced by having grown up in a family which was in the retail furniture business, but which was dead set against the idea of calling the law in to go after a customer's earnings. It seemed to the man who ran that store some way unfair to throw that much weight against apybody be did business with. Perhaps It was a small town moral- ity-possibly even tinged with the realization that in that kind of community you count on doing business with the same person more than once. But I think it Involved a more basic ethic, and a sense of the wrongness of ever letting~ institu- tions-and "the ~ystem"-get too large an advantage over individuals. Perhaps, as S~cretary of Labor, there is bias in th~ view that anything which results in the unemployment of people who are most in need of employment Is wrong unless it is proven right on some more fundamental basis. When we sur- veyed the unemployment situation in ten slum areas last November, an astonish- ing number of people who Were out of work listed their garnishment records as one of the reasons they couldn't get a job. Whatever the explanation, I found basis for great satisfaction in President Johnson's saying, in his March 14 Poverty Message to the Congress: Hundreds of workers among the poor lose their jobs or most of their wages each year as a result of garnishment proceedings. In many cases, wages ai~e garnisbed by unscrupulous merchants and lenders whose practices trap the unwitting workers. I am directing the Attorney General, In consultation with the Secretary of Labor a~id the Director of the Office of Economic Opportunity, to make a comprehensive study of the problems of wage garnishment and to recom~ mend the steps that should be taken to protect the hard~earned wages and the jobs of those who i~eed the income most. This study is well along. It is not completed. It has to be, for whatever cor- rective action is taken in this area should be the right action; and some of the questions about dealing with garnishment are not easily answered: Whether outright and unqualified abolition of garnishment is the right course; or Whethei~ tax debts and family relation obligations should be exceptions; Whether only a minimum wage should be protected; Whether the correction should be (although I think not) a prohibition not of garnishment but of discharge for having your wages garnished; What, i~ anything, to do about wage assignments; and Whether the commerce or the bankruptcy power can be more wisely used here. Nor is it possible yet to be confident regarding what treatment of garnishment will prevent the development of some alternative procedure-just as garnishment developed as an alternative to imprisonment for debt. The President has indicated his purpose to pursue "the steps that should be taken" to remedy the garnishment situation. The remaining question is bow to do this. As strong as my own feeling `about this practice is, I think it is constructive counsel that the garnishment issue be handled separately-after the truth-in- lending issue i~ disposed of, and after the garnishment study is completed-so that we can be certain that the corrective action is right and effective. As Presidei~t Johnson stated in his Consumer Message, "The American con- sumer today enjoys the highest standard of living ever experienced in the world. PAGENO="0157" CONSUMER CREDIT PROTECTION ACT 739 And it has risen rapidly in recent years." But the President went on to point out that- the march of technology that has brought unparalleled abundance and opport~ity to the consumer has also exposed him to new complexities and hazards. It has made his choices more difficult. It has made many of our laws obsolete and has created the need for new legal remedies and safeguards. This admonition is particularly pertinent to the need for consumer credit and wage garnishment legislation. This concludes my statement. Assistant Secretary Peterson and I welcome the opportunity to repsond to any questions you may have. Mrs. SULLIVAN. Thank you very much, Mr. Secretary. I am delighted that you have brought Mrs. Peterson along. We are all very well acquainted with all of her talents and I am certain that either you or she can answer all of our questions. I have just three short questions that I would like to ask and then as I said before, we will divide the time so that each member can have 3 minutes apiece to question the Secretary. Mr. Secretary, we have had some very, very fine witnesses in these past 2 weeks on this garnishment problem. Last Friday we had five gentlemen from the Federal court bank- ruptcy system, including four who are referees in bankruptcies. Their testimony was extremely enlightening and yesterday we had a Harvard professor of law who discussed some of the details that should be con- sidered in writing this legislation. It was very helpful and they con~ sulted with our counsel before they left. Garnishment is a big problem, and I agree it is a problem that needs a lot of consideration, but it is a definite part of the overall picture of consumer credit because the misuse of credit so often results in garnish- ment and then, in turn, in personal bankruptcies. Mr. Secretary, are you aware of a 1965 study done by the National Industrial Conference Board which showed that of the employees surveyed 43 percent had a policy of firing their employees in instances of repeated garnishment? Given the fact, as one witness estimated for us the other day, that there are upwards of 4 million wage garnishments per year and in view of the clear policies of so many employers to fire workers who have been garnisheed, this would appear to have a serious impact on our economic stability, do you not agree? Secretary WIJITZ. Yes, I would. There are a number of such studies which we have been looking into and surveying. The NICB survey suggests figures that are in line with others. We are trying to arrive at a figure of the number of people who lose their jobs in this country as a result of garnishment. I can't tell you yet what that figure is, but I can give you the range. We think it is some place between 100,000 and 300,000. That is the magnitude of this problem. It was reflected, too, in No- vember 1966 when we went into the slum areas in 10 different cities to find out what unemployment looked like-not statistically but on a much more intensive basis. I think it was really the results of that study that brought this subject into such sharp attention. We found in those areas one of the significant factors is garnishment. More people explained their unemployment on the basis of garnish- ment than their police records, which brought us up short. Mrs. SULLIVAN. It is my understanding that in most States where an employer fires a worker because of garnishment the worker is PAGENO="0158" 740 CONSUMER CREDIT PROTECTION ACT ineligible to receive unemployment benefits since such firing is con- sidered to be a discharge for cause, is that correct? Secretary WIItTZ. We are checking that. I don't have the complete report on the States. I cannot give you an up-to-date count but it is true that in a number of States that is the consequence. Mrs. SULLIVAN. Can you tell us why the Department of Labor, in supervising unemployment insurance, accepts the policy that the discharge of a worker for wage garnishment is a discharge for cause, making him ineligible for unemployment insurance benefits? Could the Department change `this policy without statutory amendments? Secretary WTRTZ. The Congress has in its wisdom taken the position we should not go any further with State standards than we have so far gone. The particular point to which you refer has not been raised, but the effort last year to extend the standard concept, the Federal standard concept, was rejected and so the answer would have to be that we do not, in line with the last part of your question, now have authority to prescribe the standard. Mrs. SULLIVAN. Mrs. Dwyer? Mrs. Dwvun. Thank you, Madam Chairman. I, `too, woul4 like to say that it is wonderful to have Mrs. Peterson back on the Hill. It is always a joy to work with you here. Mr. Secretary, is it my understanding that you prefer the garnish- ment provisions in this bill excluded? Secretary WIRTZ. To answer that question one way or `the other would be a little deceptive. I think quite sincerely we must find out more about what ought to be done with respect to it. I would-if the question is simply whether we go for straight abolition as provided in title II of H.R. 11601, I would have to say that I think that this is very possibly not the right answer, at least not in that form. We have to find what the right answer is with respect to these various points that I have mentioned. I don't mean to evade your question. But I want our answer to be constructive. As the President has said in his poverty message, we must take steps to meet this problem. If your question is whether I think we should take that step at this time, immediately at this time, I would think not. Mrs. Dwvi~n. Thank you very much. That would be all. Mrs. SULLIVAN. Mr. Stephens? Mr. STEPH1~NS. Thank you, Mr. Secretary, for coming before us. As I gather from your statement on page 3, that you would prefer this bill as it came out of the Senate? Secretary WIRTZ. I would argue for it as it went into the Senate. I don't thii~k it was strengthened there. I recognize, of course, the practical considerations involved. Mr. STEPHENS. What you mean, then, by the original provisions of S. 5, is not what came to us but what was originally introduced? Secretary WIRTZ. I want to make clear that I do support many pro- visions of 5. 5 as ~t came out of the Senate, but I made no bones, and Mrs. Peterson has made none, that there are `some other things we think `should be done that were in S. 5 as it was first reported. Mr. S'n~PnpNs. In respect to garnishment, we are all interested in it. But I think I would agree with you that we need to look into it more before we make a complete prohibition of it. Because as these areas PAGENO="0159" CONSUMER CREDIT PROTECTION ACT 741 have developed I have learned a lot more about it than I thought I knew. I have been in the practice of law and have used it upon occasion when I was practicing law. However, we have a provision in our State of Georgia about the amount that could be taken under garnishment proceedings from a wage earner. But there are some things that have been pointed out and you have pointed out some of them-the fact that it goes just beyond the fact that you are going to garnishee a man's wages. You might also prevent some wife from collecting alimony payments that are due to her. Secretary WIETz. Or child care. Mr. STEPHENS. And also a very important item: The Federal Gov- ernment uses the garnishment procedure very much. In a complete review of garnishment it is true that the position of the Federal Gov- ernment also may cause people to be discharged because of garnish- ment. I have a tendency to feel that this committee, not composed of law- yers and people recognized in that field, might better wait and let the Judiciary Committee go into extensive hearings. They have more ex- perts than we have on our committee in the field of judicial processes. I would like to ask you to develop with me further if you would the differences between the original provision of S. 5 that we now have be- fore us that would be preferable to what we have. Secretary WIRTZ. My statement at the top of page 3 lists the three principal differences. As S. 5 started out it did cover the open end or revolving credit. It did cover first mortgages on homes and it cov- ered transactions where the finance charges went down below the $10. The three changes made in the Senate were with respect to those points. Those are the ones that I have particularly in mind. I would add another one, that wasn't in the original S. 5, on which there has been considerable discussion. I think there is a considerable case to be made for extending these truth-in-lending requirements to advertising of credit. That was not in the original S. 5, so I mentioned that in a separate category. It is in 11601 as are the other matters listed on page 4. In specific answer to your question, it is the three points that were in the original 5.5 and were dropped out. Mr. S~rE1'HENs. Thank you very much. Mrs. SULLIVAN. Mr. Fino? Mr. FIN0. Thank you, Madam Chairman. Mr. Secretary, in view of the fact that you did not read your state- ment, I don't know whether you did cover in your statement two other points that have been the subject of some testimony and controversy before this subcommittee. One of them is the garnishment which you have elaborated on. The other one is the standby controls on consumer credit. Some of the Government witnesses have testified. Do you have the same position? Secretary WIRTZ. I know there has been that discussion. I am afraid I can't answer on that. I have no sensitivity to testifying, I just don't know enough about it to know what standby controls might be neces- sary here. PAGENO="0160" 742 CONSUMER CREDIT' PROTECTION ACT Mr. FINO. The other point is on the question of the 18 percent na- tional usury limits. There again, Government witnesses have indicated that they are not so' sensitive on that phase of the bill. Secretary WIRTZ. My position would be the same on that as on some other points-it is a pragmatic position. We need more information. Mr. FINO. Mr. Secretary, you have expressed in connection with the garnishment ban a great concern about the evils of garnishment and yet the Federa~I Government, with the exception of Internal Revenue, does not permit garnishment. Yet, although it does not permit garnishment of Federal employees' salaries it does fire employees if they have an accumulation of bills and get letters from creditors that the employee owes money. Secretary WIRTZ. The Federal Government does? Mr. FIN0. We have seen that in the postal service. Some of these postal employees have come to me complaining their services had been terminated because they had an accumulation of bills. I was wondering about that. Secretary WIRTZ. I would be opposed to it. I don't know on whose toes I am stepping but it is my greatly, deeply held conviction. It would not be my own sense of good management and it would not be the rule of the Department of Labor. Mr. FINO. Getting back to garnishment, if we were to prohibit gar- nishment per se don't you think that would have a tremendous effect on our credit system in this country, in that retailers will not extend credit to anyone unless he pays for cash? Secretary WmTz. I read the testimony of the witnesses last Friday before the committee and this is another area in which we are looking in connection with the study. Many have been assuming if we abolish garnishment, it would mean some reduction in the use of credit. This seems to me to follow almost automatically. Yet, I am frank to say that it is very hard to identify that effect when you look at the situation in Texas and Pennsylvania and Florida, which have abolished gar- nishment, and in several other States which have come so close to it that it has almost that effect. You can't find the resultant effect on credit. It is a hard thing to measure. But I am willing to go along with the commonsense su~- gestion that if you tighten up on the use of this kind of practice it must have some effect on credit. It seems to me that plain. I would be willing to accept that effect, but apparently it is less than I would have thought and perhaps by your question you `seem to imply so.~ My answer-it could be a lot shorter-I think it must have some of that effect. Mr. FIN0. May I interrupt you, more particularly with the poor people? They will be the ones who will suffer the most because if you say retailer- Secretary WIRTZ. Suffer the most? Mr. FINO. Because they will not get the credit they are looking for. Secretary WIRTZ. I don't think suffer. It seems to me they would be protected more, They really get themselves into a terrible situation. Mr. FINo~ When I say "suffer," they will not be able to make pur- chases the way they are making purchases now. Secretary WIRTZ. I think that would be a blessing. Because when they put themselves dangerously in hock for a television set I don't believe they have done themselves a good turn. PAGENO="0161" CONSUMER CREDIT PROTECTION ACT 743 In this morning's paper, there were some references `bearing on this in the news of the disturbances last night. Now, I know we are not going to find the answers to our questions in what a rioter does. I think that is wrong. But you can't, help noticing that, in the troubles last night in Houston and in Syracuse, among the institutions the rioters hit in `both cases were discount houses. Some discount houses, as you and I know, are a real advantage to the consumer. I don't suspect that was the kind of discount house that was burned last night. I repeat again, to look at the riots is likely to give us more wrong answers than right answers. I don't respect the judgment of an arsonist or anyone of that kind, but I can't be unaware of the fact that in all of the trouble that has developed this summer there has been a very interesting concentration of bitterness on those institutions which ap- parently follow the most extreme practices of repossessing, high' charges, and so forth, that you are talking about. Mr. FINO. Thank you. Mrs. SULLIVAN. Mr. Annunzio? Mr. ANNUNZIO. Thank you, Madam Chairman. I take this opportunity to commend Mr. Wirtz for his excellent statement and contribution to the committee. But I also would like to point out to you, Mr. Secretary, as one of the sponsors of H.R. 11601 and one of those who has long advocated the elimination of garnish- ment laws, you made reference to the President's message of March 14, and 5 or 6 months have gone by and this study has not been completed. It is needless for me to tell you, as I have told all the other govern- ment people, how disappointed I am. We have `been holding hearings for 2 weeks and in that 2-week period we have received information to `substantiate the point of view that I have long held. With reference to yo'ur colloquy with Mr. Fino, I wo'uld like also to point out one of the most important factors about garnishment of wages is that before a furniture store or a retail store or any other store would give credit, they would give more careful consideration to the application before authorizing credit which, in turn, would be a protection to the con- sumer. Also, we would avoid some of the situations that have been happen- ing. As you know, there have been many, many suicides reported in this country because of the garnishment laws. I have brought to the attention of this committee the laws of the various States dealing with garnishment showing the percentage of a nian's pay or the dollar amount of his pay which would be exempted fr~m garnishment, and these laws are usually quite harsh. I have also brought to the attention of this committee the situation in Los An- geles County and in my own county of Co'ok. `The record shows that thousands_-in fact, millions of dollars are being spent merely in the litigation of this garnishment law in our own courts-money that could well be spent for the poor. So I am hoping, Mr. Wirtz, that this study can be completed as soon as possible, I know that you attack all the jobs that are assigned to you with vigor and I know the outstanding job that you are doing as Secretary of Labor in administering the labor laws of this country_- and as former director of labor fo'r the `State of Illinois, I know some- thing about administering labor laws. Secretary WIRTz. A praise from Caesar 83-34O--67---pt. 2-11 PAGENO="0162" 744~ GONStMER CREDIT PROTEcTION AcT Mr. ANNUNZtEO. Mr. Secretary, I hope you will use whatever in.~ fluence you have with the Attorney General, the Office of Economic Opportunity, aud your own Department, which is involved in this investigation, to complete this study as soon as possible because I sin- cerely feel that garnishment is one of the really important problems facing the American worker in this country. Secretary Wii~Tz. I am grateful for this comment. Mrs. SuLlivAN. Mr. Wylie? Mr~WmIE. Thank you, Madam Chairman. Mr. Secretary, Mrs. Peterson, I, too, express my appreciation for your taking the time to appear here this morning. I, too, think the hearings have been most educational, at least for me and part of the reason is that ~e. have been able to hear witnesses of your high caliber. Thank you. Apparently the area of major controversy, maybe the only area of controversy is in the area of revolving credit. Have you formed an opinion regarding the revolving credit provi- sions of the two bills? One bill provides that an effort should be made to relate revolving credit to an annual rate and the other bill provides for disclosure of the monthly rate of interest. Secretary WIRPZ. I know this is a difficulty. It was debated out on the Senate side quite fully with the conclusion reached contrary to the original bill we had supported. We had supported the original bill which did cover revolving credit and it would be a mistake to say that we have changed our mind about it. In my judgment, and in our col- lective judgm~flt, it should be included. My answer is, on the merits, I think there ought to be a requirement of truth in lending which extends to the revolving credit situation. On the practical question of time, without seeming to be presump- tuous or invading your province; my reaction would be that we have to wait on that. Mr. WYLIE. I don't mean to be presumptuous on that, either, but there is sOme objection to S. 5 on the basis of what the revolving credit people have to disclose. It maybe an advantage to them if the disclosure is based on a monthly rate of, say, 11/2 percent, whereas the installment seller disclosure, say, 18 percent on annual basis, and disclosing interest may not be too meaningful to the person going in to make purchases, `anyway. I have two questions `then. One, would it be more meaningful if we said that everybody, every seller, had to disclose their interest charges on a monthly basis? Secretary WIRTZ. A monthly basis? It would be better on the `annual basis straight across the board. I think they `all ought to be on the same basis, Mr. Wylie. Mr. WmIE. That was my point. Maybe they should all he on the same basis so they could actually relate the charges. If you could do it so all interest charges ccuid be on the same basis,. an annual basis would be your preference? Secretary WIETZ. That is correct. We have grown up in terms of an unnual figure. The only reason they say 11/2 percent is that somebody is going to relate it with the low 4 percent they grew up on, and I think they have a point. Mr. WmIE. That may be true. PAGENO="0163" CONS~3MER CREDIT PROTECTION ACT 745 How about the possibility of disclosing the amount of interest or service charges in dollars and cents rather than on an interest-rate basis? Secretary WIRTZ. May I invite Mrs. Peterson's reaction? Mrs. PETERSON. I don't think it is a substitute for knowing that these service charges are really charges for the extension of credit. Therefore, I would prefer certainly that the annual rate be shown, too. Secretary WIRTZ. On a percentage basis rather than in dollars. Mrs. PETERSON. The bill requires that it be stated both ways. But in order to make a comparison, the annual percentage basis is necessary. I would prefer that. Mr. FINO. Will the gentleman yield? Mr. WYLIE. I would like to ask one other qnestion. Do you think there is any danger if we establish a ceiling as to the rate of interest which becomes a usurious rate, that this might, in fact, become the floor? Secretary WIRTZ. I surely do. That is a real concern about that 18 percent. I think I would have great trouble bringing myself to the support of an l8-percent limit for the very reason that you just talked about. I am afraid it would become par for the course. Mr. WYLIE. Do you think that same thing might occur on the an- nualizing of the percentage rate? Secretary WIRTZ. No, I have no disagreement with annualizing the percentages. As for putting in the 18 percent as a limit, that is one provision which on the merits would give me personally some pause because I am afraid it would attract all charges to that level as well as limit it. Mr. WYLIE. I have been informed my time is up. I have a little fear about this, too. And I think maybe more and more people have become accustomed to the monthly charge system and I think more and more credit is being extended on a monthly charge basis than on an annual basis so that we might well face up to that and educate people to monthly interest rates. Secretary WrRTZ. Maybe. Mr. WYLIE. Thank you. Mrs. SULLIVAN. I think we are talking about two different things: one, setting a top rate of 18 percent on all consumer credit; and the other, disclosing a rate of 18 percent on revolving credit. Secretary WIRTZ. That is Correct. Mrs. SULLIVAN. Your idea is that you don't want to see a Federal usury law. Secretary WIRTz. That is correct. Mr. WYLIE, I don't think you can separate the two. I think establish- ing a ceiling on interest rates bears a relationship to the establishment of a usury law. Mrs. SULLIVAN. I don't agree that they are related, We are not setting a ceiling on revolving credit by requiring, its disclosure on an annual basis. We are just making them show' the charges. The 18-percent ceiling would apply to all credit. Mr. FIN0. Will the Chairlady yield? In connection with what Mrs. Peterson said and what the Secretary said, I am trying to clarify in my own mind if Mrs. Peterson said that PAGENO="0164" 746 CONSUMER CREDIT PROTECTION ACT she preferred to have a percentage-rate disclosure rather than the dollar disclosure? Mrs. PETERSON. What I am saying is, they need to know the annual rate they are paying, if the monthly rate is 1i~ percent. Mr. FINo. Do you think the average person, I happen to be a lawyer-do you think I am concerned with how much the rate is rather than dollars and cents? Mrs. PETERSON. I think you are completely right; people think in terms of what the dollars and cents charges are. But also that leaves something to be desired because you have to know the annual rates to make the comparison between credit costs of different lenders. Mr. FIN0. Mr. Secretary, did I understand you to say that you would rather see the dollar disclosure? Secretary Wmrz. I think we need both dollars and annual percentage rates. We lucky college graduates think our lives through in terms of percentages. I am not sure how real the percentage rate may be in some other people's minds, although we are all used to it in our mortgages. I do think there is a communications advantage in letting people know how much their purchase is going to take out of their paycheck for the next year. So I can make a good argument for a statement in terms of dollars. But since other elements in the conditions of sales discounts, duration of payments, and so forth, differ so much, you can't easily compare one seller's costs with another unless you have the annual rate. A lot of our thinking has been channeled in percentages. I think it is a good thing that the bill provides for both. Mr. FIN0. I *ant to thank the Secretary for his frankness in this connection. Mrs. SULLIVAN. When you are shopping for a loan, for instance, ~nd find you pay back $108 for a $100 loan at one place and $100 for a $100 loan at another, but only get $92, the dollar amount of the cost is the same at both places-$8. But if you know that you are paying 15 percent for one or 18 per- cent for another, or 36 or 42 percent on some other kind of loan- even if you don~t know how to figure the percentages, you know which is higher. Secretary WIRTZ. You `and I do. But you would be surprised how many times in connection with the letters that we get, the mail that we get about the unemployment figures it is indicated to us, and it comes as a shock how many people think 0.4 is larger than 3.8-that decimal point is a sophisticated concept and so that `makes you wonder how generally communicated percentages are. I don't want to overpress the point because I agree it would only be disturbing to move this thing out of the percentage pattern. Mrs. SULLIVAN. Our bill calls for disclosure of both the amount and the percentage. But the percentage rates are all expressed in the same way, on an annual basis. Mr. BINCHAM. I wish we could continue under the 5-minute rule. Mrs. Sur4LIVAN. Mr. Bingham? Mr. BINOIIAM. I hate to be the one to interrupt my colleagues. Mr. STEPHENS. My question is pertinent to the one being discussed. Go, ahead. PAGENO="0165" CONSUMER CREDIT PROTECTION ACT 747 Mr. BINGUAM. Thank you. I, too, would like to welcome You, Mr. Secretary, and Mrs. Peterson. I have the greatest admiration for work you are doing. I would just like to make a couple of quick comments and then ask one question. My comments are that I think in this matter of dollars and percentages, it is in the use of dollars that the great abuses occur. On a small loan of $50, $5 does not sound like much, but it is actually 120 percent. But people with very little education will come up with a jolt if they are told they are going to pay 120 percent per annum. As to the work of your committee, it's nothing new that garnish- ment does not affect the volume of credit transactions. That was pointed out effectively by our witnesses last Friday but we also dis- cussed at some length the California Law Review article in Decem- ber 1965 which quotes studies from the Associated Credit Bureau going back to 1963 pointing out there is no correlation visible in the amount of installment credit and consumer credit that is used and the toughness of the garnishment laws. I realize you hadn't had an oppor- tunity apparently to study these matters. Secretary WrRTz. You are wrong, Mr. Bingham. I am familiar with the article. I don't believe there is a difference between them and I don~t believe the testimony springs from ignorance. I stated as clearly as I could the fact that `the studies revealed no reduction in the use of credit when these things come in. Mr. BINGUAM. I thought you said you were surprised by the testi- mony. Secretary WIRTZ. I still would retain the feeling that when you re- move a loose credit device there is goring to be some reduction in the use of credit. But I would like to make the record clear that my inf or- mation, limited as it may be, coincides with yours as stated previously in the record that there is no evidence in any State in which garnish- ment has been abolished of a reduction in the use of credit, I repeat that statement. Mr. BINGHAM. I would like to ask you what your position is on the enforcement provisions coi~tained in the Sullivan bill, 11601, that is the proposal for administrative enforcement that is not present in the Senate `bill ~ Secretary WIRTZ. Well, it is in general, Mr. Bingham, that the pro- visions in the Senate bill are adequate but are going to have to be watched. I have some concern, which I assume your question reflects, about leaving the remedies up to the individual who is involved here. I think especially in this situation that is going to present some question. As between the two bills I would personally take the stronger en- forcement provisions of }I.R. 11601, but as in the case of other addi- tional features of the bill, pradtical considerations are involved. I think I view either proposal with enough confidence to go along with it, but with the understanding that there might need to be improve- ments in the future. Mr. BINGRAM. Thank you, very much. Mrs. SULLIVAN. Mr. Elaipern? Mr. HALPERN. Thank you, Madam Chairman. First, I wish to commend the distinguished Secretary for his forth- right testimony and for giving us the benefit of his views. I am cer- PAGENO="0166" `748 CONSUMER CREDIT PROTECTION ACT tam they will prove most helpful to this committee in developing an effedtive and meaningful bill. I am also delighted to see our dear friend, Esther Peterson, here. Few persons know the subject before us better than this great lady and these hearings would be incomplete without her. It is a pleasure to ~have you here and I welcome you to this committee. Mr. Secretary, you ~bated that the original version of S. 5 is pref- erable to the bill finally passed in the Senate. The bill in the other body excluded revolving credit, small transac- tions and first mortgages. Could you possibly elaborate on the actual disadvantages that might occur in the final version of S. 5, if that were to be passed? Secretary WutTz. Not helpfully, Mr. Halpern. I think the bill as it came out has many good features. As for elaborating the significance of the three char~ges which were made in it, I would have no specifics to spell out the significance further. I think the largest one, the one that bothers us most~ is the elimination of the annual percentage rate on open end or revolving credit. That has come into very general usage. I would grade them this way: I would think that is significant. I doubt if the elimination of the provision of the coverage of the first mortgage has anything like equal significance. Now, I can tell you that as far as the third one is concerned, where the disclosure provisions do not apply to transactions where finance charges are less than $10, that is going to cut pretty deep as far as poor people are concerned. Mr. HALPER~. You feel that the bill should include all transactions where the finan~e charges are $10 or less. Secretary WhiTZ. No question about it. But I have to couple that with just the p~actical reaction that right now-and I don't propose to intrude upon the province which is yours-we need to pass this very important truth-in-lending legislation. If I seem a little timid about not wanting to risk that, it is because we have wanted it for so long. That's the only qualification. Mr. HALPERN. I would like to clarify some of your earlier remarks. First, you stated that you don't think it would matter whether you disclose rates on a monthly or annual basis-an annual rate-as long as all rates are comparable, yet as long as savings accounts, bank loans, and other financial instruments express their interest or service charges on an annual basis for purposes of competition, is it not necessary to express other credit charges on an annual percentage? Secretary WniTz. I want to be clear, I think it should be on an an- nual basis. Mr. HALPERN. Since H.R. 11601, the bill that we are deliberating on now requires expression of both dollar and percentage terms, does this not satisfy all your desires in this regard? Secretary WIRTZ. Yes. Mr. HALPERN. Thank you, Madam Chairman. Mrs. StTLLT~~AN. Thank you very much, Mr. Secretary. You and Mrs. Peterson have been very helpful and generous with your time. (See letter from Secretary Wirtz, p. 793.) Secretary WIRTZ. Thank you very much. Mrs. SULLIVAN. I now call Mr. I. W. Abel, president of the United Steelworkers of America. Mr. Abel heads one of the largest trade unions in the United States, and one of the best. PAGENO="0167" CONSUMER CREDIT PROTECTION ACT 749 The late Philip Murray, who founded that union a little more than 30 years ago, was `always ready to serve his country by sharing his knowledge and wisdom with Congress and the executive department, ~nd he participated in numerous governmental programs directly. Mr. Abel is carrying on that tradition of public service by serving now as a member of the President's Commission on Civil Disorders~- a tremendously important assignment which is taking a great deal of the time and energy of those Americans selected to serve on it. Con- sequently, we appreciate even more, Mr. Abel, your courtesy and helpfulness in coming here today. You are the only president of an international union we shall be hearing on this legislation, and we are happy to have you here. As I asked the Secretary to do also-because the House is going to meet at 11 o'clock and we want to get in as much of your testimony as possible and also have time for the members to do some question- ing-will you please summarize your statement rather than read it in full. The entire statement will go into the record, of course. You can go through the various parts of it, as prepared, or highlight it, as you see fit. STATEMENT OP I. W. ABEL, PRESIDENT, UNITED STEELWORKERS OP AMERICA; ACCOMPANIED BY JOHN J. SHEEHAN, LEGISLA TIVE DIRECTOR Mr. ABEL. I would prefer to go through the statement as prepared. I will try to accommodate your wishes. Mrs. SULLIVAN. All right. Mr. ABEL. My name is I. W. Abel, I am president of the United Steelworkers of America which is an organization comprising over a million and a quarter working people. I appear before you to support the principle, incorporated in H.R. 11601, that all finance charges, involved in consumer credit, be converted to the common denoniinator of an annual percentage rate and be disclosed to the consumer. At long last the issue of truth in lending is before a House com- mittee. For more than 7 years, this legislation was trapped in the Senate Banking and Currency Committee without any glimmer of hope that it would reach the floor of the Senate for a vote. It was during those years that the `heroic efforts of Senator Paul Douglas kept the legislation alive. The American consumer owes a great debt of gratitude to this man for his crusading spirit to protect the average working man from misleading and, at times, unscrupu- lous credit practices in the marketplace. The hard work and persistence of this committee will, I hope, be `instrumental in correcting some unneeded compromises made in the Senate-passed bill and in contributing some new concepts of its own to the original bill. During the last few years there has been a growing grassroots con- cern about and awareness of the plight of the consumer. As a matter of public policy, the old `adage, "Let the buyer beware," has been rejected by the American people. Congress, for the most part, has reacted favorably to this demand for legislative action. A consumer- oriented Congress has gradually expanded the areas of its scrutiny `where the safety `of the consumer `was at stake. PAGENO="0168" 750 CONSUMER CREDIT PROTECTION ACT It has also taken some steps when his economic interests were in- volved. Consumer credit vitally affects the economic well-being of every American family. Statistics presented to your committee indi- cate the phenomenal growth of consumer credit from $56 billion, just 6 years ago, to a current rate in 1966 of $95 billion. The interest charges are over $1~i/2 billion. Proper use of credit is, of course, an important factor contributing to the economic growth of the economy. However, the consumer can- not make a wise decision in the use of credit unless he has sufficient knowledge about the credit transaction. The consumer has the right to know the true cost of borrowing, just as he had the right to know the price of a~iy other commodity he purchases. Furthermore, as was pointed out to this committee by Sargent Shriver, Director of the Office of Economic Opportunity: It is the low-income consumer who is most likely to fall prey to the unscrupu- ions merchant or lender, because it is the low-income consumer who is under- educated, who needs the credit, and Who must hunt for the bargain with the low dowupayment. It is little wonder, then, that pent-up resentment in the ghettos can become the fertile ground for the violent militant. Just yesterday some of the members of our commission toured the ghettos of Harlem and certainly there is evidence at hand of every place you turn in areas like that of the impact and the need for this kind of action. The truth4in-lending legislation, therefore, would provide both in- formation and protection. The key tool is the provision which requires that there be a full disclosure both in dollar terms and in annual per- centage rates of the cost of credit which is extended in making a pur- chase or obtaining a loan. When credit transactions are reduced to a common denominator in terms of an annual percentage rate, then there can be an adequate comparison between the various forms of credit which are offered. Furthermore, the consumer will be in a position to determine whether he can afford the credit. This, I think, is very important. The consumer should, at least, be given the information so that he can make that choice for himself. I emphasize this factor of "ability to pay" because it has been the experience of saving and loan associations in Pittsburgh, Pa., that the primary cause of default for many homeowners has been the over- burdening monthly payment obligations on other consumer debts and loans. These borrowers admit getting into financial difficulty with- out knowing it. When they came to a realization that they could not keep up their payments, they lost not only the articles which they pur- chased on time, but their homes as well. The unwary consumer is too often misled by the sale with the low downpayme~it and the low monthly rate. He is usually not aware that the final price of his purchase may well be beyond his means. The small loan companies, by failing to disclose the annual interest charge, or by misrepresenting the charges to be only 6 percent, are able to extract from the consumer rates which vary from 35 percent up to 100 or 200 percent. Four years ago this month, the Senate Subcommittee on Banking and Currency went to Pittsburgh, Pa. A number of steelworkers testi- fied before that committee. One of them, a president of a local union PAGENO="0169" CONSUMER CREDIT PROTECTION ACT 751 with many years of seniority in a United States Steel plant, was a good credit risk. Yet on a loan of $152 he paid an interest rate of over 71 percent. He was completely unaware of the charge and could have obtained the same amount at the local bank for much less interest. There is no need for me to enumerate the various methods of sub- terfuge used by small loan companies and finance institutions to hide the true annual rate of interest. This committee is by now fully aware of them. As a matter of fact, nearly every member of this committee has introduced a rate disclosure bill. Let me, however, address myself to some areas of controversy~ (1) REVOLVING CREDIT PLANS There is absolutely no reason why the open end or revolving credit plans should be exempt from coverage of the annual disclosure re- quirement. Claims have been made by retail associations that the rate cannot be translated into annual percentage terms. These claims have been refuted by reliable experts. Most department stores charge 1½ percent per month on the unpaid balance. This equals 18 percent a year and the stores should be re- quired to make such a disclosure. The family which is counting its pen- flies can ill afford to have its income sifted away at rates of 18 percent a year. Despite arguments to the contrary, the so-called "free ride" period does not really represent free use of credit. During those periods, the lack of credit charge is reflected in a higher price of the article. Hence, the credit should not be measured from the date of the purchase, but from the date the service charge actually begins. H.R. 11601 rejects the spurious argument of the retailers that revolving credit charges cannot be calculated on an annual basis. We agree. The bill introduced by Congresswoman Sullivan rectifies the com- promise which the Senate made on this issue by requiring annual per- centage disclosure of all charges incurred in these plans. I can concur, surprisingly enough, in the statement of the American Bankers Asso- ciation that this category of credit should not be exempt from the same requirements which apply to other creditors. According to the ABA, a single, nondiscriminatory system of time disclosure should be uniformly applied to all creditors and all types of credit. The competition which the banks are offering through bank credit cards could be beneficial to the consumer. I would like to insert for the record an article pertaining to this that appeared in the Wall Street Journal. Mrs. SULLIVAN. Without objection it will be made a part of the record. (See p. 762.) Mr. ABEL. If we are interested in giving the consumer a real op- portunity, then there's every reason why we should encourage whole- some competition among these creditors. Furthermore, the Senate's version could become an escape hatch whereby installment or closed-end credit plans could be converted into revolving credit plans and thereby escape annual disclosure. The "installment open-end credit plan" wherein the creditor retains a security interest in the property purchased and the borrower does not pay more than 60 percent of the unpaid balance within 1 year is PAGENO="0170" 752 C0NSI~MER CREDIT PROTECTION ACT arbitrarily designed to exempt other open-end or revolving credit plans. We oppose such exemptions and, hence, the need for the above- mentioned definition. (2) FINANCE CHARGES We strongly urge that H.R. 11601, which includes credit health and/or life insurance premiums within the definition of a finance charge, be approved. The Senate bill excludes these premiums even though, in most cases, they are incident to the extension of credit. The use of this insurance, in many cases, is a subterfuge for raising the true cost of the loan to the borrower. By quoting a lower interest charge and then requiring the borrower, as a condition for receipt of the loan, to purchase a credit life insurance, the creditor, in reality, may be charging a very high rate of interest. Moreover, there is growing evidence of a tie-in between the small loan companies and credit life insurance. In testimony before the Senate Antitrust Subcommittee evidence was given that banks, finance companies, and other consumer-loan institutions require their bor- rowers to take out certain insurance policies for which they are get- ting kickbacks from the insurers. In such cases, the creditor accepts the highest bid rather than the lowest for this type of insurance because he can receive the difference in a kickback. In many cases credit companies set up their own insurance com- panies. In an article which appeared in the New Republic, James Ridgeway discloses that the CIT Finance Corp. through a wholly owned subsidiary, the North American Co., insures its credit life insurance policies wherein there was a gross profit of 50 percent in premiums or $6.8 million in 1965. And this profit is on top of the rate that is already being charged for the loan. I should like to submit two articles for the record dealing with this subject. (See p. 758.) (3) SMALL INSTALLMENT ThANSACTIONS Unfortunately, the Senate bill exempts from coverage installment sales and loan transactions in which the finance charge is less than $10. The reason for this exclusion defies explanation. In a bill which is admittedly designed to afford the consumer pro- tection, the proponents for this dropout from coverage claim that the interest rate is so high that, and I quote from the testimony of the Federal Reserve Board: The creditors may be understandably reluctant to disclose a high annual percentage rate, and might instead simply discontinue this type of credit. Well, all I can say is that the consumer himself might well decide to discontinue this type of purchase if he knew what the true charges were. It is that right which we are trying to provide by this legisla- tion. We are also concerned that a single unit of purchase might be sub- divided into parts in order to come under the $10 finance charge loop- hole. The purchase, for instance, of a $50 chair with a $5 finance charge at the end of the month amounts to a 120-percent annual rate. The exclusion of these transactions would, of course, have a real adverse impact upon the low-income wage earner who needs the pro-~ tection of this bill the most. PAGENO="0171" CONSUMER CREDIT PROTECTION AC3~ 753 (4) GARNISHMENT Madam Chairman, a Federal antigarnishment law is long overdue~ You are well aware of the vicious repercussions of garnishments. Many employers, rather than undertake the costly procedure to garmshee wages, will discharge the worker. Or the worker, driven by the threat of discharge or loss of reputation, will seek out other loan companies; to pay off the original loan. Eventually, many of them end up in the hands of the "loan sharks." Garnishment increases the security of the creditor thereby making them willing to extend credit to borrowers that they otherwise might not accommodate. The protection, which the creditor thus c~btains, makes him most eager to entice the wage earner into his tender trap. Stripped of this privilege the lenders will be more cautious in their extension of credit. The labor movement has consistently opposed the garnishment of wages. It is reminiscent of the days when workers were thrown in jail until such time as they would pay their debts. Now, instead of seizing his person, they seize his wages and, in many cases his job. Last year the Wail Street Journal ca;rried an article indicating that at the Inland Steel plant in East Chicago, md., each pay period the company makes deductions from about 2,000 production employees- all of whom are members of our union. Inland annually pays out more than $500,000 in withheld wages to creditors. Even the editorial page of the Journal remarks that: In their own interest lenders could stand a stronger dash of self-restraint. By paying a little less attention to boosting their business and a little more to a borrower's acttIal ability to repay, they not only would protect their own solvency but possibly head off new restrictive iegislation. Inland Steel has written to Congressman Anuunzio expressing their concern that these garnishments not only are a heavy financial burden to the company but that "this repayment device may well lead to the extension of credit to wage earners in situations where credit more reasonably might be withheld." Mrs. SULLIVAN. Your attachments will be made part of the record. We previously had a letter from Inland Steel that Congressman An- nunzio inserted in the hearings. Mr. ABEL. I, too, have a copy of Inland's letter and I would like to attach that to my statement. Mrs. SULLIvAN. That will be done. Mr. ABEL. A recent study conducted by the Labor Department "How Garnisheed Workers Fare Under Arbitration," which appeared in the May issue of the Monthly Labor Review, mentions that a worker's going into debt, like any other off-duty conduct, generally should be of no concern to the employer. However, if defaulted debts are subject to garnishment, then arbitrators tend to treat this the same as o1~-duty misconduct and uphold the right of the employer to discharge the worker. Mrs. SULLIVAN. That, too, without objection will be made part of the record. Before you continue, Mr. Abel, I want to announce that we will recess for a few minutes in a little while but if any of the members PAGENO="0172" 754 CONSUMER CREDIT PROTECTION ACT wish to go over to the House floor now aiid have their names recorded and then come back, they may be excused. We are going to continue here until we get through with the wit- nesses. Mr. ABEL. In many States the labor movement is trying to get the State legislatutes to pass laws to prevent discharge due to garnishment. Where there is an organized plant the discharge is subject to the griev- ance procedure and arbitrary discharge is prevented. But what about the many unorganized low-income workers who are most subject to the blandishments of easy-money advertisement. What recourse do they have where there is no union to protect them. At the very least, there should be a Federal law prohibiting the discharge of employees be- cause of garnishment. In some cases the tenacious lender pursues the employee into another State jurisdiction where there may be more liberal garnishment laws. One steel corpQraition has actively pushed a bill in Congress to prevent the courts of the District of Columbia from issuing a garnishment de- cree which is not consistent with the State law in which the worker re- sides and draws his income. For instance, the State of Pennsylvania prevents gami~hment but it is of no avail to the worker if the District of Columbia courts can attach his wages. Strong testimony was given to you by a group of referees in bank- ruptcy wherein they attest to the fact that in those States where there is no garnishment there is a drastic reduction in the number of personal bankruptcy cases. According to Mr. Elmore Whitehurst, Texas: It is my considered judgment that it is the result of these prohibitions and not a mere coinelden.ee that the bankruptcy courts in TOxas have a far less number of wage earner cases than states ot' lesser population which have severe garnishment statutes. Furthermore, there is no evidence that a prohibition of garnishment of current wages has by any means put loan companies out of busi- ness, It has not happened in Pennsylvania. We are confident it will not happen elsewhere. The experience of many of our State labor federations at the State legislatures indicates that a Federal law is necessary. In some States there is absolutely no protection. In others, there are various degrees of protection. Only three States-Texas, Florida, and Pennsylvania-have a total prohibition. It is now time to have a uniform Federal prohibition, I, therefore, urge that this committee retain the antigarnisliment provision of H.R. 11601. I would like to conclude right here and have in the record the remainder of the statement. I did want to touch on our position with respect to garnishment provisions of the bill. Mrs. SuLLIvAN. We are very happy that you did, Mr. Abel. Your full statement will be placed in the record at this point. (The statement and additional material referred to follow:) STATEMENT OF I. W. ABEL, PRESIDENT, UNITED STEELWORKERS OF AMERICA My name is I. W. Abel. I am President of the United Steelworkers of America which is an organization comprising over a million and a quarter working people. I appear before you to support the principle, incorporated in H.R. 11601, that all finance charges, involved in consumer credit, be converted to PAGENO="0173" CONSUMER CREDIT PItOTECTION ACT 755 ~ the common denominator of an annual percentage rate and be disclosed to the At long last the issue of truth-in-lending is before a House committee. For more than seven years, this legislation was trapped in the Senate Banking and Currency Committee without any glimmer of hope that it would reach the" floor of the Senate for a vote. It was during those years that the heroic efforts of Senator Paul Douglas kept the legislation alive. The American con~ sinner owes a great debt of gratitude to this man for his crusading spirit to protect the average working man from misleading and, at times, unscrupulous credit practices in the market place. The bard work and persistence of this cOmmittee will, I hope, be instrtt- mental in correcting some unneeded compromises made in the Senate-,passed bill and in contributing some new concepts of its own to the original bilL During the last few years there has been a growing grassroots concern about and awareness of the plight of the consumer. As a matter of public policy, the old adage "Let the buyer beware" has been rejected by the American people. Congress, for the most part, has reacted favorably to this demand for legislative action. A consumer-oriented Congress has gradually expanded the areas of its scrutiny where the safety of the consumer was at stake. It has also taken some steps when his economic interests were involved. Consumer credit vitally affects the economic well-being of every American family. Statistics presented to your committee indicate the phenomenal growth of consumer credit from $56 billion, just six years ago, to a current rate in 1066 of $05 billion. The interest charges are over $12312 billion. Proper use of credit is, of course, an important factor contributing to the eco- nomic growth of the economy. However, the consumer cannot make a wise de- cision in the use of credit unless he has sufficient knowledge about the credit transaction. The consumer has the right to know the true cost of borrowing, just as he has the right to know the price of any other commodity he pureha~es. Furthermore, as was pointed out to this committee by Sargent Shriver, Director of the Office of Economic Opportunity, "It is the low-income consumer who is most likely to fall prey to the unscrupulous merchant or lender, because it is the low-income consumer who is undereducated, who need the credit, and who must hunt for the bargin with the low down-payment". It is little wonder, then, that pent-up resentment in the ghettos can become the fertile ground for the violent militant. (See attachment 1.) The truth-in-lending legislation, therefore, would provide both information and protectiOn. The key tool is the provision which requires that there be a full disclosure both in doflar terms and in annaal percentage rates of the cost of credit which is extended in making a purchase or obtaining a loan. When credit transactions are reduced to a common denominator in terms of an annual percent- age rate, then there can be an adequate comparison between the various forms of credit which are offered. Furthermore, the consumer will be in a position to determine whether he can afford the credit. This, I think, is very important. The consumer should, at least, be given the information so that he can make that choice for himself. I emphasize this factor of "ability to pay" because it has been the experience of saving and loan associations in Pittsburgh, Pennsylavnia, that the primary cause Of default for many homeowners has been the overburden monthly pay- ment obligations on other consumer debts and loans. These borrowers admit getting into financial difficulty without knowing it. When they came to a realiza- tion that they could not keep up their payments, they lost not only the articles which they purchased on time, but their homes as well. The unwary consumer is too often misled by the sale with the low down-pay- ment and the low monthly rate. He is usually not aware that the final price of his purchase may well be beyond his means. The small loan companies, by failing to disclose the annual interest charge, or by misrepresenting the charges to be only six percent, are able to extract from the consumer rates which vary from thirty-five percent up to one hundred or two hundred percent. Four years ago this month, the Senate Subcommittee on Banking and Cur~ rency went to Pittsburgh, Penn~ylvania. A number of steelworkers testified be- fore that committee. One of them, a president of a local union with many years of seniority in a 11.5. Steel plant, was a good credit risk. Yet on a loan of $152 he paid an interest rate of over seventy one percent, lie was completely unaware of the charge and could have obtained the same amount at a local bank for mu~li less interest. PAGENO="0174" 756 CONS~~TMF~R CEE1~TT PROTECPIO~ AC1~ There is no need for me to enumerate the various methods of subterfuge used by sniall loan co~upanies and finance institution~ to hide the true annual rate of interest. `1~his cotanaittee is by now fttlly aware of them~ As a n~atter of fact, nearly every member of this committee has Introduced a rate disclosure bill. Let me, however, a~idr~ss m~seFf to some area~ of eontrov~rsy. (1) R~ol~7 &~Ut p~wivs.-Phere is absolutely no reaso~a why the open-end or revolving eredit pl4n~ shou]~d he exempt from coi~erage of the annual dig- closure requirement. O~ahi~is `have teen made by retail at~soclatIor~s that the rate can not be trari~lated ~iito annual pereentage terms. These claims have been re' futed hy rejiaible exper~is. Most department stores charge 1% percent per month on the unpaid balance. This equals eighteen j~ercent a year and the ~to'res should (be required to make such a disclosure. The family Which is eoutit~mg its pennies can ill afford to have its Income sifted away at rates of eighteen percent a rear. Despite arguments to the coutrar~, the so-caIl&1 "free ride" period does not really represent free i~se of credit. Duriiig those periods, the lack of credit charge is reflected in a h~r price of the article. Hence, the credit should not 1~. naeas- ured from the date of~ the purchase, but from the date the service charge actually begIns. HR. 11601 re~ected the spurious argument of the retail~rs that revolving credit charges cannot? be calculated on an annual basis. We agree. The bill introthicec~ by Congresswoman Sullivan rectifies the coin~prornise which the senate (~S-~5) makle on this issue by requiring annual percentage disclosure of all charges Incurred! in these plans. I can concur, surprisingly enough, in the statement ef the A~nerican Bankens Ais'sociation that this category of credit should not be exempt from the same requirements which apply to other creditors. Accordhig to the A.13.A., a single, nondiscriminatory system of time disclosure should be uniformly applied to all creditors and all types of credit. The competition which the banks are offering through bank credit cards could be beneficial to the ëonsumner. (See attachment 2). If we are iutere~sted in giving the consumer a real opportunity, then there is every reason why we should en- courage wholesome competition among these creditors. Furthermore, the Senate's version could become an escape hatch whereby in- stallment or closed~end credit plari~s could be (converted into revolving credit plans atid thereby escape! annual disclosure. The "installment open~end credit plan" wherein the creditor retains a security interest in the property purchased and the (borrower does not pay more than sixty percent of the unpaid balance within one year is arbitrarily designed to exempt other open end or revolving credit plans We oppose such exemptions and hence the need for the above mentioned definition. (2) Finance charges -We strongly urge that H R 11601 which includes credit heaLth and/or life insurance premiums within the definition of a finance charge, be approved. The Senate bill excludes these premiums even though, in most cases, they are incident to the extension of credit Phe use of this insurance in many cases Is a subterfuge for raising the true cost of the loan to the borrower By quoting a lower ipterest charge and then requiring the borrower as a condition for receipt of the loan to purchase a credit life insurance the creditor in reality may be charging ~ very high rate of interest. Moreover, thete Is growing evidence of a tie-in between the small loan com- panies and credit life insurance In testimony before the Senate Antitrust Sub committee evldei~ce was given that banks finance companies and other consumer loan mstitutlou~ require their borrowers to take out certain insurance policies for which they are getting kickbacks from the lnsi~rers In such cases the creditor accepts the highest bid rather than the lowest for this type of insurance because he can receive the difference in a kickback. Tn many cases credit companies set up their own insurance companies In an article which appeared in the New Repnblic, James Ridgeway discloses that the CIT Finance Corporation through a wholly owned subsidiary the North American Company, insures its credit life insurance policies wherein there was a gross profit of fifty percent in premiums or $6.8 million in 1965. And this profit is on top of the rate that Is already being charged for the loan. (I should like at this point in my testimony to submit two articles for the record dealing with this subject). (Seetattachment 3.) (3) ~maZl ffistallnwnt transactions.-Tlnfortttnately, the Senate bill exempts from coverage Installment sales and loan transactions in which the finance charge i~ less than $1!0 The renson for this exclusion defies explanation In a bill which i'f admittedly designed to afford the consumer protection the proponents for this drop-out from coverage claim that the Interest rate is so high that, and I quote PAGENO="0175" CONSUMER CREDIT PROTECTION ACT 757 from the testimony of the Federal Reserve Board, "[The creditors] may be uuderstandably reluctant to disclose a high annual percentage rate, and might instead simply discontinue this type of credit." Well, all I can say is that the consumer himself might well decide to discontinue this type of purchase i~ he knew what the true charges were. It is that right which we are trying to provide by this legislation~ We are also concerned that a single unit of purchase might be subdivided into parts in order to come under the $10 finance charge loophole. The purchase, for instance, of a $50 chair with a $5 finance charge at the end of the month amounts to a 120 percent annual rate. The exclusion of these transactions would, of course, have a real adverse im- pact upon the low-income wage earner who needs the protection of this bill the most. (4) Garnishment.-Madam Chairman, a federal anti-garnishment law is long overdue. You are well aware of the vicious repercussions of garnishments. Many employers, rather than undertake the costly procedure to garnishee wages, will discharge the worker. Or the worker, driven by the threat of discharge or loss of reputation, will seek out other loan companies to pay off the original loan. Eventually, many of them end up in the hands of the "loan sharks." Garnishment increases the security of the creditor thereby making them willing to extend credit to borrowers that they otherwise might not accommo- date. The protection, which the creditor thus obtains, makes him most eager to entice the wage earner into his tender trap. Stripped of this privilege the lenders will be more cautious in their extension of credit. The labor movement has consistently opposed the garnishment of wages. It is reminiscent of the days when workers were thrown in jail until such time us they would pay their debts. Now, instead of seizing his person, they seize his w~iges and, in many cases, his job. Last year the Wall Street Journal carried an article indicating that at the Inland Steel plant in East Chicago, Indiana, each pay period the company makes deductions from about 2,000 production employees-all of whom are members of our union. Inland annually pays out more than $500,000 in withheld wages to creditors. Even the editorial page of the Journal remarks that: "In their own interest lenders could stand a stronger dash of self-restraint. By paying a little less at- tention to boosting their business and a little more to a borrower's actual ability to repay, they not only would protect their own solvency but possibly head off new restrictive legislation." I understand that Inland Steel has written to Congressman Annunzio ex- pressing their concern that these garnishments not only are a heavy financial burden to the company but that "this repayment device may well lead to the extension of credit to wage earners in situations where credit more reasonably might be withheld (See attachment 4) A recent study conducted by the Labor Department "How Garnisheed Workers Fare Under Arbitration which appeared in the May issue of the Mon~thly Labor Review, mentions that a worker's going into debt, like any other off-duty con- duct generally should be of no concern to the employer However if defaulted debts are subject to garnishment, then arbitrators tend to treat this the same as off-duty misconduct and uphold the right of the employer to discharge the worker. (See attaqhment 5) In many states the labor movement Is trying to get the state legislatures to pass laws to prevent discharge due to garnishment Where there Is an organized Diant the discharge is subject to the grievance procedure and arbitrary discharge is prevented. But what about the many unorganized low-Income Workers who are most subject to the blandishments of easy money advertisement What recourse do they have where there is no union to protect them At the very' least there should be a federal law prohibiting the discharge Of employees because of garnishment In some cases the tenacious lender pursues the employee into another state jurisdiction where there may be more liberal garnishment laws One steel ear poration has actively pushed a bill Iii Congress to prevent the courts of the District of Columbia from issuing a garnishment decree which is not consistent with the state law in which the worker resides and draws his income For in stance the state of Pennsylvania prevents garnishment but it is of no avail to the worker if the Di~trict of Columbia courts can attach his wages. Strong testimony was given to you by a group of referees in bankruptcy `~s herein they attest to the fact that in those states where there is no garnish PAGENO="0176" 758 CONSUMER CREDIT PROTECTION ACT ment there is a drastic reduction in the number of personal bankruptcy cases. According to Mr. Elihore Whitehurst, Texas, "It is my considered judgment that it is the resitit of these prohibitions and not a mere coincidence that the bank- ruptcy courts in Texas have a far less number of wage earner cases than states of lesser population which have severe garnishment statutes." Furthermore, there is no evidence that a prohibition `of garnishment of current wages has ~y any means put loan companies out of business. It has not happened in Penns*lvania. We are confident it will not happen elsewhere. The experience 0± many of our state labor federations at the state legislatures indicate that a fedhral law is necessary. In some state's there is absolutely no protection. In others, there are various degrees of protection. Only three states (Texas Florida and Pennsylvania) have a total prohibition It is now time to have a uniform federal prohibition. I, therefore, urge that this committee retain the anti-garnishment provision of H.R. 11601. (See attachment 6.) Enforcement.-J1.E~ 11601 is stronger than the Senate bill in that it provides more than "self-enforcement." Administrative enforcement of the Act by the Federal Enserve Board through cease and desist `orders are a necessary comple- ment to the right of an aggrieved individual to bring civil suit where information has not been pro'~ibrly provided. We note that the Board is reluctant to assume thi~ responsibility~, although it recognises that "self-enforcement is probably less effective, however, in the field of advertising." Us~ø-y.-The question as to what should be the maximum ceiling for interest charges is quite a different one from whether there should be a ceiling. We agree that usurious rates should be proscribed. We are not in `a position, how- ever, `to advise this committee what that rate should be. The various types of credit situations should be reviewed by this committee. The relationship of an interest rate to the all-inconclusive `finance charge must `be made. But we support the idea that all charges which are incident to the loan should also be included in any `calculation of a ceiling. Otherwise, we are fearful that a low-interest ceiling will be compensated by `high finance charges. Certainly, the question ott the rate could b~ an area of investigation by the proposed National Commission on Consumer Finance. Te salutary effect of a disclosure bill will, we hope, create an atmosphere of competition among creditors which would help to `drive down interest chargesj Conciusion.-Madam Chairman, we know that effective lobbying by financial institution's haa prevented an earlier enactment of a truth-in-lending bill. How- ever, in the process the American people have been educated about the issue. There is now both a need and a `demand fo'r this legislation. A national con- sensus has evolved. Your `committee, we ho'pe, will give legislative `expression to that consensus. The United Steelworkers of America appreciates the opportu- nity to appear `before you in order to add Its voice to' that consensus. SENATE UNrr INVESTIGATES CHARGES THAT CREDIT INSURANCE Is "TIgD IN" TO CONSUMER LOANS According t~ several witnesses who testified before the Senate Antitrust Sub- committee last week, consumer-lending companies are forcing small borrowers to buy credit ln~urance at excessive rates. Subcommittee Chairman Philip A. Hart (D-Mieh) estimated that 85 percent of `all consumer installment credit is "tied in" with insurance that guarantees repayment of a loan in case a borrower dies or becomes ill. Allegedly, banks, finance companies, and other consumer-loan makers who require their borrowers to take out these insurance policies are getting kickbacks from the insurers. Although jnsurance regulation is now left almost entirely to the states, the Antitrust Subcommittee believes it may have jurisdiction over these credit-in- surance arrangements because of the tie-in feature. Even some state insuranc commissione~s, the hearings revealed, reluctantly admit that federal regulation may be needed to protect small borrowers `against exorbitant credit-insurance charges. Senator Hart announced that he is going to Send the transcript of his Sub- committee's* credit insurance bearings to the Justice Department and the Fed- eral Trade Commission. He will ask the agencies to see If the testimony un- covered any violations of law and to explore the possible avenues of federal in- tervention in this field, including use of the antitrust laws. PAGENO="0177" CONSUMER CREDIT PROTECTION ACT 759 ~ on May 16, James H. Hunt, Vermont's Commissioner of Banking and insur- ance, said he doubted that the states, "as a group, are dealing affirmatively and effectively with this problem" 13 years after a previous investigation of abuses by the Senate subcommittee. While he shies away from recommending federal action in a field which Congress has reserved for the states, he said there "would be many advantages to federal regulation" and be would not "worry much" if there were "dual regulation." "In most states," Mr. Hunt testified, "the debtor is paying excessive premiums and needs help. .. Credit insurance is subject to widespread abuse." He claimed that "fantastic profits are being made from the incidental sale of insurance in connection with loans and `other transactions." The real culprits and beneficiaries in this insurance tie-in system are the creditors, not the insurance companies, Mr. Hunt asserted. Since the lenders typically sell the insurance on a commission basis, they push the policies with the highest rates in order to receive the highest rebates. As Mr. Hunt put it, "The crditor accepts the highest bid rather than the lowest because he gets the clif- ferences in kickbacks in one form or another." He called this "reverse competi- tion"-competition that pushes rates up rather than down. "The debtors form a captive market for the insurance and have no ability to evaluate the reason- ableness of the insurance charge," Mr. Hunt added. ABUSES Vermont's commissioner pointed out that in many cases the credit extenders set up their own credit-insUrance companies, He said the insurance abuses in- clude failure to refund the unearned insurance premium on refinancing or re- payment of the debt, pyraxniding of policies when debts are refinanced, excessive coverage, the addition of finance charges to the insurance premium, and failure to refund finance charges on prepayment of a debt due to the death of an insured debtor. Many of the best insurance companies, Mr. Hunt indicated, are discouraged by the abuses from seeking new business in the credit-insurance field. He said the largest companies "are only modest participants in credit insurance" and ,"this is a serious indictment of the credit-insurance industry for it tends to breed a myriad of inefficient companies whose administrative and other expenses would choke them if they bad to compete on a price basis." Many of the Vermont commissioner's views were echoed by South Carolina's Chief Insurance Commissioner, Charles W. Gambrell. He described consumer- credit insurance as a "camouflage to obscure from the borrower the actual cost to him of the loan" and as "a devious and costly rigmarole" intended to increase the lender's income. He related the difficulties his state has been having in coping with this problem. "To urge that this solemn farce which is called consumer-credit insurance be ended or curbed through denying the privileged sanctuary represented by Mc- Carran-Ferguson [the federal law] to these tie-in transactions which pose as `insurance,' is not to espouse federal regulation of insurance. Indeed, freeing st~'te regulation from the impossible burdens of attempting to reach the real parties hi interest, the lenders, through `regulating the ilisurers, who are held in thraildom by the lenders, would enable state regulation to address itself to its true functions of regulating for solvency and protecting the insuring public." VEIiTICAL MONOPOLY Specific federal legislation ~ as proposed by Edward C Fritz a Dallas attorney at the May 17 hearing He said that credit insurance sales by lenders is a type of vertical monopoly whereby the lender prevents the borrower from shopping for insurance of his choice, prevents competition, and restrains trade * * * in violation of the Sherman Antitrust Act." But, be added, under existing law "it is difficult to enforce a prohibition against tied-in sales of credit insurance." The best solution would be a new law that would "separate the creditor from the insurance company and from the in~urance income. This can be done `by prohibit- ing the creditor from obtaining any compensation, directly or indirectly, from the insurance except the insurance security for the loan or for the pledged property." Mr. Fritz maintained that a federal law is "the only likely hope for protection to the consumer from the evils of tied in insurance Another state insurance commissioner testifying before the Subcommittee on May 18, said the consumer-credit insurance field has "become a racket." Massa- 83-340-67--pt 2-12 PAGENO="0178" 760 CO~SUMEE CRED~P PROTEOTTON ACT chusetts' Deputy Bai~king C~mmissioner, John P. Olair, urged action by ix~th the states and the Subcommittee to stop overcharges and other abuses that he de~ seribed as "mighty ~1bse ~to larceny." Mr. Olair recommended that the Sulcommittee look into the field o~ educa- tional loans. Many c~lleges have been embarrassed to find they've leen reterring parents to loan plane that charge "outrageous" insurance rates and are "mislead- ing" as to credit eost~. `~It's time that w~ call a halt in this country to lenders making more money selling Insurance than lending money," Mr. Olair declared. He said the situation has reached the point where insurance companies are getting into the lending business to share in the profits creditors are making on the sale of consumer credit life, health, and accident insurance. MODEL STATE LAW Two Maryland witnesses testified about similar abuses in their state. Attorney General Francis B. Burcb and former Insurance Commissioner Norman Polovoy predicted that, in 1968, their state would pass the model law of the National Association of InstErance Commissioners designed to curb consumer-credit-insur- ance abuses and overcharges. But Subcommittee Chairman Philip A. Hart (D-Mich) expressed doubt that the model law would be the solution. More than half the states have adopted it, and many still have high credit insurance rates. Mr. Bureh and Mr. Polovoy both stressed the importance of state rate regula- tion and of adequate enforcement as other needed factors in controlling credit insurance. Mr. Polovoy estimated that more than $2 million of the $9,638,000 Marylanders paid for credit insurance last year was excessive. He said that, in his opinion, lenders should pay the entire cost of the insurance for small loans since it provides them with "additional security and protection." The senators also heard Cecil G. Huskey, a Charlotte, North Carolina, home- builder relate his~personal experience with abusive credit insurance. Mr. Huskey claimed that North Carolina's fourth largest bank, First-Citizens Bank & Trust Cot, pushed the cost of his business loans as high as 36 percent by making him buy credit insurance from an affiliate. The first time he went to the bank for a loan, no credit insurance was required. But the next time, he testified, a bank official insisted that he buy credit insurance through the bank at a very high rate. When he asked the bank official why he couldn't buy a cheaper policy elsewhere, Mr. I~uskey said the official replied, "We want to make money, too." At the May 19 hearing, Leonard J. Harmatz, a Baltimore attorney charged that "Maryland i~ an open field for the practice of loan sharks and racket lending." Two specific Maryland loan firms were named by Charles W. Grathbrell, the South Carolina Insurance Commissioner. Attorney General Burch told Senator Hart that he will investig~ate the Atlantic Management Co. of Silver Spring, which trades as ~faryland Cash Loans, and Investor Loan of Frederick, [From the New Republic magazinej Dnip~ Dia&i~ Tx SMALL LoANS (By James Ridgeway) Finance con4anies are making a killing on insurance Tacked on to their high interest rates i~ an exorbitant charge for n4suratce used to repay the loan in case the borrower dies It takes the risk out of lending But what the customers probably don t know is that relatively few borrowers die before loans are repaid Much of the premiums are pure profit and a good bit of it is funneled back to the finance company either in the form of commission or because the loi~n company owns the insUrance company. In a speech in Chicago last week, Dean Sharp, an assistant counsel of the Senate antitri4st and monopoly subcommittee, said an unpublished committee re- port on credit jlife insurance indicates that borrowers have been overcharged $700 million since ~959 About 80 p*~rcent of the $7~ billion in outsianthng consumer debt is covered by credit life in$uranee This is financing for automobile and household appliances as well as personal loans Premiums for credit life vary around the country, and run from a low of 37.5 cents per $100 borrowed per year charged by General Motors Acceptance Corp., the biggest fipance company to $2 per $100 asked by the small loan companies lo cated near military bas~s A usual premium is $1 per $100 The Insurance usually PAGENO="0179" CONSUMER CREDIT PROPJ~CTION ACT 761. is calculated on the whole loan and must be paid at the outset, This can add up: A Washington finance company recently quoted a prke of $30 for lnsurau~e on a three-year, $3,000 loan. Credit life is a relatively small part of the insurance industry, but it Is the fastest growing. The business is lucrative because eost~ are low, and borrowers seldom howl. Once in the hands of a finance company they are too beaten down to figure out the different charges which frequently are hidden. Last year 68 million borrowers paid insurance companies $500 million in premiums for credit life. The major costs to the insurer are death payments, but they only came to $280 million. James H. Hunt, Vermont's insurance commissioner, and one of the people concerned about the high cost of this insurance, said recently' that actuarial studies showed the cOst of a claim to be only 30 cents per $100 bor- rowed. The insurance companies themselves have said that administrative expenses run a bit under 5 cents per $100. This brings total cost to 35 cents. So, if a company charges the usual $1 per $100 rate, it comes out with a profit ocC 65 cents. This system can result in rosy profits. For example, Old Republic Life Insur- ance Co. of Chicago is one of the biggest firms specializing in credit life and writes little else. In 1965 Old Republic reported premiums of $62.6 million and paid out death benefits of $23.3 million. This suggests a gross profit of 63 percent. The interests of the finance and insurance companies frequently coincide. The insurance company pays the finance firm a commission on the credit life sold and, of course, the more made in premiums, the higher the commission. At the end of a good year, it is common practice for the insurance company to kick back profits to the finance company. This is known in the trade as the retrospective rate credit. Thus, competition works in reverse. Instead of looking around for the cheapest insurance for its borrowers, it is very much in the interest of the finance comfany to work the rates as high as possible. Moreover, some of the biggest finance companies own the insurance companies that write policies on their loans. Under this double-headed arrax~gement, the parent finance company makes money on interest as well as from premiums, and it can charge the insurance subsidiary management fees for handling the records. There are even more subtle renderings. "In examining the statement of a very large and well-regarded stock insurance company," Commissioner Hunt has said, "I noticed that most of their credit life business was being reinsured. There was no actuarial reason for this. so I made some inquiries. It turned out that this company wrote credit insurance for a large finance company. The deal was that the insurance company reinsured over 95 percent of the incoming credit business with an insurance company controlled by the finance company. About 45 percent of the premium was profit, and, of course, all but a prenegotiated part of this went to the wholly-owned subsidiary of the finance company. For a price, then, the finance company bought the good name Of the insurance company and, to boot, avoided the appearance of controlling the business, whereas, in fact, they did." Mr. Hunt makes this seem all rather conspiratorial. flut there are no laws pro~ hibiting finance companies from owning insurance companies; nor in most places nre there any restrictions on their dealings with insurance companies. These transactions are in the open and apparently regarded as a common business practice, as the following examples suggest: CIT Finance Corp., second biggest finance company in the country, buys credit life from Connectic~t General which then reinsures these policies with a wholly-owned subsidiary of CIT called North American C~. (Figures for North American were not readily available. But Connecticut General says that it to'oi~ in $18.5 million in credit life premiums in 1965 and paid out $6.7 million in death benefits for a gross profit of 50 percent. As a reinsurer North American shared in the risks and the profits.) Associates Investment Co., another of the largest finance compl~nies;, also owns an insurance subsidiary which writes some of the credit life on Its lo~ns. rrhe way it got into' the business Is interesting. tn 1953, Associates wanted to move Into' the insurance field. At the time, Old Republic was issing credit life policies for the finance company. Associates then set up an insurance subsidiary called Alinco. Old Republic reinsured Associates" business with Alin~o and handled the administrative details. Alinco had no office or any salaried employees~. An ac- countant employed by another of Associates' subsidiaries spent one day a month taking care of the books. Despite the simplicity of its operation between 1953 and 1959. Alinco's financial success was striking. Its net gain from opera~ tions during that period, before federal income taxes but after paring ita expenses and share of death benefits, was in excess of $28.5 million~ In 1957 Associates PAGENO="0180" 762 OQNSUMER CREDIT PROTECTION ACT acquired Capitol Lif~ Insurance Co. of Denver, an old line Insurance company,. and subsequently shi~tt down Allnco. An Associates' offiëial recently said insurance rates range from 50 to 75 cents~ per $100 borrowed. I~i 1965 Capitol Life, which writes half of Associates policies, reported premiums of $4.3 million and death payments of $1.6 million (gross. gain of 63 percent). Other companies have insurance subsidiaries. Commercial Credit Co. owns American Health & Life Insurance Co. which writes policies on the parent's loans. An American official said an insurance rate is $1 per $100. American showed premiums of $10.6 million last year against death payments' of $5.8 million for a gross gain of 45 percent. Financial General controls Bankers Security Life Insurance Society. The Transanierica Corp. Qwns Pacific Finance Corp. which, in turn, controls Pacific Fidelity Life Insurance Co. In general, the pr&fits for insurance companies in this' business range from about 36 percent to 60 percent. Commenting on this situation, Commissioner Hunt said, "If normal competition, rather than reverse competition, could exist there wonld be a tremendous reduction in costs' o'f credit insurance passed on to borrowers. I would estimate that, based on current premium income, the sav- ings would exceed a hundred million dollars nationwide annually." Payment of death benefits probably has risen during the past year because of the war. Many finance companies thrive on army camps. One congressional investi- gator reports helicopter pilots at Fort Rucker, Ala., about to' leave for Vietnam, are buying automobiles and household appliances. They borrow the money and it is insured against ~heir death at rates up to $2 per $100. The Defense Depart- ment has approved 98 life insurance companies to solicit business on military posts. One-third of these write credit life, and include companies charging high ratea A~ in the case o'f all insurance, regulation of credit life' is left in the hands of the states'. Thirty-one states have no' effective regulation over rates charged. Massachusetts recently sought to bring down rates by limiting the' premium t~ 50 cents per $100 per year. Both Vermont and Connecticut have passed laws prohibiting lenders, from making a profit on credit insurance in the small loan field. In his Chicago speech, Dean Sharp called for federal regulation. As a step in this direction, the antitrust and monopoly subcommittee will surely want to release its stiidy of ct'edit life insurance, and hold a full-scale investigation. This would come under Se~ator Dodd's insurance subcommittee. Dodd comes from Connecticut, the Insurance capital, which means that when he proceeds, if ever, it is at a snail's pace. dThe committee has been involved in an alleged study of the insurance industr4r since 1958.) At any rate in this matter, the large life insurance companies may want to protect themselves before the finance companies get them into a mess `which Dodd can't cover up. Credit life insurance on any loans under $1,000 shotild be banned outright. The risks to the finance companies are too slight to bother with. And the congress should make it illegal for a finance company to profit on insurance. JAMES RIDGEWAY. BANK IN THR BILLFOLD-MORE CONSUMERS PAY LOCAL SHOPPING BILLS Wi~n BANK CREDIT CARDSL~~~LRNDERS DON'T SET MINIMUM INCOME REQUIREMENT PLANS CHEERED BY SMALL RETAILERS-"JTJST LIKIS THE RICH PEOPLE" (By George Nicl~olaieff, Staff Reporter of The Wall Street Journal) PIPTSIrnRGH.-"How about this," says a grocery clerk here as he brandishes a new credit card. "Just like the rich people." The clerk's prized pOssession represents a relatively recent development in the world of on-the-cuff living-the bank credit card. Such cards, issued by a rising number of banks around the country, permit their holders to charge everything from doctor bills to candlelight dinners for two. Their growing use-and easy availability-may well signal that the day of credit-card existence has dawned for the plumber and factory hand as well as for the executive and professional man. The bank credit cards overlap to some extent with national credit card plans like those offered by Amer1c~n Express Co. or Diners' Club, Irkc. Both can he used to charge restaur~tnt tabs, for example, and some baliks have copied the PAGENO="0181" CONSUMER CREDIT PROTECTION ACT 763 natiomU cards and persuaded airlines to accept their cards. But, for the most part, banks are carving out new areas of operation for their credit cards. STRETCHING OUT PAYMENTS Whereas applicants for national credit cards met specified income standards- American Express sets $7,500 as the floor-banks have no minimum income re- ~uirements for their card holders. Also, whereas national credit cards are -designed mainly for use in travel and entertainment, bank cards are intended principally for local shopping or for paying repair and other service bills. Another significant difference between the two types of cards is that national cards must usually be paid in full each month, except in the case of airline ticket purchases, while banks allow holders of their credit cards to extend payments over a period of time if they choose. Within the past year, a half dozen banks, including Mellon National Bank & Trust Co. and Pittsburgh National Bank here and Valley National Bank of Arizona in Phoenix, have launched their own credit card plans. California's giant Bank of America and Buffalo-based Marine Midland Trust of Western New York have issued their own credit cards for several years. A score of other banks across the nation currently are studying the possibility of starting credit card programs. From the banks' point of view, credit cards offer a way to put their ample funds (commercial bank deposits total about $310 billion now, up from $223 billion at the end of 1960) to work at a high rate of return. Evidence that banks see the credit-card field as increasingly attractive is found in recent moves by First National City Bank of New York to acquire Hilton Credit Corp.'s Carte Blanche national card plan and by Chase Manhattan Bank to buy Diners' Club as well as in the rise of local bank credit-card operations. BOON FOR SMALL BUSINESSMAN But the impact of the new bank credit cards is not limited to the profits of the banks, who collect for their services from both participating businesses and credit-card holders, nor to the new class of card users being created. A prime beneficiary is the small businesman who lacks the cash or accounting facilities to provide credit on his own but who, with the aid of bank credit cards, can offer his customers the same credit services as larger competitors. Says E. H. Gugliotta, manager of a small Buffalo shoe store that participates in the credit card plan of Marine Midland Trust of Western New York: "This store went into the black this year and it's all because of the credit card. People used to look into the window and then keep walking to the big department stores. Now they see the credit card decal and come in." Mr. Gugliotta adds that bank credit cards have increased multiple sales 100%-"now they buy two or three pairs of shoes and let the old man worry about paying." Some department stores, on the other hand, are not at all happy about bank credit cards. Many department stores permit customers to stretch `out payments over several months, charging a monthly fee on the unpaid balance and thereby adding substantially to earnings. This same type of credit service is available to shoppers wider bank credit-card plans, and as a result, says R. B. Adam, president of Adam, Meidrum & Anderson, Buffalo's second largest department store, "there's no question these cards are a threat to us. The bank is in competi- tion with us, and we don't like it." IBIiESPONSIBLE HOLDERS Some early attempts to set up local bank credit-card plans `encountered rough going. Chase Manhattan started a bank credit programS in 1958 and then dropped It in 1962 when, `according :to the `bank, the `plan "did not develop as projected." Other bankers, however, blame the failure on inadequate screening of card ap- plicants, which left hundreds of cards in irresponsible hand's. The credit manager of one New York store says Chase's list of holders of credit cards that were net to be honored reached 10 to 15 pages. The Bank of America, which started issuing credit cards in 1958 and Marine Midland Trust of Western New York, which set up its plan in 1959, both had large losses `at first because of high promotional costs and a high proportion of bad debts. Industry sources estimate the Bank of America lost about $15 million to $20 million in the first two years or so' its credit-card plan was in operation: Bank of America calls this estimate high but refuses to disclose any figures itself. PAGENO="0182" 764 O~NSUMER CREDIT PROTECTION AQT B~owever, the Ba'k of America started making a profit on its credit cards in 1~1; in 19fi2, its first full year of in-the-black operations', it's `believed the bank earned about $8 million from credit-card business. In 19~3 Marine Midland Trust of Western New York get its credit-card plan into the profit column. When the Bank of America's credit-card plan began to pay off, it was the signal for a i~wnber of other banks to enter the `field. "I think we all waited to see how the Bank of Ameri~~a would turn out," says a Mellon Bank spokesman here. "When it turned th~ corner we could see what a well-run program could do." Mellon `started its cr~Uit-eard plan this past summer. The key to a sncqessfui credit card operation `appears to be a happy balance~ that excludes dubio~ts risks but still gets the maximum number of card holders, and moist banks make their cards available to any applicant who can pass a credit cheek, regardless of his income level, In contrast to most national credit cards there is no initial fee. "We look at the man's credit record and `then we make a decision," says P. M. Welch, vice president in charge of consumer credit `at Atlanta's `Citizens & Southern National Bank, which has issued cards since 1959. "This means we're dipping pretty well into the middle and even some low-income groups." holders of bank credit cards are billed once a month. They have the option of paying the whole amount at one time or dividing It into installments. Besides using bank credit cards to pay bills, holders can use their cards to borrow money up to a specified limit-Pittsburgl"s Mellon bank, for example, will automatically innd holders of its cards up to $350. "It wouldn't pay to lend $100 or $200 as a conventional instalment loan, but it works real well with a card," says one bank official. ATTRACTING NEW ACCOUNTS Banks charge merchants and others who honor their credit cards discounts ranging from 2% or less to as much as 5%, on each sale. They pay participating businesses over-night for charged sales by crediting an account the business must keep with them; a side benefit of credit-card plans for banks, note bank officials,. is that they draw new accounts from businesses, some of whom eventually begin to make use of the banks' other services. Instalment cbarg4~s to card holders on unpaid balances average about 1.5% a month, or 18% a year. Bankers estimate that total net earnings on a successful credit-card progran~ work out to over 5% a year on investment; by way of com- parison, instalment loans generally net about 3.~% annually on~ investment. Banks that issue their own credit cards and the firms that issue national cards maintain they don't seriously compete with each other. Btnt as bank cards catch on it seems inevitable that they will cause trouble for the national cards. United Air Lines now accepts the cards of Mellon National Bank, the Bank of America, Citizens & Southeri~ and Bank of Hawaii, a development that puts the banksr cards into direct co~npetition with national cards for travel business. Moreover, bank and national cards are likely to compete increasingly in restaurant and. specialty shop fields~ CUTTING t~ISCOUWTS In some areas, where banks have aggressively promoted their credit-card plans, national cards alren~dy have `been forced by the competition to cut their discounts. In California, wbei~e the Bank of America has over 1,250,000 cards holders, the national cards were charging discounts of 7% to 10% before `the hank's' plan started going strong. But they had to drop their discounts to 4% and 5% in order to bring them more in line with the Bank of America's rates. In Phoenix, national cards reduced their discount to 4% from 6% at one large restaurant shortly before Valley National started its credit-card program thi~ year, according to T. L. Lar- sen, manager of the operation. Despite the absence of minimum Income requirements for holders of their credit cards, most banks ~ay they now have little difficulty with customers' failing to' pay up. Banks with credit-card plans usually allow for bad debts equal to 1% of volume on charge cards, but some are hitting well below this figure. CItizens & Southern of Atlanta, for example, says its bad debts on credit cards are running at 0.35% of volume.' For many of the' new credit-card holders, the big attraction is convenience. B. J. Klein, a 28~y~ar~old airline clerk in Buffalo, recently bought rubber boots and shotgun shells ~or a hunting trip, a purchase totaling only $7.50. "I had the PAGENO="0183" CONSUMER CREDIT PROTECTION ACT 765 money in my pocket, but if 1 spent it I might be cauglit short at work, so I used my card," he says. Some users of bank credit cards concede, however, that at least initially the new purchasing power went to their heads. That was the experience of a Buffalo cab driver who, together with his wife, has an an~iual income of "about $7,OOO.'~ Shortly after he got his card, be relates, "I bought $300 worth of junk for my car in one month. My wife got so mad she took my card away for a while." SEIZING PAT-UNIONS, FIRMS, LAWYERS Snz~ To Cunn GARNI5InNO As ITS INCIDENCE Risns-Ip LEADS ro BANKRUPTCY, FIRING AND RELIEF ROLLS, Tnn~ SAY; AUTO WORKER KILLS HIMSELF-DEDUCTING $500,000 AT INLAND (By James P. Gannon, Staff Reporter of The Wall Street Journal) CHIOAG0.-One payday in January, auto worker Carl W. Clark discovered his entire week's take-home pay of $112.39 bad been turned over to the state of Indiana for delinquent state income taxes. Beset by debts, he asked officials at Ford Motor Co.'s plant in suburban Chicago Heights, Ill., for his accrued vacation pay to tide him over. Next payday, he learned Indiana-the state where he used to live-had 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 fropa 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 over~burdened 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 ltftll 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 metropolitan areas indicate more and more workers are finding part of their wages eoi~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 MR REEDS PLIGHT The records of Inland Steel Co indicate how widespread wage attachment can be. Each payday the company makes such deductions from the paychecks of PAGENO="0184" 766 CONSUMER CREDIT PROTECTION ACT a1~out 2000 of its 22,000 production employes in the Chicago area, says Dorothy A. Laseoe, who handles thi~s dhore. I~n1and animally pays out more than $500,000 of withheid w~tges to creditors, sbe adds. Who are the people behind the statistics? Most often, they are working men like Franchot `i~one Reed, a 29-year-old tire mounter for a Chicago-area truck manufacturer, who learned of garnishment the hard way. In 1904 Mr. Reed tsa~ded his 1956 Plymouth in on a 1950 Cedillac and signed an installment saleis contract to pay $1,200 for the aging ear in 48 weekly pay- ments of $25. After be defaulted, the dealer repossessed the ear 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 $2,195 in debts, including bills for jewelry and clothing as well as the ~ostly old Cadillac. TRIGGERING BANKRUPTCY As this case si~ggests, there is a connection between mounting garnishments and the steady itise in the number of personal bankruptcies in recent years. "Garnishment f$quently triggers bankruptcy," says Linn K. Twin~m, chairman of the American `B~.r Association's committee 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 years earlier. Bankruptcy filings this year are expected to top 200,000. Personal bank- ruptcy filings accounts for 91% of the total. Mr. Twinean says there is a "close relationship" between the severity of a state's garnishment law. and its bankruptcies. California, which has a relatively tougth garnishment law, led in bankruptcy filings in fiscal 1905 with 33,056. At the other extreme, three populous states that don't allow garnishments have dramatically h~wer bankruptcy-filing totals; Pennsylvania had 1,133, Florida 958 hnd Te~a's 601. Garnishmen1~ often causes workers to lose their jobs. Many employers fire em- ployes whose 4eht problems lead to excessive wage attachments, arguing that company hanc~1ing of garnishment paperwork and court appearances by em- ployes are cosi4y and time-consuming. The Cook C¼unty Credit Bureau in Chicago surveyed 1,100 employers in 1904 and found that processing a single garnish- ment costs a co'm~any from $15 to $35; the estimated costs of garnishments to the surveyed employers totaled $12 million annually. Few companies will discuss the firing of workers for garnishments. A per- sonnel official at one General Motors Corp. plant near Chicago confirms union reports that 45 men were discharged at the plant for that reason last year. Another Ohtoago manufacturer admits firing "25 or 30" men for garnishments. Union officials liken the practice of firing debt-burdened workers to the medieval ~ustom of kicking 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 ~s he is making sincere efforts to straig~ten out his debts. Employes fired for debt problems often wind up on relief rolls, social workers 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. REtI?ORM 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 legislators in many states to increase the amount of wages exempt from garnish- ment. These exemptions vary widely at present, from 50% in California to t~0% in New York; in some states, the exemption is a fiat amount, such as $100 a month i~or a family-head in Mississippi. In fllinpis, where Gov. Otto Kerner is considering calling a special legislative session `this year, the state AFL-CIO wants the wage exemption raised from 85% to 9O%, with the minimum amount safe from attachment set at $65 weekly rather than the present $45. Unions in Illinois also want abolition of wage assignments. Unions in Ohio, Connecticut, Colorado and other `states also are seeking legislation to Increase the `amount of pay `shielded from attachment. Recent PAGENO="0185" CONSUMER CREDIT PROTECTION ACT 767 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. Pwinem, because "more and more attention is being focused on garnishment." And last week Kentucky's house of representatives 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. PAYING THIS BACK TAXES Another union goal in several states is a ban on firing an emrgoyee 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 overcome 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 Demo- crats 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 community 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 the pay- check 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 consumer credit is under way. The National Conference of Commissioners on Uniform State Laws, comprised of representatives of each state, currently is drafting a uniform consumer credit code. The model law is expected to cover all aspects of consumer credit from "advertising and sales solicitation through the sales contract to collection and' default problems, including garnishment," says Allison Dunham, executive direc~ tor 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 EUSINESS Businessmen, meanwhile, are accelerating a debtor-aid program of their own.. Consumer credit coui~seling services designed to aid overburdened debtors were set up in 15 cities last year under a program sponsored by the National Foundation for Consumer Credit, a trade association. Since 1062, more than 30 such counseling~ centers have been established, largely supported by contributions from mercbants~ banks loan companies and others The foundation plans to set up one or two a month" in 1966. 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 parce~s it out among creditors as agreed In Salt Lake City, for example, the Consumer Credit Counseling Service of Utah, Inc., last year aided 433 families, collecting and paying to creditors PAGENO="0186" 768 CO~SIJMER CREDIT PRO'T'ECTlON ACT $426,000. "It would have been necessary for at least 75% of the 48$ families we were servicing to have taken bankruptcy had crur service not been available," says Charles E. Willian~s, president. Generally, the business-supported counseling services don't charge fees. [IFrom the Wall Street Journal, Mar. 29, 1966] REVIEW AND OUTLOOK-THE VIRTUE OF PROFLIGACY Among Inland Steel Co.'s 22,000 production employes in the Chicago area, nearly 10% have a portion of their wages withheld every payday to pay off delinquent debts. While the Inland workers probably aren't typical of the whole population, their dreary credit record helps point up a growing national problem. Consumer credit outstanding has nearly doubled in the past seven years, rising to nearly $90 billion. Though most American1s use credit responsibly, an increasing number are submerging themselves in overdue obligations; the result, as a recent story in this newspaper reported, can be personal tragedy, even suicide. Obviously, then, k cause for serious concern, and yet some of the approaches to the problem seem lncapable of offering anything like a full solution. Labor unions and other groups are urging new laws to defend beleaguered debtors, and perhaps certain changes are needed. It seems excessive, for instance, to allow Federal ~nd state tax collectors to seize a man's entire paycheck or to permit Kentucky businessmen to take all but $16.87 a week. There's more than a chance, however, that the process of legal change will go too far. As a number of businessmen and other creditors are arguing, the nation has come a long way since the days of debtors' prisons; personal bank- ruptcy laws and other statutes now often make it possible for debtors to avoid paying most or allof their legitimate obligations. Any further legal revisions surely should be fair to creditors as well as debtors, and not only for reasons of equity. Credit is essential to the present- ~day economy, ai~d many businessmen simply may not extend It if laws are passed to unduly~ weaken their ability to collect from customers. Even-handed d~bt-collection laws, in any case, clearly can't make all Ameri- cans use credit rationally. Nor will it help much to require, as the Administra- tion proposes, that all lenders state credit costs in the same way. If a consumer is foolish enough to overburden himself with debt, it won't matter greatly whether his credit costs are high, low or in between. More productive might be an extension of credit education through the na- tion's school, a process that is already under way. Something can be said, too, for stricter enforcement of present laws to curb deceptive and dishonest lenders; they may be a $mall minority, but there's no question that they exist. Beyond that, a lot of quite reputable businessmen can't escape a share of the responsibility for the troubles in consumer credit. High-powered advertising and promotion has helped produce vast changes in public attitudes toward debt over the past three or tour decades. Maybe it was overly puritanical to consider borrowing almdst a sin, as many of our fathere did, but the pendulum now per- haps has swung too far in the other direction. In not a few business establish- ~ment:s today a customer who wants to pay cash finds himself regarded as a bit peculiar. In their own interest, lenders could stand a stronger dash of self-restraint. :By paying a little less attention to boosting their business and a littlh more to a borrower's actual ability to repay, they not only would protect their own solvency but possibly head off new restrictive legislation. It's more than slightly ironical that the source of some of that legislation probably would be the same Federal Government whose own carefree fiscal and monetary polieies have donb so much to foster an easy-come-easy-go philosophy among the pitblic. The way Washington has been living it up, it may be sur- prising that ~ large proportion of the po~iilation still remains free of credit ~woes. Many of these fortunate ones~ of course, are sustained mainly by the present ~high level of prosperity~ If more widespread trouble is to be averted in some ~erbaps not distant future creditors, debtors and the Government all had better get over any notion that profligacy now is a positive virtue. PAGENO="0187" CO~SStMER CFti~DIT PEOTIICTION ACT 769 INLAND Snmn Co., Augu~9t 3, 1967. Hon. FRANK ANNUNZTO, House of Representatives, ~nbcommittee on Consu~nier Affairs, Cornm~itte~ on Banking and Currency, House Office Building, Washington, D.C. TJEAn 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 Ptoteetion Act, of which you are a cosponsor in the House of Representatives. You were good enough to en- close 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 garnishment 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 dis~losure of credit terms may often fall or~ 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 an'd 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 fall 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 $treet 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 davice 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 whi~h 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. 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, Gaoaos A. RANNEY, Vice President and General Counsel. SPECIAL Rzponv: DISChARGE FOR GARNISHMENT A worker's going into debt, like other off-duty conduct, generally is no business of the employer. But if bad debts result in garnishments, arbiters tend to treat this the same as on-duty misconduct and uphold a management policy requiring discipline for garnishment. This is one of the findings of a survey of published arbitration awards under- taken by Robert W. Fisher of the Labor Department's Bureau of Labor Statistics. His report, "Bow Garnisheed Workers Fare Tinder Arbitration," appears in the May issue of the Monthly Labor Review. In all of the cases examined, the arbiters found that management had the right to discipline garnisheed workers, even in the absence of a formal rule, Fisher finds. But in about half the cases, the arbiters nevertheless refused to go along with discharge decisions. In treating garnishment as in-plant misconduct, the arbiters note that em- ployers naturally want to avoid the inconvenience and expense of extra book- keeping, the necessity of filing written returns to the attaching office, and the need for company representatives to appear in court. Thus, each case of discipline for garnishment is tested against the usual yardsticks for determining just cause: (1) Was the rule reasonable and well- PAGENO="0188" 770 CONSUMER CREDIT PROTECTION ACT known to the workers ; (2) was the application of the rule nondiscriminatory; and (3) were there extenuating circumstances? Rea~so~ivableness o~t R~lcs.-A rule that provides for automatic discharge after a single garnishment is not regarded as reasonable by arbiters, Fisher finds.. While rules specifying ~`two times and out" have been okayed, many arbiters seem to favor wit~iholdllng the discharge penalty until the third garnishment. One arbitrator gave this explanation: "Many companies have established the practice of terminating employees after their third wage or salary deduction. This may seem harsh to those who are perpetually in financial difficulties; but at least the employees are put on notice;~ tbe3~ are counseled and . . . warned that future financial involvement of this kind will result in discharge." (44 LA 87). Arbiters invariably insisted that employees be amply warned of a garnishment rule, Fisher notes. Thus, discharges were invalidated where (1) the company had not posted or otherwise disseminated its garnishment rule (14 LA 787) ; (2) no preliminary warning was given prior to a "final" warning (46 LA 822); or (3) the contract, which contained a new and stiffer rule, had not yet been printed (43 LA 1268). Equal Treatment.-Application of a policy against garnishments must be regular and predictable, with the same corrective escalations of discipline ap- plied to all employees if arbiters are to sustain a discharge, Fisher says. Thus, a discharge for a third garnishment was set aside where it was shown that in six similar cases, only three had been discharged. (27 LA 160). But a too mechanical observance of a disciplinary schedule also may be rejected by an arbiter. Where the policy called for a warning for a third garnish- ment and disch~irge for a fourth, a company should not have discharged an employee when the third and fourth garnishments arrived on the same day, an arbiter said. (37 LA 85). Ewtenuating c1ircumsta~ioes.-In garnishment cases, arbitrators reinstate more workers becaus~ of extenuating circumstances than for all other reasons eom-~ bined, Fisher ~iotes. 13~xtenuating circumstances include discharging the debt through bankruptcy, speedily lifting it prior to discharge, lack of knowledge of the debt, a good work record, or loss of income due to chronic layoffs. One arbiter, l3enjamin Roberts, noted in a recent address that discharges for garnishment are being given a closer look by arbiters these days. A discharge may be set aside, Roberts said, If it appears that the employee had found himself in unusual and difficult circumstances not necessarily of his own making. If extenuating circumstances are found, reinstatement may be directed on the condition that there be no further garnishments and that the ex isting liabilities be liquidated as soon as possible. State legisl~ttures currently are showing an interest in this subject and are considering restricting management's right to discharge for garnishment. Hawaii~ for example, has adopted such a law. Despite the determined fight of unions to prevent the firing of workers whose wages are garnisheed, the worker in debt whose wages are garnisheed more than once or twice is in grim danger of losing his job. A study of widespread arbitration cases published in the current Monthly Labor Review by the U.S. Department of Labor comes to the conclusion that garnli~bment-although an off-the-job "offense"-has come to be regarded as hay- in~ equal st~itus with such on-the-job offenses as fighting, drunkenness or theft. A~uthor ot~ the study, Robert W. Fisher, notes that unions "do not accept dis- charge of workers for garnishment with equanimity primarily because such dis- charges smack of employer control of the employee's private life-the philo- sophical ro4~t of the questioning if discharged for garnishmept." He further notes, however, that in the absence of protective legislative or a specific clause in the collective bargaining agreement, most arbitrators accept too frequent wage garnishment as a legitimate "just cause" for discharging a worker. As a rule, Fisher found, arbitrators took the position that garnishment repre- sented a burden on employers who are subject to harassment by cred~to'rs, the necessity for keeping special accounts as well as being called into court under certain conditions Having ~tccepte4 garnishment as a `)ust case" for discharge in principle most arbitrator~ seek to lay down mitigating conditions One arbitrator stated that GARNIsHMEn~T STILL Bm TUREAr To WoRKERs IN Dnnr PAGENO="0189" CONSUMER CREDIT PROTECTION ACT 771 "discharge should be used only when employee behavior affected the employer- employee relationship," and that "pay attachments were definitely in the twi- light zone." He was critical of civil law that permitted creditors, many of whom knowingly permitted workers to overbuy, to "wipe out the pay envelope" and even have a man discharged. Nevertheless, he and other arbitrators accepted the "just cause" principle, but have worked out a number of "reasonable rules" `surrounding job loss. One Is the number of garnishments. Fisher reported that most arbitrators would not permit the firing of a worker for the first garnishment; many would permit two garnishments within a stipulated time. Three garnishments, however, appeared to be enough to warrant firing in most of the arbitration cases studied. Another factor taken into account by arbitrators was whether a company had amply warned its workers of definite garnishment rules that may lead to discharge. A third factor was whether a company was consistent in its policy toward garnisheed workers-that is it can't discriminate in the application of its rules. Finally, other "extenuating circumstances" which resulted in the reinstate. ment of discharged workers were lack of knowledge of the debt; prompt pay- ment of the debt; going into bankruptcy which extinguished the garnishment or a good working record. Mr. HALPERN. I would like to welcome a very able, and no pun in- tended, and distinguished witness. He `has been a `credit to the labor movement and, in the short time since he succeeded an admired and outstanding predecessor, he has proved his ability as a respected leader of organized labor and is a potent and highly respected part of the American industrial and economic scene, and I welcome you to this committee and wish to commend you for your most superior and most helpful testimony. Mr. Ar~m~. Thank you. Mrs. `SULLIVAN. We will take a few minutes recess at this time. (Short recess.) Mrs. SULLIVAN. The subcommittee will come to order. Mr. Abel, I want to say that you have given a very clear and pre- cise statement of your position on our consumer credit protection proposals. You have made your position so clear that I don't have too many questions to ask of you. Mr. Abel, Congressman Annunz'io has introduced into our hearing record a letter from the `board chairman of Inland Steel Corp. sup- porting the provision of H.R. 11601 to abolish wage garnishment, as a terrible annoyance and expense to the employer and a cruel thing for the employee. From y'our knowledge of the steel industry `and others with which you have ~ontraets, would you say this is the prevailing sentiment of the employers you deal with? Mr. ABEL. Very definitely I would. As a matter of fact, perhaps Inland is more lenient with their views toward this pro'blem than are most companies. Inland is one compan.y that doesn't discharge their employees because of garnishments but many companies do. Mrs. SULLIvAN. Do you know whether any of these companies have debt counsellors who help employees who get themselves into financial trouble? Mr. ABEL. There is some of that in the personnel departments, but it isn't a large practice. PAGENO="0190" 772 CONSUMER CREDIT PROTECTION ACT Again, the cOmpanies take the poswtion that this is a cost and soine~ thing they can~t afford. It is bad enough the burden is placed upon them to make the collections and do the paperwork and take care of the creditors. So, there isn't too much of that. As I say, in a number of cases they just discharge them, sometimes on one garnishment, and other companies have a policy of perhaps three garnishments and then the employee loses his job. Mrs. `SULLIVAN. There is another subject that I want to bring up, but first I will yield to Mr Annunzi~ Mr. ANNuN*Io. Thank you, Madam Chairman. I take this ø~portunity to welcome the distinguished president of the United Sthelworkers of America to our committee hearings and aiso 1~o comme~id hun for his very forthright position with ref&ence to }LR. 11601. As a former legislative representative of the United Steelworkers for the State of flimois, I am naturally tremendously delighted to wel- come you, Mr. Abel, to our committee, and I would like to state for the record that MT. Abel, as the leader of 1,250,000 steelworkers, represents the American dream. Mr. Abel is a steelworker-he started to work in a steel plant, and through the ~rocesses of industrial democracy, he now has risen to the posttion of the head of one of the largest industrial unions in America. We know in today's union structure an industrial union does more than protect the rights of theworkers as far as w'a~es and hours~ are concerned. The union also contributes to American industrial society by educating and protecting the workers regarding the rights they have under our Constitution. Mr. Abel, I am tremendously pleased with the position you took with reference to the garnishment section of lEE R 11601, and I know that my other colleagues on the subcommittee who cosponsored the bill with our distinguished and charming chairman, Mrs. Sullivan from Missouri, alsb appreciate your forthright position. As I stated to Mr. Wirtz, the Secretary of Labor,, who is on the Corn- mittee which the President ordered to conduct a study some 5 months ago for garnishment of wages, I know that you are a vice president of the AFL-CIO, you are a member of that executive board, and you are truly a representative of labor appearing before this committee. The legislative director of the Al~L-CIO, who appeared before this committee r~cently, stated that the national labor movement of Amer- ica had no official labor policy with reference to garnishment, hut I k~uow that every State labor federation in the country has formulated a position ~nd that we are against garnishment. I know that my colleagues who sponsored this bill would be grate- ful for an official statement from the national AFL-CIO and we are tremendously grateful for your very forthright position on the gar- nishment provisions. Mr. Abel2 for the benefit of the committee. can you tell us if the steel- workers union has an education program? Mr. AunL. Yes, Mr. Annunzio, we do have a very good one, I think, I would like to say that the steelworkers-one of the first things that Philip Murray did in establishing the steelworkers union was to set up an educational department and employ an educational director. We have since' that time expanded our efforts, both in an attempt to bring PAGENO="0191" CONSUMER CREDIT PROTECTION ACT 773 about better understanding, qualify our representatives better to ren- der a greater service to the membership. As a result, we have programs, resident programs in the city of Pittsburgh for staff people, a staff that numbers some 1,260, so that they are kept current and better qualified. We have going on at the present time throughout the country on the campuses of universities and colleges throughout the country some 27 of them, summer institutes and we will have at these institutes roughly 25,000 local union officers, committeemen, and members where we attempt to acquaint them, better acquaint them with the problems of the day and even getting into problems such as we are discussing here today-~-triith in lending, credit charges and that sort of thing, hoping that through this process we make them not only trade union- ists but better citizens. Since you have given me the opportunity, I might report to the committee that since 1947 we have sponsored quite a scholarship pro- gram in our union and between our local unions and our districts we have since that time granted 1,160 scholarships to youngsters who otherwise would not have an opportunity to go to college, and these 1,160 scholarships represent an investment of better than $1,500,000 in this kind of effort. So, we are very much interested in educational programs. Mr. ANNUNZIO. As the president of 1,250,000 steelworkers--for the benefit of the committee and the record-would you tell us the States in which the steelworker union are located? Would that be too difficult a job for you or could you answer that for the record when you get the transcript? Mr. ABEL. We could give very definite coverage, but I would say briefly we have membership in practically every State in the union, including some membership in Hawaii, membership in Puerto Rico. Unfortunately, we don't have any in Alaska, but States where you wouldn't maybe expect-in Utah and out in the Western States-. wherever membership in the hard rock lines in fabricating operations. So, it is practically every State in the Union we find United Steel- workers of America. Mr. ANNUNZIO. One more question. If an employee of a plant where the steelworkers have organized is fired for garnishment, I know that that worker can go to the grievance committee of the union, and the grievance committee will protest the firing. Could you enlighten the committee as to the cost that is involved, because this is another hidden cost in the enforcement of this law, that is ultimately passed onto the people? Mr. ABEL. We have that experience constantly, Congressman, as you have made the point. Most any problem that a member encounters, whether it be discipline or discharge, does make him by reason of his membership entitled t~ protection and every effort to rectify it. So, we do find ourselves going to arbitration in many cases where an employee has been discharged. In some cases we are successful in reversing the discharge and reinstating the individual, in some cases the arbiter up- holds the discharge so we lose. With respect to the costs of such action, it is difficult to put an exact dollar and cents cost because of the service required on the part of local union officers as well as staff representatives and occasionally some of our experts. PAGENO="0192" 774 CONSUMER CREDIT' PROTECTION ACT But with respect to arbiter's charges, I don't think it is any secret that they, too, have been doing quite well in our society and the average charge of an arbiter now runs about $500 per case. So, it would be safe in saying that each one costs at least $500 to the arbiter, to say nothing of the costs of the union's services. It is a costly factor. Mr. ANNUNZIO. In trying to establish the exact cost of these garnish- inents, we find it is costly to the counties involved and it is costly also to the international unions. The money they are spending to arbitrate these cases could easily be spent for more worthy purposes than rep- resenting a man who is losing his job. My time is up, Mr. Abel, and we appreciate your coming. Mr. ABEL. I might add further to what you have said that in many instances we probably would be ahead to pay the bill that the individual had rather than having the arbitration charges. But then again, I think you must keep in mind, always, that while we have this problem-and it is a burden to us in our industry-it is almost unbelievabl~ the impact of this on the lower earning workers that are unorganiz~d and have no protection such as the union. Mrs. SULLIVAN. Mr. Wylie? Mr. WYLIE. Thank you, Madam Chairman, I, too, would like to thank you, Mr. Abel, and Mr. Sheehan for being here this morning and for giving us the benefit of your testimony during our delibera- tions. Were you here, Mr. Abel, when I was asking questions of Mr. Wirtz? Mr. Aiu~L. Yes; I was. Mr. WYL~. I have been pursuing a line of questioning `all during the hearings in an effdrt to gain information. You stated you are for full disclosure both of~ an annual interest percentage rate and in dollar- and-cent terms. I have taken the position that a disclosure in dollars and cents, in cash amounts, would be more meaningful to the customer than a disclosure in interest rate terms alone, would you agree with that? Mr. ABEL. It has an impact both ways. I think you must realize, while dollars and cents may be more understandable in many instances, I think a real understanding is to understand-to wake up one day to find that maybe you have been paying 147 percent as a usury charge and this in itself pretty much scares you. As I pointed oi~it also one of our own local presidents found he was charged 71 pdrcent. ~\`faybe the actual dollars didn't concern him too much and evidently they didn't. But when he got it translated into 71 percent and learned that he was paying almost double that shook him up. So, we think it should be in both methods. Percentagewise as well as dollars and cents wise. Mr. WmiE. The people who have a revolving charge account, as I understand it, may represent about 40 or 50 percent of the credit ex- tended in this country. Now the revolving credit people maintain that to disclose an annual interest rate of 18 percent based on a 11/2 percent per month revolving charge is not truth in lending but untruth in lending, in that their annual rate may be something less than 18 percent. I am wondering if you think it would be just as meaningful if we could amend this bill so that the interest rate would be disclosed on a monthly basis for PAGENO="0193" CONSUMER CREDIT PROTECTION ACT 775 all credit, if that would be more nearly the approach we are trying to get at in this legislation and in this bill? Mr. ABEL. Mr. Congressman, there I would have to agree with the Secretary's view that this in itself is misleading. Because setting forth the 11/2 percent a month certainly can lead people to believe that they are getting a break, and actually it is not the true fact. An 18 percent would certainly cause them some pause. Mr. WYLIE. Except for the fact that we are trying to disclose an interest rate so that customers can compare or make comparison before making purchases. If one store says we use a 1½-percent interest rate and another says we have three-quarters of 1 percent interest rate per month, that would give a customer more of an opportunity to make a comparison of purchases than having one say we charge interest at a rate of 11/2 percent per month and a~çiother at 9 percent per year. Mr. ABEL. You can make comparisons, that is true, But certainly in our way of thii~king, as we have looked at `both bankiqg, financing, and that sort of thing down through the years, the terms are on an annual basis. We talk about `6 percent per annum. We talk about re- turns on investment on the basis of per `annum, not on th~ `basis per month. Certainly we feel that this should be kept on an annual basis. Mr. WYLIE. Thank you~ Mr. Abel. Thank you, Madam Chairman. Mrs. SULLIVAN. Mrs. Dwyer? Mrs. Dwyj~it Thank you, Madam Chairman. ~Tust one question. First of all, I want to congratulateyou' for a very fine constructive statement, Mr. Abel. Mr. Abel, as a union president what do you think is more meaningful to your steelworkers during contract negotiations, the annual per- centage increase in salary in benefits or the dollars `and cents increase in their weekly pay envelope? Which do they understand best? `Mr. ABEL. Well, that I am afraid would be difficult to give a truthful answer. Certainly everybody looks at the dollars and cents in the pay envelope. But again, we have become accustomed to translating imprpve- ments in advancement on a percentage `basis-there is a lot of com- parison and a lot of thinking on the percentage part. A year or two ago there was much talk of trying to limit the improveme~it to 3.2 percent, you know, and now we hear talk of 5 percent. In some cases even 8 and 10 percent. So it is translated pretty much on a percentage basis. At the same time we are looking at the dollars, too. Mrs. DWYER. Did the 3.2 carry much weight with the worker himself? Mr. ABEL. I think so, more than a flat 5 cents an hour or 6 cents an hour or 10 cents an hour. Mrs. Dwn3~n. Do you think the wife who is interested in the pay envelope `thinks in terms of percentage or does she think in terms of dollars and cents in the pay envelope? Mr. ABEL. You always get down to the dollars and cents. Mr. Sidney Hillman said some years ago about organizing reports when they were reporting on increase in membership. He said, "Don't give me the percentages, give me the facts." So, no doubt, that is the case with the housewife-she is concerned naturally with the dollar because it is the dollars she is spending. 83-340-67-pt. 2-13 PAGENO="0194" 776 CONSUMER CREDIT PROTECTION ACT Mrs. DWYER. She has to budget. She is thinking in terms of dollars and cents, is she not? Mr. Ae~. That is right. Mrs. DWYER. That will be all, Madam Chairman. Mrs. SULLIVAN. Apropos of Mr. Wylie's comment, he may be right that dollars and cents are what most people think of when they use credit. However, that is one of the main reasons why we need truth in lending-to educa~te people to understand that the cost of credit or the price of credit is more meaningful for comparison purposes when stated as an annual rate. Mr. Bingham? Mr. BINOHAM. Madam Chairman, thank you. I just want to join in welcoming Mr. Abel here today, I think we are all very grateful to him, not only for the work he is doing as president of the Steelworkers, but more particularly for taking the time and trouble to come here today and present this splendid' state- ment. I particularly welcome your statement on garnishment, Mr. Abel.. I think it is very helpful, particularly in light of the fact that AFL- 010 did not take a firm position on this matter Since you~ work di- rectly with the rank and file, I think it is most important that we have your statement and views. Since I y~clded the' time previously I won't ask any questions. Thank you, very much. Mrs. SULLIVAN. Mr. Abel, as a member of the President's Commis- sion on `Civil Disorders, do you see, as did Secretary Wirtz, a connec- tion between these disorders and predatory credit policies? Mr. ABEL. I don't think there~can be much question there. As I said during the course of my statement, several of us on the Commission spent all day yesterday in Harlem and in the ghettos of Brooklyn, and I don't think there can be much question in your mind that this is a contributing factor. Here is a sizable portion of' our people who are exploited in every degree. I am sure the loan shark, the easy-credit man, has left his mark and' made his contribution to bring about our ghettos in this country. Mrs. SULLIVAN. Thank you. I felt sure that you would have a basis' for judgment on that as a member of that Commission. Mr. Abel, if we can't get through the committee a complete prohibi- tion of garnishment at this time, do you think that a 90-percent ex- emption on wages, such as they have in Washington, D~C., and in New York State, would be helpful ~ Mr. ABEL. I think any step in this direction would be better than where we are at the present time. There is no question in my mind the extent of confiscation of the paycheck in many of these garnishees forces the individual to go out and seek credit to tide them over through this period and it is one of these things that feeds on itself. Eventually, the individual is beyond his means. I think this is one of the great prQblems we find even in our reputable banking institu- tions who are donstantly urging people, if they have 10 or 12 pay- ments to make in a month, consolidate them-get one big loan and pay. This just compounds this problem. Mrs. SULLIVAN. I know that putting this provision in H.R. 11601 made `many people gasp. The first reaction among lawyers' and busi- nessmen to the idea of prohibiting any garnishment of' wages seems PAGENO="0195" CONSUMER CREDIT PROTECTION ACT 777 to be one of shock. But I wanted to do a little shocking on this issue because I think the issue needs to be brought out into the light and explored. We have received a liberal education on this subject m the past 2 weeks. I am just sorry that the study ordered by the President last March has not yet been completed by the Department of Justice, and by Labor and OEO. But, I think we have made great progress, and I am still going to push as hard as I can to get something accomplished on this issue. One other thing: You did not mention anything about our provi- sion on credit advertising. You have touched so thoroughly on the other provisions in the bill that I would appreciate your comment on whether or not you feel the advertising of credit as it is done today helps to mislead those who want to use credit. Mr. ABEL. I don't think there is any question-I just mentioned, as you recall, the reputable banks now advertising consolidation of payments, and this is just one example. The issuance of credit cards by a lot of our banks today to again move into this lucrative field, in my opinion, of easy credit certainly contributes-at least in the Pittsburgh area there is constant advertising and enticement offered to get people to get credit cards. Mrs. SULLIVAN. We would not, in our bill, stop the advertising of credit-only the misleading type of advertising where they might ad- vertise 4 or 3 percent and then you come in and find it is several times that much. Mr. ABEL. That is right. I think there is no question, there is a lot of this that has built this thing up to proportions and it is in a dan- gerous area in my opinion-in our opinion. Mrs. SULLIVAN. Again, I say thank you very much for giving us your time, your thoughts, and your help on this legislation. Mr. ABEL. We thank you and your committee for this opportunity to express our appreciation of the fine work you are doing in pointing up this problem and paving the way, we hope, for some remedial action that is going to help alleviate this condition. Mr. ANNUNZIO. Madam Chairman, I also wanted to express my appreciation to Mr. Jack Sheehan, legislative director of the steel- workers union, for the very constructive help he gives to this com- mittee. Mrs. SULLIVAN. Thank you very much. Our next witness this morning is the Director of the Office of Emer- gency Planning in the Executive Office of the President, former Gov. C. Farris Bryant, of Florida, whose job it is to prepare the plans for the day we hope will never come-when the United States would again be fighting for its survival in a world war. The legislative authority for most of the planning work done by Governor Bryant's office is the Defense Production Act of 1950-or what is left of it. This legislation comes within the jurisdiction of our committee so we have had the pleasure of having Governor Bryant testify on previous occasions. Our reason for asking you to appear this morning is to discuss with us the position of the administration on the question of adding to our arsenal of economic defenses, in time of national emergency, the au- thority to establish limits on the use or extension of credit. War or the threat of war always sets off an inflationary spiral, particularly in civilian goods which would undoubtedly become scarce in time of PAGENO="0196" 778 CONSUMER CREDIT PROTECTION ACT war, and this affects the entire economy. We had credit controls dur- ing World War }I, and for part of the Korean war. This committee tried last year to reestablish-not the controls-but the authority for them during a national emergency. However, we were badly beaten on the House floor. One of the reasons we were badly beaten was the charge that we had not held hearings on this issue-that it was added to the bill as an amendment after the hearings ended. We have provided such standby authority in section 208 of this bill, and now Governor Bryant, we want to go into that with you. STATEMENT OP EON. PARRIS BRYANT, DIREOTOR, OITICE OP EMERGENCY PLANNING; ACCOMPANIED BY MO'RDEC'AI M. MERKER, GEI~tERAL OO~JNSEL; AND LEONARD SICUBAL, CHIEF, ~CONO1VIIC STABILIZATION DIVISION Mr. ~BR1~ANT. ]\~[adam Chairman and members of the Subcommittee on Consumer Affairs, I am pleased to have this opportunity to discuss with you H.R. 11601. The Office of Emergency Planning is involved in the development of preparedness plans and programs which are intended for use in the event of an extraordinary national emergency situation. Included in such plans is legislation specifically covering consumer credit con- trols. If such controls become necessary, we would submit draft legis- lation to the `Congress. We have taken this approach in our planning for two .reasons: (1) If consumer credit controls become necessary, a program admin- istered by the President should `have the support of the Congress, and (2) If consumer `credit controls become necessary, legislative support for such a program would have the best chance of enactment at that time. There appears to be general legislative authority for consumer credit controls in section 5(b) of the Trading with the Enemy Act (50 U.S.C. App. 5(b) and 12 U.S.C. 95a). I have discussed that law in some detail in my report to the chairman of the House Committee on Banking and Currency. By citing this authority I do not mean to imply that ~e would plan to rely upon it without further con- gressional actiofl. In a most extraordinary emergency situation, how- ever, it could be used. Accordingly, we do not feel that more standby authority, such as se~tion 208, is needed at this time. If, however, the Congress decides to enact such additional authority at this time, we strongly rec- ommend `that no restriction, such as the restriction contained in the last sentence `of section 208 with respect to r&d estate credit, be included in such legislation. The other provisions of H.R. 11601 which would require full dis- closure of credit charges would be in accord with the President's pro- gram. Those provisions, however, are not within the responsibility of the Office of Emergency Planning, and I defer to the departments and agencies having a direct interest in the subject matter. Mrs. SULLIVAN. Thank you, Governor. I want to make a comment before we begin the questioning. Inci- dentally if we don't have time to complete the questioning, I have a series of questions I will read into the record for you to answer when you correct your transcript. PAGENO="0197" CONSUMER CREDIT PROTECTION ACT 779 Mr. BRYANT. Thank you very much. Mrs. SULLIVAN. Governor, this committee of the House, more than any other, recognizes the problems of your agency in preparing for eventualities we hope will never occur. I personally think-and have expressed this on numerous occasions- that we should have on the books all of the necessary authority- standby authority-we would need in a war situation. That includes price, wage, salary, and rent stabilization powers, credit control au- thority, rationing-nobody mentions that word and yet in a war situ- ation it would become instantly essential to have such powers. Why don't we write these things into law when there is no emer- gency-when we can look at the problems calmly and with reason without trying to translate national policy during a war emergency into a question of whether controls should help the retailer to get a refund from the wholesaler or the wholesaler from the manufacturer. The Korean war started on a June day and it was September before the Defense Production Act was enacted. Even then it couldn't be put into operation in major particulars until the following January. In the meantime, the Consumer Price Index went up 1 percent a month. We are trying to help you do your job for the Ainericau people. But there is too much timidity in facing up to these issues until an emergency is actually upon us and then I think it i~ far too late. This is my speech. But it is something I have believed should be done ever since 1953 when we voted to take the standby economic powers out of the Defense Production Act. That act was passed in 1953 over my nay vote. I have been trying to do something about this issue ever since. I feel very much concerned about it. With that I will turn the questioning over to the other members until they have exhausted their time. Mrs. Dwyer? Mrs. DWYER. I have just one question. I am happy to welcome you, Governor, to this committee. I might say to the chairman that he is doing an outstanding job as a chairman of the Advisory Commission on Intergovernmental Relations. My question is, Do you believe, and I don't think you do from your testimony, that consumer credit controls should be in a truth-in-lending bill at this time? Mr. BRYANT. Really, I would have to say that I do not think that they ought to be in any bill at this time. I would not particularly relate it to truth in lending. It is our position that the development of emergency credit controls is related to the total problem of economic and other emergency controls and ought not to be considered until the shape of the emergency is more easily and completely discernible than it is now. Mrs. Dwnnt Thank you. Mrs. SULLIVAN. Mr. Bingham? Mr. BINGUAM. Thank you, Madam Chairman. I, too, would like to welcome Governor Bryant. I want to compliment him on the work that he is doing. I would just like to ask one question, Governor. Would you develop a little further the thought contained in your statement that if there is a restriction-that if Congress does decide to enact this emergency authority at this time that you recommend PAGENO="0198" 780 CONSUMER CREDIT PROTECTION ACT there be no restriction with respect to real estate credit as is now con- tained in the last sentence of section 208? Mr. BRYANT. Yes, sir. The problem of credit control is not really a separable problem, and if it is attempted, it ought to be attempted in its broadest aspects, and, therefore, in our planning, we do prepare to submit control measures which would control the entire spectrum of credit including real estate credit. Mr. BINGHAM. Was real estate credit included in the regular uses during the Korean war, for example? Mr. BRYANT. Yes, sir. Mr. BINGHAM. Thank you very much. Mrs. SULLIVAN. I have a few questions that I would like you to answer now; and then, Governor, if there are others, I will submit them for the record for you to answer in writing. First, as I understand your position in your recent letter to Chair- man Patman, you are claiming that since President Roosevelt on Aug- ust 9, 1941, 26 years ago, issued Executive Order 8843 establishing regulations over consumer credit on the authority of section 5(b) of the Trading With the Enemy Act, originally enacted in 1917, that the President could still adopt emergency consumer credit controls by Executive order pursuant to section 5(b) of the Trading With the Enemy Act. Is that correct? Mr. BRYANT. Ye~, madam. Mrs. SULLIVAN. Could you tell me specifically what provisions of section 5(b) of the Trading With the Enemy Act could be relied on to support consum~r credit regulations by Executive order? I ask this question because the title of section 5 of the Trading With the Enemy Act is "Suspension of Provisions Relating to Ally of Enemy; Regulation of Transaction in Foreign Exchange of Gold and Silver." The annotated code indicates that practically all execu- tive actions taken under this provision have related to foreign trade and exchange matters and not to control of domestic consumer credit. Mr. BRYANT. May I refer you, Madam Chairman, to title 12 in the U.S. Code Annotated, section 95(a), subsection (1) (A), in which the President is given authority, "to investigate, regulate, or prohibit transfers of credit or payments between, by, or through, or to any banking institutioj~i." I have not given you a total quotation, `but that is the essence of the language upon which the authority is predicated. Mrs. SULLIVAN. I am not a lawyer, so I don't know whether the legal meaning of that section can be stretched to apply it to standby controls or the requiring of a minimum amount to be put down on any item that is to be purchased with credit by the ordinary consumer. Mr. BRYANT. Madam Chairman, I have with me today, two persons that I would like to present at this time, one, Mr. Skubal, Chief of the Economic Stabilization Division and Mr. M. M. Merker, who is General Counsel for OEP. May I ask him to respond more fully to your legal question? Mr. MERKER. Madam Chairman, the Executive order which was issued on August 9, 1941, by President Roosevelt specifically relied upon section 5(b) of the act of October 6, 1917, which is the Trading With the Enemy Act. PAGENO="0199" CONSUMER CREDIT PROTECTION ACT 781 So, we feel that the precedent of reliance upon that statute at that time would still be available to us today, even though our planning does not contemplate it. We would seek legislation at the appropriate time. Mrs. SULLIVAN. Of course, at the time President Roosevelt adopted this device in the summer of 1941 we did not have on the books a whole pattern of congressional legislation pertaining to various aspects of emergency regulation of our economy. Since that time Congress has spoken on this subject by enacting several laws including the Defense Production Act, containing legislative authority for consumer credit controls. It seems to me that the administration is on very thin ground in relying on a 1917 law for such executive authority when Congress as recently as 1950 provided such authority in the Defense Produôtion Act and in 1953 deliberately and consciously allowed such authority to lapse. Don't you think that there was a clear intention here by Congress, at least in a limited emergency situation, that the President should not exercise any such authority without coming to Congress first, as President Truman did in 1950~ Mr. MEEKER. That is why our planning contemplates we would come to Congress. We mentioned it only in connection with the most extra- ordinary situation which might arise which would be more than ~ normal limited situation where we could appear before Congress. This authority is still on the books and is still available, but is certainly not the approach that we are taking, as we have indicated. Mrs. SULLIVAN. As I have said, this is the whole reason why I have been trying to have this issue brought up in a calm situation, when we are not in an emergency. Certainly, the President, or the Federal Reserve Board, would not ~use such authority under any except the most urgent circumstances. ~So the whole problem should be reviewed by Congress now, not when it is necessary, or when we are in a hot war, or in a situation where something legislatively would have to be done quickly, and perhaps too hastily. As I stated before, the Korean war started in June, but we didn't get this act passed until fall, and most of it couldn't be put into effect until the following January. I can remember very, very clearly what happened to prices at that time. People rushed out to buy things they were afraid would be scarce. There was no regulation as to how much of a downpayment they had to make on these things. And we did go into an inflationary spiral. Mr. MERKER. The approach we have taken has been the agency's position for about 10 or 12 years, and the reason for that is that at the time we developed this approach, it was felt that if we proceeded for legislation without the relatively immediate need for legislation, that we might have restrictions written into the law, such as the restriction that is in here at the moment concerning real estate credit, and other restrictiosis which might not give us the generally broad authority which the President ought to have if he is to institute a program of consumer credit controls. Mrs. SULLIVAN. What would prevent you from sending up a bill and letting us explore it? As I say, things are calm right now. There would be no fear that this power was about to be exercised. PAGENO="0200" 782 C~NSUMER CREDIT PROTECTION ACT Mr. MDE~R. 4s I in'dicat~d, we felt that was not appropriate be- cause we would not get the kind of bill we wdtild like to submit and like to see enacted. Mrs. SULLIVAN. Our staff advises me that you have recognized this problem in your own dncuments that you have prepared. One of the most important documents your agency publishes, c~llêd "The Na- tional Plan for Emergency Prepa1~edness" states in chapter 13: Economic Stabilization: In a limited war mobilization, without attack on the United States, emergency measures would probably be required to stabilize the economy. Fundamental problem would be re~training or controlling the inflatlou which acceterated m~~bilization could set in mdtion, even though in- flatidnary pressures might not be generated by immetha4e shortages of food and sereices in the early stages of a limited war the psychological reaction in such a situation could produce inflationary pressures requiring forceful national action. We could be approaching such a situation in the next few months, for all we know. We don't know. Under what authority would the ad- ministration provide forceful, natior~al action in the consumer credit area if it did not haive standby authority already on the books and did not wish to risk the psychologic~l reaction which would certainly result from a request to Congress for legislative authority under such circumstances? Mr. ERrANT. The appToach would have to be a much broader economic approach that one relating only to consumer credit. As I indicated a moment ago when the q~iestio~i w~ts whethe~ or not this should be included in truth in lending, I said, in my opinion, it should not be included in any bill until it was approached in its broadest aspects, that is, until you encompass the entire spectrum of inflationary or economic controls. However, we would have no objection to section 208 if the restriction on real estate credit is removed. Mrs. StLLIVAN. We weren't getting anywhere with this on any other proposed bill, including the Defense Production Act, where it had been before, so we ~ut it in with this bill on consumer credit, where we really think it does belong. Mr. BRYANT. I understand that. Mrs. SULLIvAN. I biso notice that "The National Plan for Emergency Preparedness" has a section entitled "Index of Authorities" which is said to be the "principal Federal statutes and Executive orders con- cerned with emergency preparedness." Under the heading, "Principal Statutes" you list the following laws: The National Security Act of 1947, the Federal Civil Defense' Act of 1950, the Defense Production Act of 1950, the Si~rategic and Critical Materials Stock Piling Act, the Federal Property and Administrative Services Act of 1949, and Reorganization Plaiti No. 1 of 1958. There is no mention anywhere in that listing of the Trading With the Enemy Act as an authority for the exercise of emergency consumer credit controls or of any other domestic emergency preparedness measure. If the Trading With the Enemy Act is tM authority that the executive branch is relying on to institute emergency consumer credit controls, how can you explain that this is not cited in your list of principal statutory authorities for emergency action? Mr. BRYANT. I think even worse than that, I wrote Chairman Patman a letter March 30, 1966, really in response to your inquiries, PAGENO="0201" CONSUMER CREDIT PROTECTION ACT 783 I think, in which I did not refer to this Trading With the Enemy Act. I can only plead that I had only been aboard for 6 days at that time and I simply failed to give you the full information relative to this matter. The second response I would give to yo1~, we are not really relying on it. We think that in a real emergency situation it could be used as a basis for credit controls~ but we do not propose to rely upon it. Mrs. SULLIVAN. Let me just cite an illustration of why I am con- cerned; it is on the reç~ord and although it doesn't apply to the issue we are talking about here today, it indicates why I feel we should go into these things candidly. As you may have heard, I have been at war with the administration for 3 years-but only openly since March-on the negotiations over the Panama Canal. I violently oppose the proposed treaty provisions to turn the authority over the Panama Canal to a country that is politically unstable. During the past 3~ years, when the negotiators have been coming to us in executive session to discuss the issues, I asked them time ai~ter time whether the Congress does not have to act as a whole if we are to turn over any pro~erty-bought and paid for by the United States- under any treaty. And the answer always was, "No, when we abrogate the treaty and make a new treaty it will only have to be ratified by the U.S. Senate." Now they are finding out they were wrong; yet for 3 years I had been raising the question with them. Whether they thought they had the right answers, or whether they went into it deep enou~gh, I don't know. But I think many of these things need delving into. We are not always right as individuals. Our negotiators, who worked with some very clever people, evidently hadn~t done their homework well enough to find out whether or not additional authority would be needed, and absolutely ignored our questions on it and made no further study on it. I still have my doubts-going back to our own subject right now of standby credit controls in a national emergency-whether you have the authority to do what you would need to do in time of such emer- gency. In this connection, the Wall Street Journal ran a very interesting story on June 20, 1967, called "The Emergency Jumble: Presidential Crisis Powers Are Irrational and Full of Gaps." I would like to in- clude this article at this point in the record. I feel that the administra- tion should devote more time to clarifying for us and for the public the emergency powers that it has or might need on a standby basis-~- especially in the area of economic stabilization and the control of con- sumer credit. That is all I have at this point. If there are additional questions, you can answer them for the record. Mr. BRYANT. Thank you. (The article referred to follows:) [From the Wall Street Journal, June 20, 1967] EMERGENCY JUMELE-PRES1DZ~TIAL Cnrsis POWERS ARE IRRATIONAL AiW FULL 01' GAPS (By Joseph W. Sullivan) WASHINGTON.-The United States presently faces: (A) Disturbance in its international relations; PAGENO="0202" 784 CONSUMER CREDIT PROTECTION ACT (B) Actual or threatened hostilities; (0) Athreatofwar; (D) A threat of predatory incursions. For President Johnson, in particular, the mulling of this checklist is more than a semantic exercise. Each check mark made by the Chief Executive can `trigger an extra quantum of the far-flung reserve powers Congress has handed him over the years for crisis use. From such gunboat-~diplomiacy relics as the authority to arm private vessels when there's "danger" that "physical force" may be applied against U.S. citizens or property abroad, these standby powers span the gamut to a temporary dicta- tor's mandate to be `invoked upon proclaiming that he "anticipates" an attack on the U.S. So jumbled are the statutory tests for bringing all of `them to bear, however, that (short of resorting to the anticipated-attack button) they almost defy coordi- nated use. More than a dozen finespun declarations, of which those on the check- list `are only samples, would be required to trigger the President's arsenal in sequence. While his Ofilce `of Emergency Planning has devis'ed, at least on paper, machinery for meeting all sorts of contingencies, even OE'P officials are unclear as to which plans can be activated by which triggers. They can't, in fact, even say with certainty which ones are already authorized under President Truman's 1950 proclamation of a "National Emergency," a nuneio all authorities agree has continued in effect, though few are sure it should have-or would have if chal- lenged in the courts. Nor has Congress~ it's quite plain, followed any cohesive design for attuning the triggers to the gravity of the crisis. Thus, an incongruous appendage to the military draft law empowers the President to direct and even seize industrial facilities for defense production upon finding that the "national security" re- quires it But to activate tools for deahpg with di'doeations in the civilian econ only, his only statutory recourse would be to forecast an attack on the U.S. in order to impose the sweeping economic controls conferred by the Federal Civil Defense Act. (One exception: Rationing of "critical" materials-but not price controls-could be Imposed more easily under yet another law.) Corning amid the war in Vietnam and the Middle East turbulence, the long- overhanging threat of a nationwide railroad strike starkly points up the entire system's irrationality. OTHRR CARRIERS NO PROBLEM If the elosedown threat were to loom against the maritime industry instead,. the President would have authority as clear as any can be in this muddled field to take command of the U.S. merchant fleet as a "national emergency" measure Should transit service have been imperiled in some city, the Secretary of Defense could have ordered continued service by "motor" carriers for military personnel and defense plant workers, also on the ground of a "national emergency." If mil- itary deliveries were about to be held up by a eloseclown in a plant instead of on the rails, moreover, the President could first order the contractor to keep the plant going and, if linheeded, seize the plant himself. (President Truman's fail- ure to follow the proeedui~al rules is what tilted the Supreme Court against him when it struck down his 1952 order seizing the nation's steel mills.) By the quirks of the emergency law book, though, the 1916 statute covering railroads authorizes Presidential assumption of control only "in time of war." While President Truman relied on World War II's legal continuation to tens- porarily seize the rkilroads in 1946 and again In 1950, it is the Justice Depart- men't's view that thIs legal fiction can no longer be sustained. Thus, however ringing Defense Secretary McNamara's statement that a rail strike would be "unthinkable" and would "cause critical and irremediable short- ages for essential defense production," he and President Johnson say they can only look to Congress to prevent It. As last week's crus'hing Rouse defeat of the' Johnson settlement proposal made clear, though, the lawmakers are too frag- mented to be counted upon. Seizure, binding arbitration, bars against industry- wide bargaining-all these were advocated by some faction, but none could com- mand a House `majority. Yet the stopgap strike bar finally voted is being resisted by the Senate and, ~s the two chambers grapple, the threat of a railroad shut- down continues unabated. (It's a matter of pure guesswork how long the rail unions will abide `hi `their promise to forgo' a strike while awaiting the verdict of a House~Senate conference.) Still, haphazardness and sputtering on Congress' part aren't the only con- tributors to the emergency-preparedness mishmash, as the railroad episode also PAGENO="0203" CONSUMER CREIfl PROTECTION ACT 785 shows. If the Administration were better braced internally, it might be able to make some use of contingency plans that President Kennedy ordered drawn five years ago for "centralized control of all modes of transportation in an emergency for the movement of passenger and freight traffic of all types." "HOPELESS" It would probably take a nuclear holocaust to justify full implementation of such plan. If they existed, though, the President might be able to draw on them now in a limited way by invoking an obscure section of the Interstate Commerce Act that permits him to direct all carriers to give priority to troops and military goods in time of "threatened war." The railroad unions say they're ready to keep military cargoes moving during any strike. Despite the Kennedy directive to pre- pare for such emergency movements, however, Mr. MeNamara has told Congress the task is "hopeless." It's still likely, to be sure, that Congress will ultimately provide the Admin- istration some new tool for preventing a walkout. And however clumsy the legislative workings in this instance, there's still much to be said in theory for tailoring emergency measures to fit the emergency, as against writing broader powers into the lawbooks for use in unforeseeable future circumstances. While an ever-cautious Lyndon Johnson may spurn the use of emergency powers, moreover, some successor might be inclined to use them excessively. It's hardly likely, for example, that the Congressman who wrote provisions for "emergency" regulation of the currency into 1917's Trading With the Enemy Act foresaw Franklin Roosevelt's 1939 use of this authority to justify imposition of consumer credit controls. Both diplomatic and domestic political reasons have deterred the Johnson Administration from invoking powers that require fresh proclamations of crisis. The President forewent a call-up of mifitary reserves in 1965 at least in part because it would have entailed making an unsettling new declaration of "na- tional emergency." But should a nuclear showdown ever come, the President would clearly as- sume authority, on paper, to do mdst anything, and all the perplexities of the lesser statutory triggers would be rendered moot. Under the 1950 Civil Defense Act, the President is authorized to raise and spend funds about as he sees fit, to seize any property and to "sell, lease, lend, transfer or deliver materials or perform services for civil defense purposes on such terms and conditions as he may prescribe and without regard to limitations of existing law." Even If Congress hadn't provided such a sweeping mandate, moreover, many legal scholars contend the President could assert all the powers anyway, relying on his Constitutional prerogatives as Commander in Chief. "Short of an inva- sion or attack on the U.S., the act's provisions are blatantly unconstitutional, but under the conditions they envision I suspect that the President's authority would expand just as far without them," says Benet D. Gellman, author of a Virginia Law Review article on emergency planning. LESSER POWERS CAN BE HANDY All the same, many of the lesser power grants would appear to fill gaps that might prove vexing in a pinch. One of these directs suppliers to give priority to the Government's communications, power, materials and transport needs; others suspend civil service hiring regulations, agricultural marketing quotas, require- ments for bidding on defense contracts and for publication of newly issued patents. While the President could probably assert implicit powers as Commander in Chief in a lesser crisis also, there's probably utility in the provisions that spell out his emergency authority to lift Congressional lids on military manpower and to lower bars against realigning the military services' respective combat functions. Mr. Johnson is already drawing on a number of these prerogatives when they can be invoked unobtrusively by the Truman declaration of 1950. Defense "set- asides" of copper, direct negotiation of defense contracts and extension of Navy enlistment terms are all based on the Truman "emergency." Some of the authority is itself vague (one provision would appear to sanction a Government shutdown or takeover of all broadcast stations and even the telephone system whenever there's a "threat of war"). But it's the vagaries PAGENO="0204" 786 CONSUMER CREDIT PROTECTION ACT of the many triggering devices that render the entire system suspect. The President to drgw just one further contrast, can activate and dispatch up to a million Army reservists into battle upon a simple "emergency" finding, yet It would take an "extraordinary emergency" for him to supersede a law barring harbor-dredging workers from toiling more than eight hours a day. Congress should be acutely aware of the anomalies. Every Aug. 1 the lawmakers violate the law providing for Congressional adjournment by July 31, on account of the "emergeacy" that sprang up 17 years ago. Yet there's been no attempt to set criteria tsr the t~rminatlon, or even the periodic reaffirmation, of emergency deelarations-either df the sort now in effect or of the dictator's mantle provided by the Civil Defense Act. True, Congress can vote to end emergency powers. But how is it to agree on that as long as It's perpetuating a spate of different standards for starting them. Mrs. SULLIVAN. Governor, you have been very gracious in waiting to testify. We had hoped to reach you by the time you arrived here, but we can't control what happens in the House, so we just have to do the best we can. I know how busy you are and what a sacrifice it has been for you to come here and then have to wait. Mr. BRYANT. Onthe contrary, it is a pleasure. Mrs. SULLIVAN. Thank you very much. I also want to thank your two associates for coming. Is Dr. Ralph R. Renter, chairman of the Metropolitan New York Consumer Council, present ~ Dr. Reuter, we tried to reach you late yesterday to warn you that we were not gohig to be able to have an afternoon session today. If you can testify briefly now, we would like to have you give us the ben- efit of your knowledge on the subject. Your entire statement will be made part of our record and we will read it and study it, but will you summarize it for u~? STATEMENT OP ~ RALPH It. REUTER, CEAIRMAN, METROPOLI- TA~ ~EW YORK CONSUMER COUNCIL Dr. Rnurnn. That is exactly what I propose to do. I do not want to leave this microphone without congratulating the committee on what we consider to be an excellent bill in toto. We believe that some of the features that have been discussed this morning are most essential, particularly the garnishee question, and the matter of revolving credit which is becomhig a real horrendous problem. We think you should take particular note of the fact that in the State of New York we at one time thought we were ahead of every- body else in credit legislation. We don't feel that way any more. The credit people have found ways and means of getting around the laws and we ~ow find credit as exorbitant, as was stated the other day to this committee by Senator Douglas. We have found cases where his figures were quite generous. We found, it worse than that from so-called legitimate institutions. Consequently, we find this legislation in its entirety very, very necessary. We would only hope that this bill will remain intact when it comes out of the House and out of the joint conference committee. Thank you. Mrs. SULLIVAN. Thank you, Doctor. There are people on this sub- committee who are fighting for this bill. PAGENO="0205" CONSUMER CREDIT PROTECTION ACT 787 Our success remains to be seen. (Dr. Reuter's full statement follows:) TESTIMONY or Da. RALPH It. RIscrTza, CHAIRMAN, METROPOLITAN NEW Yonz OONSUMER COUNCIL, Ixo., Nnw YORK, N.Y. Madam Chairman and distinguished members of the Subcommittee on Con- sumer Affairs: We feel proud and honored to be able to support H.R. 11601 without reservation. The Metropolitan New York Consumer Council, an organization of more than one hundred and seventy member organizations who have gathered together in the Council to promote and educate for the consumers welfare, is indeed grateful that this legislation is finally receiving the kind of attention which it long ago deserved and which most certainly is rather belated. Your hearings to date have undoubtedly convinced you that consumer credit is no longer a sales tool. It has become a sales object. Debt is promoted with all the skill and ingenuity that American advertising and sales promotion can muster. And debt is sold on precisely the same ethical standards as those that characterize the promotion of the cold cure, the headache remedy, the weight reducer, the cigarettes, the detergent, the hair ointment, etc. This is indeed a matter for real concern for the Congress of the United States as the elected representatives of all the people. Twenty-two years ago, the big war was all but over. Back in 1945 people were beginning to satisfy their war-starved appetities for homes. and things, and especially for cars, mostly with cash money. Mortgage debt for urban homes then was around $20 billion and short-term debt for goods-debt scheduled for repayment in five years or less-was less than $7 billion. Ten years later, in 1955, mortgage debt bad grown to $88 billion, mo.re than four times what it had been. Short-term debt had grown to $39 billion, six-and-a-half times what it had been. In another ten years, by 1965, mortgage debt had become $200 billion, ten times its 1945 level. Short-term debt had multiplied twelve times tO a total of $80 billion. Because of its pivotal importance, it is the latter kind of debt, the debt associated with the acquisition of consumer goods and services, that we must point to. A house and lot can be considered an investment. But short-term debt for consumption purposes is seldom more than a promise to pay. The goods financed have no subStantial market value once they are acquired and the promise to pay under an installment note is based largely upon the expectation of future earnings. How will economic historians, or anthropologists, be able to explain in the year 2967 just what has happened to us during the past twenty-two years. How will they account for our having the largest per capita debt for consumption purposes in our history after experiencing twenty-two years of what we have called unprecedented prosperity? How will they explain that, during these twenty-two years of great prosperity, our personal bankruptcies rose to an all time high, more than double their number during the depths of the depression, increasing at a rate twice as fast as the population? While debt for consumnition purposes expanded twelve times over to rea~b $80 billion, disposable income only tripled between 1945 and 1965. Who then loaned out these billions so fast that debt increased three times as fast as did the wherewithal to pay them back? Commercial banks are the largest holders of consumer paper. They account for about 40% of the total. Sales finance c~m- panies come next, with less than half as much as the bank. Then come depart- ment stores, credit unions, other loan companies, and other retailers, etc. With respect to consumer lending, the banker has certainly changed his con- servative ways. We once understood that instalment loans on goods were a sound and solid undertaking because of the terms of such loans were so calculated that the goods sold constituted security for the debt financing involved in their sale. And this principle, we gathered, was, practically speaking, immutable because lenders were prudent. Ordinary people, as we all know, are not always so con- stituted that they withstand well the pressure of urgent present desires if there is a conflict between today's clear wants and tomorrow's hazy needs. But lenders are different. They are disciplined fellows. That is how they got where they are. Hence the once-prevalent idea was that we could all depend on the bankers and other lenders to insist on security for their loans and his prudence would save PAGENO="0206" 788 CONSUMER CREDIT PROTECTION ACT both borrower and lender from overcommitment. But lender prudence, as we all now know, has turned out to be an illusion. You hardly ever hear the term used anymore. As for the practice it referred to, when 36-month auto loans became standard, any residual traces of lender prudence had evaporated. The fly-now, pay later era began in earnest. But, then, how do lenders loan? They say they base their loans on the character of the borrower. NoW that's a pleasant idea. It conjures up the figure of a friendly town banker looking a borrower straight in the eye and recognizing in a needy supplicant the sturdy, honest will of a Horatio Alger, Jr., hero. What actually happens, however, is that lenders holding consumer notes don't look into bor- rowers' eyes; they look at their handwriting. And the signatures giving com- mercial value to the paper are executed where goods are displayed and sold and where a salesman, on commissior~ often, supplies first the pressure, then the pen. Today's borrower, as a matter of fact, often doesn't consider, himself such at all. lie is simply a buyer, a buyer on time. So what lenders really mean when they talk about a borrower's character is his credit rating, and that depends on a commercial service called credit checking, which is admittedly staggering into ineffectualness. The burden of trying to keep tabs on the ability to pay of some 25 to 40 million borrowers who are, month by month and day by day, pursued by a veritable army~ of credit granters has stumped us even in this computer age. Just view the multiplicity of credit o~ered. In addition to Instalment credit for autos and other durables, for jewelry, for tires, for furniture, and for home repairs, there are credit cards for both goods and service's; there is revolving credit for all soft goods; there Is the combination of credit card plus revolving credit offered by commercial banks (this Is sometimes called a check-credit plan); and recently banks have Inaugurated a new type of billing service for small retailers that Opens up to every side street shop facilities for selling goods on credit. Now the hardware store, `the drug store, dress shop, florist, beauty shop, sporting goods outlet, dry cleaner, toy store, TV repair shop, and stationer have joined the car dealer, discount house, furniture retaIler, department store, appli- ance dealer, mail order house, house-to-house distributor, credit jeweler, gasoline station, book club, re4~ord club, hotel, restaurant, bus line, railroad, funeral parlor, and airplane compai~y in the business of creating interest-bearing debt. Food is almost the only significant exemption in this onrush. Nearly all other goods and services, displayed fi~om millions of counters and promoted by billions of adver- tising dollars, now provide eagerly promoted opportunities to borrow as you buy. Is it surprising that credit checking flounders and that when a bankrupt lists his debts for the courts that list looks no'thipg like the record on the debtor to be found on file in the local credit bureal. This does not mean that borrowers are attempting and suceçeding in a wholesale deception of lenders. Any commercial debt adjuster (whose job is to try to counsel debtors into solvency and who is paid a high fee by the over-committed family for the service) will tell you that, without excepl4on, every client fails to remember all of his debts, try as he will. After all, there are sometimes as many as twenty creditors involved. And `lenders themselves also withhold credit information from a credit rating bureau for their own reasons. Most bankrupt families, for example, list in their debt declarations loans in at least three different small loan co'mpanies-loans which a credit rating based on reliable credit checking would have forestalled. But the small loan companies of a given community frequently don't exchange borrower information with each other because, as they know all too well, one small loan leads to another, and the first lender does not want to make it easy for a second loan company, a competitor, to horn in. So loan companies hoard infor- mation on their own customers. And a large department store, depending on 90-day credit from suppliers for its stock, is not apt to rush bad news about the condition of its revolving credit accounts out to gossipy trade through a credit bureau, to which, of course, the store's own creditors also have access, So lenders themselves undermine the credit checking upon which they say they rely. Thus, for a number of reasons,, credit checking as an effective bar to overcommitment is becoming, like lender prudence, a thing of the past. `Except for a few ipatances, lenders seem to be getting along fine. How do they do it? Different kinds of lenders have different angles and some have better ones than others. Let'~ take banks and sales finance companies first. They do the lion's share of the consumer credit business and they do an ingeniously devised hedge PAGENO="0207" CONSUMER CREDIT PROTECTION ACT 789 against being caught with too much poor consumer paper. That hedge is known us a dealer reserve. It works this way. A car dealer, for example, sells his instal- ment contracts to a bank or a sales finance company. (This is, by the way, what happens to all but a tiny fraction of the contracts consumers sign at a dealer's lot or for that matter at most retail outlets where consumer durables are sold.) The lender makes a deal with the car dealer about hew much lie (the lender) wants to charge for the car loan. This Is not the amount, however, that the car buyer pays. He pays more. If the lender's a~reed-upon take from the loan is, say, 12% true annual interest, the dealer may write up a contract calling for 18%, `24%, or even 85i~~. (It is not written in, of course, as an interest charge; but as a sum called a time-price differential,) The difference between the lender's interest rate and the dealer's Is known as the dealer's kick-back, or, in more polite terms, tile dealer's reserve. It is his share of the finance charges. And whatever that amount may be, it Is credited at the bank to the dealer's account. But, although the money is the deailer's-he pays income tax on it-the lender controlS it. These funds are held by the lender until an agreed-upon total has been accumulated in the reserve. The total that must be maintained is a matter of negotiation between an individual dealer and a lender. This reserve is supposed to insure the lender against poor consumer loans. Thus, when a car buyer fails to make his payment, the lender takes the balance due him on the contract out of the dealer's reserve and hands the contract back to the dealer. What happens when a bank or Sales finance company dips into a dealer reserve to pay up a consumer loan is quite important to those of us who are con- cerned about the role of consumer credit In our lives today. On the lender's books that car contract, which went sour, appears as a fully paid-up loan. No wonder we hear sueh glowing reports from lenders about the quality of consumer credit, about how only 1% or 2% of instalment contracts are losses. Under such a fool- proof scheme you wonder how there can be even a 1% or 2% loss. In many cases a bank's agreements with dealers will call for the bank returning the car ast well as the contract to the dealer, hence there are repossession costs involved. These account for some of the losses. Then there Is the skip-the fellow who signs a contract and takes off with a car to parts unknown where neither lender nor dealer nor their nationwide trading set-up can find him or It. And finally there are dealer failures and sometimes a lender has not had the foresight to fatten the reserve sufficiently to cushion him against all the loss from a bankrupt dealer's had paper. What about overeo~nmitment? What about the risk to the whole community against which lenders would shield us? How does this dealer-reserve insurance system that protects lending affect borrowing? The effect has been to turn retailing of durable goods into a game of chance in which chicanery can produce better returns from poor credit risks than price competition would allow on `a cash sale. Oar dealers, for example, would rather sell cars on credit to poor risks than to sell ca'rs for cash. This doesn't mean that dealers would rather sell poor risks than good risks; but it does mean that the gamble of credit-selling holds out such rewards that cash sale's tend `to be less profitable than credit sales. Part of th'e profit on credit sales, of course, a goodly part, `builds tip in dealer reserves, but the lure of those fund's that a dealer owns only after t~. fashion is more hypnotic than was the Piper of Hamlin. `Then there are the insiuk-ance commissions to be earned `on auto contracts. These are handsome. And insurance `Charges build up the interest earnings `in a con- `tract. Finally, a repo~sessed car also o~ers a promise of another sale, and an- other contract. Oredi± $elling allows deajers to charge what the traffic will be'ar and under such circumstances the buyer often doesn't know what he has been charged. He'll know his trade-in and his monthly payments, and that's all. And that leaves all kinds of room for profitable maneuvers when an enterprising dealer has an unsophisticated customer at hand and there are, when it comes to credit contracts, millions upon millions who are unsophisticated. The car story is duplicated In nearly all consumer durables, including tele- vision sets, furniture and rugs. For these goods, too, a dealer reserve protects lending and has much the same effect on borrowing. All these sellers say, ~nd they mean it, that they make more on the credit than on the goods. Another group of lenders that has no dealer reserves to count on. It is a large group made up of various kinds of lenders: personal loan companies, department stores lending on revolving credit accounts, credit-card issuers, and banks, too, for `that smaller part of their consumer lending where they deal directly with a bor- rower rather than through `a dealer. Although this group of lenders is numerous, PAGENO="0208" 790 CONSUMER CREDIT PROTECTION ACT the total of its outstanding loans is lower than the vol~ime. of consumer credit extended through banks and sales finance companies for dealer paper. These lesser lejiders, ~ievertbeless, have done pretty well for themselves so far. *i'th ~e~~iial loan companies up goods are involved, of course, except for the ~hatteis that may be put up as collateral. And these chattels, in most cases, are )io't aëtuafly a security for a loss so much as a potent threat of punishment against a delliiqüenh borrower whose one and only broken down bed, although worthless, is quite i~nportant to him. At bottom, what personal loan companies a~ad the rest of these lenders, who have no insurance set-up like a dealer reserve, dep~iid tip~n to assure repayment of loans is police power. The auto dealers, too, taft into this group `with the paper returned to them by lenders. In, advance of court action, collection procedures are tried, independent collec- tion agendies may be called in, but early in the game references to legal action are ~ pa~rt of the eoll~ction pressure; ~nd flnally, garnishments or Qther judgments that become claims ~gain~'t real property are the inevitable punishment for the debtor who does not, or cannot, pay. The bu~k~r Who signs the paper that makes him a debtor is seldom aware of how directly he has hazarded his total resou~ees when be gives in to sales pres- si~re. Ret the lender~ and sellers are aware. They know how the law reads and how they would like it to read and how to change it, in session after state legisla- tive session, to mold it closer to their objective of making police power a more effective and to them a less costly debt collection tool. What their efforts amount to, of course, is the creation of an even larger public subsidy for debt collection. Thus the country sheriff becomes a backstop for the salesman. The tricks and stratege'ms `of the lender in the debt collecting process produce almost as many snares and pitfall's for the borrower as to `those of the seller who induces buyers `to become borrowers. Even among people whose social ex- perience has been wi~e, `there are only a few who are aware of how a debt can be, and is, escalated through the debt collection process; `of how, for example, through a $1~5 debt a man ca~i, as `one did not long ago, lose a $5000 equity in his `home. Here is an area Of pr~sent-~ay living `that we know little about. The debt collec- tors `don't publicize it for the most obvious of reasons, and the debtors conceal it ipshamO. People d'On'tiike to tatk about their debts. Not `only has the number of bankruptcies, f~r example, ~increased at an aatcmisauing and puzzling rate during our great prosperity, `but the percentage of those bankruptcies that are family, as opposed to business, financial failures has risen ~teadily. Today over 90% of the bar~kruptcies are consumer bankrupbcie's; the debts listed for the courts are debts for consumption purposes. Among the creditors listed by lankrupts, there are nearly always three `and sometimes more personal loan companies. Usually these borrowlngsare consolidation loans, instal- ment personal loans at high interest ratea-from 24% to 42%-4o pa~y up Other interest-bearing debt for goods. This kind of `borrowing leads down a steep path to `other loans for ~onsolidation again and again, and interest on interest escalates the indebtedness at a tragic rate. A `harbinger of things to Come may lie ih `the fact that ins~al'meut personal loans,, which acCount at present for about 25% of the consumer credit extant, are the most rapidly rising fOrm of consumer debt today. Why are so many people going bankri~pt? Why, is it that on `an np-curve of good times and with an unparalleled sustained increase in prosperity over many years bankruptcies multiply to unprecedented high figures? One of the recent issues of U.S. News an'd World Report devotes a special feature to this inquiry. U.S. News and Woi~ld Report is hardly an ultra liberal publication it must be pointed out. It corroborates what many have been saying with grave warn- ings. A great deal of the cause originates out of the greed of 1'eth~ilers and the weakness and injustice, built in bad state laws. Annual loss from personal bankruptcies, s~y~s U.S. News and World Report, is one and one-half billion dollars, and the figure is going up. `Experts clearly put the blame on the abuse of easy consumer credit. Bankruptcies have tripled in ten years. Say USNWR: To most experts in the field, the main factor is the lure of Casy credit. "A dol- lar down and a dollar a week" has given way to "no cash down and no paymetts for three months," or "no payments until spring," or ". . . until ~ One leading authority is Linn K. Twinem, who for eight years has `been chair- man of the consumers bankruptcy `committee of the American Bar Association. PAGENO="0209" CONSUMER CREDIT PROTECTION ACT 791 Mr. Twinem tells "U.S. News and World Report" that about 1.5 billion dollars will "go down the bankruptcy drain" this year. That is counting personal bank- ruptcies only. There are many reasons why people get "overextended on their debts," says Mr. Twinem. Many people, he explains, are "Misguided or misinformed" on money matters. To most federal bankruptcy referees who face nearly a year's backlog of cases, ignorance and easy credit are the villains. One of these referees says there are two big reasons for the bankruptcy boom. "One," he says, "I believe that credit `is too easy. Second, credit is too expen- sive for the poor, A ~fellow buys a trailer for $4,000, and by the time be's through paying for it he has forked out $2,000 in credit charges. flow crazy can you get?" The race to keep up with the Joneses, consumer-credit couhselors sty, is being encon~ged by some merchants, who use highly aggressive tactics in selling all sorts Of consui*er good~ ~n credit. Too many young families, theSe counselors say, cannot resist what looks like an easy way to enjoy immediately the good life that their parents waited decades to aChieve. Other factors cited: harassment by bill collectors and, in some states, laws that make garnishment of worker~' wages so easy that many familtes feel driven `to hankrutcy as the only way out. What can be done? We believe that a beginning wIll be made by the passage of HR. 11~01. The need for outlawing garnishees has also been amply demon- strated. All too often they lead to harassment on the job at the very least and not infrequently loss of job. Moreover, in many cases the consumer Was never properly served. "Sewer Service" is prevalent in ma~riy instahces and most frequently the poorer the person the more likely that they were not served at all. It goes without saying, that these are also the people who cah least afford to lose their job. No comfort is to be found in a `qffir~ in the consumer credit picture. A study, "The New Dimension in Mortgag~ ~IDebt," faiMlished by the National Industrial COnference Board, reports that- "Savings in the form of building up home equities by the consumer sector as a whole have abruptly abated. The annual withdrawals of equities now are ap- proaching the annual amortizations on ~oftgage debt." Oasb realized by consemers through refina~ing 1ir~t mortgages or taking out second mortgages rose, aCcording to the t~iCE study, from $t billion in 1960 to $fO hillion in 1963. On the basis of those totals and their rate `of increase during the three years from 1960 to 1963, it is reasonable to pos;tulate an annual with- dvawai of ho~e equities of $20 billion in the not to~ distant future. "Although in some in~tances home owners may decide to refinance to obtain better mortgage terms," eommenhs the N'iC1~, "cash is generally the sole dbje~tive.. ," And among the reasons for Seeking ~aih the report lists "consolidation of Short-term debt." Refinancing of second biortgages for needed cash has beeh promOted by a seg~ mont of both sellers and lebders for a number of ~reafs b~t Such promotion, especially foi~ second mortgages, has been atep~ped up ~havply. tlnllke the re- financed ftrst mortgage that usually runs 20 to eiren 30 yeats, the second deed is generally a short-terth debt rnhning for 36 to 60 mOnths. Although the rates on these loans are quoted as from a 6% to 12% simple interest ~lependXng on state real estate laws), the actual cost of such borrowing is muCh higher because, in addition to interest, Other charges such as `brokerage fees, fin&er'a fees, itive~tiga- tion co~tS, etc., are levIed as ~a front-end loan against the suth boi~rbwed, The result is that the `borrower may receive an amount that is as Itinch as ~0% to 40% less than the `face of the note `he signs. A lVew l~ork Times (October 19, Il~64) discusSion of the rapid growth of second-mortgage financing Cited the e~am~le of a debtor who, in return for $3000 cash, signed a second moygage note fOr $5,075. One business propaganda agency for the promotion of credit sends thousands upon thousands of bodklets into our schools, publishes hundreds of analyses and fact boots for our press, ~nd is now establishing advisory and counselling services for dObtors in city after City, is, as you might guess, really representing the sellers-the sante sellers ~cs~ho tell us t~iat they make more on the dCbt than `they do on the goods. Here is where debt for consumption purposes in ottr times, in 1967, differs from that Of other days. l~lxtensions of consumer credit in the far, far past were understood to be exploitations of dire need. ~lxtensions of consumer 83-340-67-pt. 2-14 PAGENO="0210" 792 CONSUMER CREDIT PROTECTION ACT credit in the fairly recent past, have been understood to be financial devices to promote the sale of goods. Today, however, the promotion of goods has become a device for the creation of interest~bearing debt. The nation's retail merchants at their annual convention in San Francisco 12 years ago put it succinctly with the phrase: "Bait the hook with merchandise." It is obvious that urgent action is necessary. Action such as you are consider- ing in HR. 11E~O1. The statistics of the U.S. Department of Commerce quite clearly show how necessary this legislation is. The U.S. Government paid $13 billion in interest on its $329 billion debt in 1966. In the same year U.S. Oonsumers paid nearly as much as $12 billion, in interest on installment debts, charge accounts and other loans of only $95 billion about three times the rate paid by government. Moreover, John German, a Commerce Department economist, has figured out that nearly a fourth of the average family's income in 1966 went to pay off debts and the interest on debts. Seven long years h~ve passed since this legislation was introduced. Meanwhile, millions of our citizens have gotten themselves and their families Into even greater financial difficulty due to a lack of curbs on the unbridled avarice of those in the credit business. Bankers, small loab companies, retail merchants, and their various trade as- sociations have violently opposed truth-in-lending from the beginning. They have called it an attempt to hamstring private enterprise. They have de- scribed it as a move toward federal regulation of interest rates and credit charges. They have pleaded that it would be impossible to administer, because salesmen and sales clerks could not compute the finance charges they are asking the cus- tomer to pay. These arguments are sheer and utter nonsense. Truth-in-Lending imposes only two conditions on credit establishments and money-lenders. It would require them to tell their customers the total amount they are paying for credit: *In dollars and cents. *As an annual percentage rate on the loan or credit. This is not regulation; it is simply disclosure. A lender or credit house that is unwilling to do this must feel that it has some- thing to hide. This, of course, Is the point. The credit houses and the loan companies know to the third decimal point exactly how much they charge for credit and at what annual rate. They have to know; it's how they make their money. They could provide their personnel with little tables-like the sales tax tables that perch on so many cash registers, and they do in many Instances but to their salesmen only-that would give instant answers. Nor is the requirement for a maximum finance charge unreasonable. Credit extended in an effectIve, useful and prudent manner can yield sufficiently to make much more handsome profits than many business organizations do. The worst sufferers from excessive credit charges. are those who can least afford them-the lower income groups. They have less cash, and greedy sellers can more easily exploit their need for credit. In addition, members of minority groups are often charged higher rates regardless of their personal credit standing. But these are not the only victims. The well-to-do are also duped. The true rate of Interest on one of the more popular college tuition loans was found to range from 26 to 54 per cent a year. Servicemen are among the favorite targets, too. The Defense Department has sought to rescue them with a truth-In-lending directive of its own, requiring lenders to disclose finance charges and actual interest rates in transactions with men in uniform, This very action by the Defense Department is some small indication of how serious the si'tuatIor~ is in the area of credit. After all the Defense Department is essentially saying, that these charlatans are prepared to `take advantage even of men who are going to the battlefield and are prepared to die for their country. Furthermore, it is common practice for them to hound to death survivors of servicemen with means both legal and illegal which would shame the worst of us. H.R. 11601 is necessary because businessmen have not learned that their con- tin~al wrongdoing must eventually lead to effective elimination of their evil deeds through meaningful legislation. It is not clear to them that accurate labelling and safe cars, for example, are ultimately in everyone's interest- including the businessman's. They fail to believe tha't honest business is the best business, as some learned a long time ago. PAGENO="0211" CONSUMER CREDIT PROTECTION ACT 793 Yes, we are badly in need of legislation which will once again restore some sanity and decency to the area of credit. In closing we believe it to be essential to remind you of some very vital statistics. Half of all American families are now paying installment debt-two-thirds of them at last count-~either had no money set aside for emergencies or had any- where from $1 `to $500 to tide them over in case of illness or death, loss of job or other disaster. A full one-quarter of the poorest citizens, those families with incomes under $3,000 a year, were paying some installment debt. About half of these low-income debtors were spending at least 20 per cent of their incomes to pay off what they owe. This is only part of the story. When the money we owe on our mortgages is included, a Commerce Department study shows that `the average American family is using almost one quarter of `the take-home pay to satisfy interest charges and to repay installments loans and mortgages. There is mounting evidence that consumers are finding it mo're difficult to keep up their loan payments. A study by the American Bankers' Association discloses that at the end o'f April of this year, consumers were 30 days or more behind on 1.75 per cent of installment bank loans, the highest delinquency rate since the 1961 recession. It is our sincere hope that your Committee will hold fast to the `bill a's It is presently written. That you will exer't all `of yo'ur might to assure Its passage by the House and that out of the conference committee their emerge a bill closely resembling the present one. We sincerely hope, that our expectations and your efforts will be rewarded with legislation which will do h'onor to t'he Congress of `tho United States and provide a measure of decency and protection `to all of our citizens who have need of a credit vehicle. Once again our sincere appreciation for your kindness in permitting us to be heard. Mrs. SULLIVAN. Thank you very much for coming. Tomorrow morning, we plan to complete this series of hearings, un- less additional information is required. We will hear from the presi- dent of the Independent Bankers Association, and from representa- tives of the United Automobile Workers of America and the Idustrial Union Department of the AFL-CIO. We have received many com- munications from associations and organizations which have a direct interest in this legislation, or in some aspect of it, and those com- munications will go' into our hearing record when appropriate. The subcommittee will now recess until 10 o'clock Friday morning, August 18. (Whereupon, at 12:30 p.m., the subcommittee recessed, to reconvene Friday, August 18, at 10 a.m.) (The following material was subsequently submitted for the record:) U. S. DEPARTMENT OF LABOR, Orrica OF THE SECRETARY, Washington, September 6, 1967. Hon. LEON0R SULLIVAN, Chairman, Subcommittee on Consumer Affairs, Committee on Banking and Currency, House of' Representatives, Washington, D.C. DEAR MADAM CHAIRMAN: At the conclusion of my testimony before your Sub- committee on August 17, 1967, on H.R. 11601 and related bills to provide for con- sumer credit protection, I was presented with two questions by counsel for the Subcommittee, and requested to furnish for the record my responses to them. The questions and my responses are as follows: "1. Mr. Secretary, are you aware of a study prepared by the Bureau of Business PAGENO="0212" 794 . CONSUMER CREDIT PROTECTION ACT and Economic Reseatch of Michigan State University entitled `An Analysis of Economic and Perso~iial Factors Leading to Oonsumer Bankruptcies?' In this study, 80 percent of the persons who went bankrupt had been threatened with wage garnishment. Seventy-five percent of them indicated that garnishment or the threat of garnishment was the reason for their filing for bankruptcy. Do you agree, Mr. Secretary, that the correlation between consumer bani~ruptcies and wage garnishment Ms been adequately and positively established?" I would agree that considerable evidence supports a conclusion that there is a correlation between consumer barlkruptGies and wage garnishments. Our ex- amination of the subject shows that there is a widespread opinion among judges, lawyers, economists ~nd bankruptcy referees that there is a correlation. This is corroborated by the opinions of three referees in bankruptcy recently testifying from personal knowledge before the Subcommittee. A study in 1965 by ~he Administrative Office of the United States Courts showed that bankruptcies were highest where wage garnishments were least restricted- Alabama (9~522) bankruptcies, Michigan (5,877), Ohio (14,850), Tennessee (8,602), and Oregon (3,080). Conversely, states strictly limiting or prohibiting garnishment had the fewest bankruptciesk-Ailaska (76), Pennsylvania (512), Texas (329), Florida (507), and. South C~rolina (140). Evidence of a correlation between consumer bankruptcies and wage garnish- ments was among the considerations prompting me to call attention to the possible use of the bankruptcy powers as a Constitutional basis for developing measures to cope with the garnishment problem. "2. Mr. Secretary, personal bankruptcies have risen from 19,033 in 1950 to 208~000 for the fiscal year ending June 1967, In the latter year consumer bank- ruptcies-that Is wage earner bankruptcies-have accounted for over 190~000 of total personal bankr~ptcies. in excess of ~$i.25 billion in debts have been negated by such consumer bankruptcies. What, in your view, is the impact on our economy of this trend?" I observe striking parallels between the upward trend in consumer bankrupt- cies and that of consumer credit, the latter expanding 40 times in the last 40 years. It is fair to assume that the credit abuses sought to be removed by legis- lation before the Subcommittee have been partially responsible for the credit- bankruptcy tandem. The removal of these abuses would likely tend to reduce the number of consumer bankruptcies and therefore have a wholesome impact upon the economy. In addition, I do not think I can overlook the personal tragedies of 190,000 persons ailid their families who found themselves so deep in financial trouble that they were forced. to turn to bankruptcy for a solution. If you wish any additional information concerning the subject matter of the proposals before you, 1 shall be pleased to assist you in any way that I can. Sincerely, W. WILLARD WIRTZ, &~oretary of Labor. PAGENO="0213" CONSUMER CREDIT PROTECTION ACT FRIDAY, AUGUST 18, 19e7 HousE or REPRESENTATIVES, SUBCOMMITTEE ON CONSUMER AFFAIRS OF THE COMMITTEE ON BANKING AND CURRENCY, Wa&/ii~ngton, D.U. The subcommittee met, pursuant to recess, at 10:15 a.m. in room 2128, Rayburn House O~ce Building, Hon. Leonor K. Sullivan (chair- man of the subcommittee) presiding. Present: Representatives Sullivan and Stephens. Mrs. SULLIVAN. The Subcommittee on Consumer Affairs will come to order. This morning we will conclude our scheduled hearings into con- sumer credit and on the many bills now before us to regulate this vast industry which has brought to the American people the fruits of their future earnings, or perhaps, to put it another way, the enjoyment of their expectations. None of us on this subcommittee opposes the use of credit, but we all hope that, as result of our efforts on this legislation, perhaps we can help all of the American people to have a better understanding of the costs of credit and thus be able to use it wisely. Our record is full of illustrations of the unwise and disastrous use of this magic device for acquiring goods or services you cannot at the moment pay for. r want to pay tribute to the members of this subcommittee who were so faithful in attending our hearings, morning and afternoon, during the past 2 weeks. Mr. Annunzio asked me particularly to express his regrets to our witnesses this morning for his first absence-I think he has been at every session-but he had switched to today some engagements he had in Chicago last Friday in order to attend our hearing with the bankruptcy referees and that was before today's schedule was drawn up. I am sure other members who could not be present this morning also regret not being able to hear the final witness. Our witnesses this morning come from the banking industry and from organized labor. It is very easy for us to remember when those two groups found nothing to share with each other except mutual distrust and perhaps bitter hatred. Things have changed ~o much for the better that a labor leader and a banker share many common prob- lems and often solve them together. Hence, I am going to ask all of the witnesses this morning to come to the witness table at one time and counsel with us. 79,5 PAGENO="0214" 796 CONSUMER C:REDIT PROTECTION ACT We have the president of the Independent Bankers Association, Mr. Stanley R. Barber of Weilman, Iowa, accompanied by Mr. Howard Bell, of Sank Center, Minn,, executive director of an organization which is always welcome before the Committee on Banking and Cur- rency; and, from the ranks of organized labor, Mr. Pat Greathouse, of Detroit, vice president of the United Automobile Workers of America. Mr. Jacob Clayman, administrative director of the Indus- trial Union Department of the AFL-CIO, was also scheduled for this morning but is not able to be here. We have a lot of ground yet to cover in completing these hearings today and we have found that by having the witnesses make their presentations in turn, and then giving the members an opportunity to question any or all of them at one time, we can cover far more ground and make Sure that each member can ask the question or questions he is most anxious to direct to a particular witness. We also have with us Mr. Herbert O'Conor, Jr. former commis- sioner of banking for the State of Maryland. Mr. ó'Conor, I under- stand that you would like to present to the committee a statement to be made part of the record since we may not have time to enable you to do it orally. SThTEMENT O~' HERBERT B. O'CONOR, BALTIMO~E~ MD. Mr. O'OóNoR. I would have no objection if your schedule permitted it, but knowing that you have previous witnesses scheduled I will just offer it for the record if I may. Mrs. SULLIVAN. We will be happy to accept it. After we study your statement, if there are any questions that we would like to put to you, if we can give it to you in writing will you have your answers back to us in a few days? Mr. O'CONOR. Vety glad to do so. I would add this, I believe Mr. Keyserling testified on Wednesday. He testified that he felt an 18-percent ceiling on interest was too high. I happen to agree with that. But I disagree with the fundamental practicality of trying to incorporate that in the bill this year. I think it is unrealistic to attempt it at this time and it might well destroy the passage of good legislwtion. Thank you. Mrs. SULLIVAN. Thank you very much for preparing a statement for our information~ based on your extensive experience in this field. (Mr. O'Conor's statement follows:) STATEMENT OF ~ H. O'Cowon I am Herbert R. O'Oonor, of Baltimore, Maryland. I am a practicing member of the Maryland bar; my public service includes a term as State Bank Commis~ sioner from May 1, 1963 until July 1 of this year. I do not purport to be an expert in the field of finance or a specialist in consumer loans or credit. Rather, I happen to be an interested citizen convinced that one of the essential safe- guards to the system of government we all cherish is a well-informed public. There can be no doubt about the fact that a very substantial portion of the American public is no't aware of the true cost of borrowing money or obtaining credit in the purcba~e of goods and services. Much of this' lack of understanding is due to the absence of meaningful and standard information about the various species of legitimate transactions. PAGENO="0215" CONSUMER CREDIT PROTECTION ACT 797 Specifically, for example, the average person does not realize that neither a "6% discount loan" nor a "loan with 6~o interest added on" really represents 6% interest. To the ordinary man "6% discount" suggests a cut in prices, a lower cost to him. In actuality the true rate of interest on a 6% loan discounted for five years is more than 15%. If the length of such a loan is for a longer period the rate of interest climbs steeply (e.g. at eight years it would be more than 18.5% interest). The true yield on a 6% add-on loan over a five year period is greater than 10.8%. Both methods of computing interest are allowed in Mary- land. It was reassuring, therefore, when the Senate approved S. 5 by a unanimous vote and it is encouraging to note that the House of Representatives is manifest- ing interest in similar legislation. It is most desirable that the two bodies agree on a bill this year while the circumstances are propitious. Mrs. Sullivan and her cosponsors are to be commended for introducing a gen- erally fine bill. H.It. 11601 would plug a number of loopholes in the otherwise desirable truth in lending bill passed by the Senate. The application of disclosure requirements to the advertising of credit as well as the actual transactions is a significant improvement. I do subscribe to the view expressed by Under Secretary of the Treasury Barr that the sure chance of passage which truth in lending has this year might be endangered if too much is attempted in one measure. I support the inclusion of "revolving credit" under the bill, and agree in so doing with those who say that the quotation of an 18% per annum rate is co~i- siderably more useful and informative to the consumer and no more inaccurate than the frequently advertised "11/2 per cent a month". When one first encounters the subject of interest in school, it is presented as an annual increment on prin- cipal. Because the great majority of experiences one has with interest thereafter are computed on a yearly basis, the original impressiOn iS enforced. The monthly statements showing a service charge of 11/2% are simply not meaningful to the average housewife; she does understand 18% a year and if that is what she is being charged, that is what she is entitled to be told. Even more essential, I feel, is the removal of the $10 exemption written into the bill in the Senate. Such an exception would remove the protection of this bill from those who need it most-the poor, who so often buy $25, $50 or $100 worth of, for example, furniture, without realizing that they are paying exorbitant prices for credit. A $10 exemption would be an open invitation to the unscrupulous to break up purchases into smaller units, on no one of which would the charge exceed $10. The idea that credit transactions should be exempt if the amount involved is small is a fallacious one. It would be wrong to allow the people who most need help and some of whom are poor credit risks to begin with to place themselves deeper in debt without affording them the protection given the balance of society. This country must find a way to enable the impoverished to acquire necessities at reasonable costs. This challenge is one of the most difficult ones facing us in these evolving times. No one really believes the market place is going to be vacant just because the merchant is required to reveal the fact that the real price on an electric toaster is half again as much if its charged ~rather than paid for in cash. On the question of whether or not first mortgages on homes should be included, there may be an honest difference of opinion as to the necessity of it. In this area, there is a real competitive market. In Maryland our savings banks, building and loan associations and insurance companies compete with each other and this promotes a low cost. Nonetheless, the rivalry among these fine segments of busi- ness and the fact that the most of them are above reproach does not mean that unconscionable lenders will not come along and take a first mortgage with out- rageous terms. In the area of second mortgages, there is no question as to the desirability of inclusion in your bill. No substantial price competition is now operative in this field, and the required disclosure of interest charges on such loans should be of significant benefit in safeguarding the consumer in this area. The Maryland Legislature has discharged its responsibility in this, as in other areas, by adopt- ing a second mortgage law which requires, among other things, a complete dis- closure of all finance costs in terms of simple annual interest. Such a require- ment in the federal bill would be desirable and the list of exempt charges in the bill should be eliminated, since they offer substantial avenues for evasion and abuse in concealing interest charges, allowing a deceptively low annual interest rate to be quoted at the same time usury is committed in the padded charges. PAGENO="0216" 798 CONSUMER CREDIT PROTECTION ACT I support the incluSion of credit insurance charges in the computation of the finance charge, since experience has shown that a heavy iusurance charge with a hidden rebate to the lender is often used an a device for taking additional profit in the making of a loan. There might be excluded from the finance charge the insurance premium turned over to an insurer who is truly independent of the lender. In other words, the lender who requires the borrower to take the insurance should be made to include any commission he gets when be tells the borrower what his markup will be. Since the individt~al must incur this expense to obtain credit it is obviously part of his cost and it would be inconsistent with the fundamental principle of truth in lending to allow its exclusion when that individual is told what he is obligating himself to pay the lender. I am apprehensive about the proposal of an j8% `ceiling on interest. While it might help the residents of sonie states, it would also be used l~y lending interests to attempt to pressure legislators in states such as Maryland to relax their laws and allow a return which is neither jpstifiecl nor currently allowed. it is my considered opinion that, for the present at least, the matter of taterest ceilings and usuary laws ifs better left to the states. Traditionally the states have had the right and the duty to enact usury laws to protect unsophisticated and impecunious borrowers not equipped to shop for credit and unprotected by any real competition in the mar1~etplace. Until and unless the states fail to meet their responsibility I for one do not favor preemption of the field of loan regulation by the Fedei~al Governnj~ent, Professor Oountrynu~n in his able presentation to this Subcommittee pointed out that it is desirable 1~o do more than protect wages from garnishment. I enddrse his suggestion that assignment of future wages should be invalidated by legisja- tion. It is difficult to ithagine what would cripple a worker's moraje more than the realization that he was working over a period of time for the benefit of a money lender to who be turned in an emergency. Mrs. SULLIVAN. Now, Mr. Greathouse, Mr. Bell, Mr. Barber, will you please come to the witness table? Mr. Barber, would you please introduce the gentlemen accompany- ing you, and after Mr. Barber does so, will you do the same for the record, Mr. Greathouse? Mr. BARBER. I am Stanley R. Barber, president ~f the Independent Bankers Associationbf America and president of the Wellman Savings Bank in Wellman, Iowa. With me is Howard Bell of Sank Centre, Minn., executive director of the association, and Horace R. Hansen of St. Paul, Minn., IBAA counsel. Mrs. SULLIVAN. Mr. Greathouse, will you introduce your associates? Mr. GREATHOUSE. Mr. Daniel S. Bedell of our Washington office, Mr. Paul Wagner and Mr. William Dodds from our Washington office. Mrs. SULLIVAN. Mr. Barber, will you start with your statement? You may summarize it or read through it. It is quite short, I see. STATEIVLENT OP S~NLEY B. BARBER, PRESIDENT, IND~PENiJE~T BANKERS ASSIOCWVION OF ~MZBiCA; ~iCCOMP~Nj~j' Bt HOW- ARD BELL, EXEC~ETTIVE DIRECTOR; A1Th HORACE B. HANSEN, COUNSEL Mr. BARBER. Our association, at its 196~' convention in New Orleans last March, adopted the following resolution: Resolved, That the InUependent Bajikers Association of America is of the firm opinion that the public should be made fufly co~riinant of the actual interest rate being paid on any financill transaction: Now, therefore, he it Resolved, That the ii~depen~ent Bankers A*ssociatio~ of America urges all companies, `agencies or lildivicluals exteud~ng credit to disclose this in1~ori~atLon fully and `clearly; and further, this Association approves the passage ~f interest rates disclosure legislatipn, such as S. 5 and H.R. 949, provided any final bill PAGENO="0217" C0NSUMI~R CREDIT PROTECTION ACT 799' is in such form that it can be technically administered and applies to all ex- tenders of credit. The organization I represent, composed of some 6,500 National- and State-chartered community banks throughout the United States, be- lieves strongly in the public's right to know the facts of a financial transaction. We believe `there is no valid reason why a customer or borrower should not have an accurate and understandable statement of the cost of borrowing and credit. We also believe this is in the public interest. Presently, commercial banks effectively inform the consumer- borrower of financing charges. Comptroller of the Currency William B. Camp has testified before `the Senate Banking and Currency Com- mittee in praise of national bank performance in this area. We believe State banks have much the same performance record. A subcommittee of our Federal Legislative Committee was ap- pointed to study H.R. 11601 and 1EI.R. 11602. Conclusions reached by this group at a meeting in Chicago on August 4 form the basis of this testimony. Provisions of section 203 in the Sullivan bill, IE[.R. 11601, regard- ing disclosure of finance charges, follow generally S. 5 as adopted by the Senate and embodied here in the Widnall bill, H.R. 11602. In both proposals, the Federal Reserve Board is designated as the agency to prepare regulations for implementing the legislation. Should either bill become law, we are confident that the Board would promulgate fair and workable disclosure regulations. Such regulations would ease the burden of compliance by our member banks. Section 204 of the Sullivan bill includes guidelines to the Board for writing regulations. These provide for tolerances, adjustments, and ex- ceptions. Perhaps most important, so far as our member banks are con- cerned, is that the Board would prepare tables and charts for quick calculation of interest rate charges. The Board should not, however, be made the policeman for all viola- tions of all types of creditors as provided in the Sullivan bill section on administrative enforcement. These duties are not in keeping with its functions and it is not equipped to handle them. The testimony of the Board in the Senate on this point should be carefully reviewed. We be- lieve the enforcement procedure. of the Widnall bill is preferable. As to the period for which the finance charge is to be disclosed, whether monthly or annually, it is the position of our association that the requirements should apply uniformly and equally to all types of creditors. Thus, whether the rate is disclosed on a monthly or annual basis, there would be for the borrower an ease of understanding exactly what he is paying. Certainly the dollar amounts of finance charges should be dis- closed on consumer loans. We recognize that it is difficult to arrive at an annual interest rate on credits containing variable terms. It is our sincere desire that the small banks forming the bulk of our association's membership could, under this legislation, continue to offer loans tailored to specific and particular needs of customers. Section 211 of the Sullivan bill specifies July 1, 1968 as the effec- tive date. We believe this date is too early and does not allow suf- ficient time for development of regulations that would be equitable for all segments of the credit industry. PAGENO="0218" 800 CONSUMER CREDIT PROTECTION ACT Section 204 of the Sullivan bill permits the option of stating the finance charge in terms of dollars or percentage until July 1, 1968. Again, we believe this is too early. We suggest that the option con- tinue until the Board has fully and carefully completed all of its rules and regulations, and has prepared its tables and charts for in- terest computations. The date for termination of the option should be fixed by the BOard, but should b~ no later than January 1, 1972, the date set in the bill adopted by the senate. During the option period, we believe lenders should be allowed to state finance charges in terms of dollars per hu:ndred on the unpaid balance, as is now customary. We agree with the Federal Reserve Board that if the total finance charge for a closed end credit is $10 or less, the transaction should be exempt from disclosure requirements. The history of the legislation before you is that it is primarily de- signed to regulate consumer credit. We note that agriculture loans are now included among those on which disclosure would be required. We favor exclusion of agriculture loans from disclosure. Such loans are not in the consumer credit category. We object to a~iy provision that includes, as part of the cost of credit, the premium for credit life insurance. This adds an unneces- sary complication to an already complicated piece of legislation. Credit life insurance is not a charge for lending money. We have no objection to including the standards in the Sullivan bill as to advertising of credit terms. These are almost identical to requirements for disclosure statements. However, we feel that the phrase "specific credit terms" in subsection (j) (1) on page 15 is vague and needs clarification. For example, assume an advertisement states only that auto loans may be repaid over a 36-month period, or states only that `auto loans are available at "low bank rates," with no specifics as to rates or amounts of monthly payments. Would such statements violate this portion of the bill, or is the phrase "specific credit terms" intended to exempt such advertisements? The same question `applies to the phrase "specific terms" in subsection (k) on page 16. We believe such statements should not be construed as being in violation of this sec- tion in the Sullivan bill. There are three provisions in the Sullivan bill that are covered in State laws and we feel strongly these should be left to the State and no;t preempted by the Federal Government. They relate to the maxi- mum interest rate (p. 17), confession of judgment (p. 17) and garnishment (pp. 33 and 34). As to maximum interest rates, most States have legislation which, by virtue of Federal law, applies to national banks as well as State banks. The Congress long ago determined that the States are best able to decide what kind of banking accommOdations suit their varying economies, not only as to interest charges but also as to other basic areas of bank regulation. What is best for an industrial State may not be best for an agricultural State. The Congress never has sought to preempt the financial field or to impose any rigid or monolithic system upon the States. PAGENO="0219" CONSUMER CREDIT PROTECTION ACT 801 Garnishment of wages and confession of judgment as means of en- forcing payment of loans have been long established and are the sub- ject of State laws. These laws vary widely. There are no cogent reasons for the Federal Government to destroy these State laws. If properly designed, these laws furnish security and thus enhance availability of credit. Banks must be concerned with their depositors' money. To take away these forms of security is not in the public interest. As to civil and criminal penalties, we feel that an aggrieved per- son should have a civil remedy, but oniy after any error or violation is discovered and the creditor has had a reasonable time to correct it. For example, if the annual percentage rate is stated to be 6 per- `cent and is actually 61/2 percent, the customer should be paid the difference within 15 days after discovery by either party. If the creditor fails or refuses to pay within that time, only then should court action be permited. The amount of judgment should be no more than the difference, plus reasonable costs. This is the practice in most collection situa- tions in our courts today, and it should be no different here. The civil penalties stated in these bills are apt to unduly encourage law- suits, against creditors. We have no objection to severe penalties for habitual offenders. We can see no reason for the bill to create the presumption that the creditor is dishonest and deliberately falsified the rate. If the `creditor is in fact dishonest, that remedy should be under a limited `criminal penalty. The criminal provisions are too severe `and we oppose them as written. They should be limited to permit their use only in case where the creditor "repeatedly, knowingly, and willfully" violates the law. The penalty should be limited to fines up to $5,000. The pro- vision for imprisonment should be deleted. As to penalties generally, we feel that in new and untried "fair practice" legislation such as this, initially it would be best to think In terms of moderate penalties. We see no need for creation of a Commission on Consumer Finance. The Federal Reserve Board necessarily would consult with many rep- resentatives from all areas of the credit field in developing the con- templated regulations. No matter how well chosen, no nine-member commission could possibly represent a cross section. Furthermore, the Board and the Attorney General are required to give Congress and the President a full report each year on the experience under the act.. This should be sufficient. The section on commodity futures trading does not appear to us as being within the scope or purpose of these bills. We see no point to the section on Presidential standby power, to cause controls over consumer credit. A "national emergency" is unde- fined and such drastic controls should be invoked only when Congress finds an emergency to exist. This section should be deleted. In closing, I wish to reiterate our concern, previously expressed in our testimony on the Senate side, that disclosure legislation would put banks at a disadvantage in competing with captive finance companies controlled by manufacturers or retailers. PAGENO="0220" 802 CONSUMER CREDIT PROTECTION ACT For example, an automobile dealer could adjust or "pack" the price of a car to the extent that he could quote a finance charge that was ostensibly lower than that available at a bank. A furniture dealer could do the same. Under these circumstances, the total cost to the purchaser would be more than if he had bought a car or furniture at a fair price and had financed his purchase with a bank loan. Our estimate is the vol- ume of such "rigged" transactions would increase sharply if dis- closure proposals become law. In prior years, the Congress has considered bills to force manu- facturers to divest themselves of finance companies. Enactment of a law prohibiting a manufacturer from financing what he sells would be an effective roadblock to the type of "rigged" transactions we have mentioned. We believe that divestiture of captive finance companies should be considered in connection with this legislation. If disclosure is to become a standard procedure, perhaps considera- tion should be given to a truth-in-packaging law, which would force the seller of merchandise or services to list on each sales tag or in- voice his costs, plus his markup, expressed in amount and percentage. In summary: Our association favors the objective of truth in lending but believes that great care must be exercised so that any legislation. attempting to achieve this obj~ctive does not unduly re- strict industry aild commerce. We are pleased to present our views to you and will attempt to answer any questions you may have. Thank you for your attention. Mrs. SULLIVA~. Thank you, Mr. Barber. I would just like to make one comment before we go on and that is, we do have a truth-in-packaging law, but I am afraid it is as weak as the Senate bill on truth in lending, S.5. Mr. BARBER. I misstated when I suggested consideration might be given to truth in packaging and meant to say truth in pricing could be a logical further extension if true disclosure were to be made. This suggestion was somewhat with tongue in cheek. Mrs. Sur.~LIvAN. We have had some rather unsatisfactory experiences with the so-called truth-in-packaging law. (The follo~ving letter from Mr. Barber was subsequently received and included in the record:) INDEPENDENT BANKERS ASSOCIATION OF AMERICA, WeUman, Iowa, August 29, 1967. Hon. LEONOR K. SuLLIVAN, Chairman, ~ubconvm'tttee on Consumer Affairs of the Committee on Banking and Currency, Rat~pburn House Office Builditig, Washington, D.C. MADAM OHAIRMAN * * * I wish to reaffirm the willingness of banking to make available full informa- tion regarding credit transactions. We ask only that the legislation be made ap- plicable to all extenders of credit and that it not result in an undue burden to banking and other lenders. We noted in our testimony that we urge deletion of agricultural credit;from disclosure legislation. Agricultural loans are vet~ largely capital type credits. In addition, these loans are practioally entirely on a simple Interest basis. Our 6,500 banks are largely serving smaller agricultural communi- ties and the additional effort of reporting this type of credit would be con- siderable. We also wish to reemphasize what we feel is a real danger In disclosure legis- lation. This is the driving of interest rates underground and the elimination of PAGENO="0221" CONSUMER CREDIT PROTECTION ACT 803 the two price system. As long as merchants have two avenues of profit, namely mark up on goods sold and interest on financing of goods sold, and lenders have only the latter, it is difficult for us to see bow disclosure can be applied equitably to all segments of the industry. Short of a "truth-in-pricing" bill, or more correctly short of price controls and profit limitations, disclosure legisla- tion cannot effectively curb discretionary pricing of profit margins and products with the result that finance charges can be concealed. This, obviously, bears unfairly on the banking industry, which we believe most agree has been follow- ing high ethical standards in lending. Respectfully submitted. STANLEY R. BA1~BER, President. Mrs. SULLIVAN. Now, Mr. Greathouse, do you feel you would like to read through your statement or summarize it ~ STATEMENT OF PAT GREATHOUSE, VICE PRESIDENT', UNITED AUTOMOBILE, AEROSPACE & AGRICULTURAL MPi~MENT WORKERS `OP 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 DOI~DS, DEPUTY DI- RECTOR, LEGAL DEPARTMENT, UAW Mr. GREATHOUSE. I would like to go through most of it. I will see if I can summarize it. I now have the opportunity of speaking today not only for the million and a half members of our union but also speak for the Industrial Union Department of the AFL-CIO. Mr. Clayman will rely on the statement that I have here today. There is no question about the significance of this legislation and the need for truth-in-lending as most all witnesses who have appeared before your committee have testified. We have followed the hearings closely and have read the testimony and certainly agree that this legislation is long overdue. We say in our statement at least 5 years overdue-I think the need for the legislation has been much greater than 5 years. But if you take the orignal submission made by Senator Douglas and allow for a couple of years, we think the legislation should have been enacted at least 5 years ago. While the poor and the average factory worker are misled by current credit practices, middle-class and well-educated Americans also need the benefit of truth-in-lending legislation. A recent study revealed that four out of every 10 persons with a college education do not know how much they are paying in credit charges. Truth-in-lending legislation can also make a definite contribution to lowering the cost of living for millions of American families. Interest on consumer credit amounted to some $13 billion in 1966. This legislation should result in cheaper credit for the American public. It will have an impact on the pockets and pocketbooks of men and women in all walks of life in all parts of the country. Furthermore, it will especially help those who are most deceived by present credit practices, the poor and the disadvantaged in the inner city ghettos and in the isolated rural slum areas. Until now, the lack of effective price competition based upon ac- curate information has allowed high prices, excessive profits, and encouraged inefficient operations in the consumer credit field. Truth- in-lending will produce invigorated competition in the credit industry. PAGENO="0222" 804 eON~tTMER CREDI~t PROTECTION AC~ Lenders offering low interest rates should see an increase in their business, as is r%litfully due to those who offer the lowest prices in our free economic system. Businessmen extending credit at higher interest rates will be under pressure to economize and increase the efficiency of their operation's, or to work under lower profit margins than they have been accustomed to in the past. Congress can contribute significantly to the war to eliminate poverty by enacting legisla~tion to protect the consumer from the malpractices and misinformation that are all too common in the field of consumer credit. The poor have not escaped the mass media's bombardment of messages to buy now and pay later. Slogans such as "easy payments?' and "no money down" have been very effective in luring even those on extremely limited incomes. The result is that substantial numbers of today's poor have been exploited in the marketplace. Many have be- come hopelessly entangled in problems of installment debt. Too often the consequences 1~ave been threats, legal penalties, and even loss of their jobs as a result of missed payments. Because major department stores and other sources of reasonably priced credit are often unreachable and are not usually willing to extend credit to them, `the poor usually fall prey to less scrupulous merchants. Numerous studies have revealed how the poor pay higher prices and receive shoddy merchandise at the same time. On top of this, they pay usurious interest rates so that they wind up paying in total sev- eral times the usual retail price. Then, they are faced with the threat of repossession an4 losing their merchandise entirely if they are not able to keep up wit~i the excessiv~ payments they are required to make. It is no wonder t~ien that we discover that in the recent catastrophic rioting in Detroit, the victims of burning and arson included 32 furni.. ture, appliance and hardware stores, and 23 clothing and jewelry stores. These types of outlets in ghetto areas are very often known for their excessive credit practices. Numerous sto'ries on the riots appeared in the Detroit press alluding to the systematic burning of stores which were believed to engage in excessive credit practices. One columnist writing for the Detroit News claimed that: A Negro woman on relief set fire to a furniture store because she felt she would never be able to pay the bill she owed there~ Due to the interest rate she was being forced to p~y $910.12 to satisfy an original debt of $285. While our society can never tolerate looting and burning no matter how deep the social injustices that breed these irrational and lawless acts, it seems to me that we can `take some elemental steps right now to begin to eliminate the conditions that lead men to become looters and burners. The passage of the strong truth-in-lending provisions and other sec'tions of JI.IR. 11601 which help to stamp o'ut shady and im- moral practices in the consumer credit field can do more to help main- tain law and order in our cities than a dozen repressive antiriot bills. The consumer is not the only one who will benefit from truth-in- lending legislation. `Truth-in-lending will protect the ethical lenders and business merchants from losing business to unscrupulous competi- tors. An otherwise honest businessman is subject to tremendous pres- sure to adopt unethical credit practices by his unethical competitor in order to stay in business and earn a decent living. By requiring every lender to be truthful and to state the true interest rate in a uniform PAGENO="0223" CONSUMER CREDIT PROTECTION ACT 805 manner, we can break the endless chain of misleading claims and shabby deceptions which now characterize too large a segment of the credit industry. Businessmen would be secure in the knowledge that higher cost competitors cannot lure away their customers with decep- tive credit information. While the modified truth-in-lending bill passed by the Senate repre- sents progress in the long efforts to enact meaningful legislation in this area, a number of glaring weaknesses and loopholes are contained in that version which can seriously weaken the effectiveness of truth- in-lending protection. I am most happy to see that IELR. 11601, which your committee is considering, closes most of these loopholes. The basic premise behind truth-in-lending legislation is that the true facts as to interest and financing charges and annual interest rates should be disclosed on all types of credit so that the public can com- pare and make a sound choice in obtaining credit. The omission from coverage in the Senate version of revolving credit accounts, and pur- chases where the finance charge is $10 or less, opens up glaring ioop- holes that could possibly nullIfy most of the protection provided by this legislation. Revolving credit accounts is the fastest growing form of credit in the country today. In addition, the interest rate charged on these ac- counts is typically 18 percent a year, a most excessiverate of interest equal to the national interest rate ceiling recommended elsewhere in }LR. 11601. There is no reason why department stores, credit card plans, and others who offer revolving credit accounts cannot state their interest rate charge on an annual basis. If they are required to state only the monthly rate of interest, millions of consumers could be led to believe that the interest rates on these accounts are among the lowest available to them, where the actual fact, revolving credit ac~ counts are one of the most costly forms of credit available. The existence of such a glaring loophole as this can only encourag~ installment sellers and lenders to abandon other forms of credit that they now offer and operate on a revolving credit basis. The effect would be to water down considerably the protection that the consumer direly needs. Furthermore, it would place in an unfair competitive position those businessmen who would be required to state interest rates on ai~ annual basis. The exclusion from coverage under the Senate bill of debts of small amounts where finance charges are less than $10 is completely unjusti- fied. Interest rates are often the highest on these smaller loans, where the cost of the item is $100 or less, Moreover, these smaller sized pur- chases make up the bulk of the credit buying for the average worker and for those living in poverty. The argument that the true interest ~harges are hard to compute in these cases, or that this would con- stitute a costly inconvenience to merchants does not hold up when elaborate tables have been prepared which avoid the need for the seller to do any computations. The only difference in computing in- terest charges and interest rates on a $100 loan as compared to a $1,000 loan or a $10,000 loan is one or two decimal points. I am most happy to see that the bill your committee is considering does not allow such flimsy reasoning to stand in the way of providing needed protection for the low-income family making small purchases, PAGENO="0224" 806 CONSUMER CREDIT PROTECTION ACT One of the greatest sources of credit problems for the workingman and the poverty stricken is the oversimplified, confusing, misleading, or blatantly deceptive advertising of credit and the sale of goods on credit. If truth-in.1lending legislation is to be truly effective, the true facts of the interest charge and the interest rate should be available to the prospective customer before he has decided where he is to make a purchase or a loan. With the high-pressure salesmanship that exists in many retail establishments, the average worker does not have a truly free choice to determine where he can make his purchases on the most economical basis if he is initially misled by advertising of the cost of credit. While we cannot mandate that the true cost of credit be inserted in all advertising of consumer goods, we should require that any ad- vertising of credit costs state the truth about interest charges. The omis- sion of advertising from the coverage in the Senate-passed bill is a grave weakness. Ti~e TJAW strongly supports the provisions of the bill before your committee which bring advertising under truth-in-lending protection. Other improvements in H.R. 11601, as compared to the Senate passed version of truth in lending which the 1IJAW strongly supports, is the provision for full. disclosure on charges on first mortgages, where discounts and the point system are most confusing to the average homebuyer, and the inclusion of insurance charges levied against con- sumer credit as part of total finance charges in computing ~the true cost of credit. I would like to point out one area regarding the truth-in-lending provisions of the excellent bill before your conimittee that we in the IJAW would like to see changed. This is the choice of the Federal Re~ serve Board as the agency charged with enforcing the truth-in-landing legislation. The Federal Reserve Board is an agency that is basically oriented toward the banking business. Furthermore, it has little or no experiepce in the consumer protection field, and has no staff ready to carry out the enforcement provisions in the bill. In its place, we would recommend that enforcement of consumer credit legislation be placed in the hands of the Federal Trade Com- mission. The FTC is already in the field of advising and protecting the consumer. It has far more expertise in the. fields of retail selling and advertising, has a history of dedicated efforts to protect the con- sumer from unjust, illegal, and fraudulent practices~ and has an effi~ cient system for monitoring advertising, for investigating complaints, and for instituting the type of proceedings called for to bring about ~omphiance with this legislation. I am sure that the members of this committee are aware that placing a law on the statute books does not in itself accomplish the end ob- jective of providing adequate protection for the American people. I urge that you mal~e every effort to provide the best mechanism for vigorous, eMcient, and fair enforcement in the consumer credit field. The TJAW would like to go on record in strong support of the provi- sions of this bill that would outlaw wage garnishments. The device of garnisheeing wages is used with abandon by numerous unethical merchants who prey upon unsuspecting workers with their easy-pay- ment schemes. The tragic results are pay envelopes reduced to the PAGENO="0225" CONSUMER CREDIT PROTECTION ACT 807 point where workers can hardly support their families, hiconvenience and extra costs for employers, substantial court costs imposed on tax- payers, disciplinary suspensions which make it even harder for work- ers to repay their debts, and outright dismissal and loss of employ- ment. Unscrupulous merchants often use the courts as a collection device without even attempting to use other legitimate means of collection. They often sell goods Qn credit when they know a worker is already overextended in debt~ with the knowledge that they have a sure-fire method of collecting the payment. Legitimate businesses with substantial reputations are able to collect on bad debts without resorting to garnishments. Merchants and cred- itors in Texas, Pennsylvania, and Florida, where garnishments are outlawed, have learned to adjust their collection practices without ill effects or any noticeable reduction in the volume of retail sales. The statistics on the extent of garnishments are staggering. In just one court alone in the city of Detroit, the common pleas court, 55,000 garnishments were issued in 1966. It is estimated that 95 percent of these garnishments were issued by default where the defendant never defended himself from becoming garnished. This took place in spite of the fact that this court is a liberal court in dealing with this issue, and has established a conciliation system to attempt to settle debts without having to attach wages. A most unfortunate side effect of the garnishment system is that the courts often become the "enemy" in the eyes of the poor. They become further convincea that the society which they come to know as the "system" only works against them and grinds them down. A revealing study conducted among low-income families in New York City uncovered the fact that one out of every five of the families interviewed had been threatened with garnishments, had their wages garnished, or had goods repossessed. Typically, low-income families faced a major crisis of this type whenever the chief breadwinner be- came ill or unemployed. The problems the poor face arising out of garnishments often go hand in hand with direct exploitation by merchants. In the same study in New York City mentioned above, David Caplovitz cited as typical this experience of a 28-year-old Puerto Rican man: I bought a set of pots and pans from a door-to-door salesman, They were of very poor quality and I wanted to give them back but they wouldn't take them. I stopped paying and told them to change them or take them back. I refused to pay. . . They started bothering me at every job I had. Then they wrote to my current job and my boss is taking $6 weekly from my pay and sending it to pay this. An additional problem which compounds the consumer problems of low-income families is the fact that these families often do not know where to turn to for help if they are cheated by merchants. Even if they do know where to go for help, they are usually unable to obtain it. The New York City study pointed out that 64 percent of the fami- lies interviewed did not have any idea of where to obtain help against unscrupulous merchants. Furthermore, only 9 percent of the families who encountered these problems actually sought professional help, although more than one-third cited a source of help that they knew about. 8S-340-67----pt. 2--15 PAGENO="0226" 808 CONSIJMER CREDIT I~R0TECTI0N ACT It is appai~ent to the IJAW that Congress must take additional steps to protect the consulner and to eliminate unethical practices in the mer- chandising and cre~dit fields. The Commission on Consumer Finance provided under title III of this bill appears to provide an excellent vehicle to determine further steps of a regulatory or legislative nature needed to provide the long overdu~ protection that the consuming pub- lic deserves. The provision of H.R. 11601 calling for a national ceiling on interest rates makes extremely good sense to the UAW. Excessive profits from interest charges for fast buck merchants and small loan companies who prey primarily on the poor should rapidly become a thing of the past. However, th~ ceiling of 18 percent established in this bill is too high. The 18-perce~t rate charged by many department stores on re- volving credit is st excessive that it can actually result in a greater profit on the credit transaction than on the original sale of the item itself. Conventionai bank rates and interest rates on commercial credit are very substantially lower than 18 percent. Credit unions are able to extend loans to working people and to the poor at about half that rate. In its place, we would suggest a flexible ceiling that would be re- lated to going interest rates such as the Federal Reserve Board's dis- count rate. Your committee might investigate what multiple of the discount rate woulld be most appropriate to provide a flexible and workable ceiling that would relate to changing conditions in the na- tional economy. P4ie difficulty with any flat rate is t1~at it would have to be high enough to provide adequate leeway in a tight mOney market when interest rates are extremely high generally. When you do' this, however, the ceiling does not provide any significant protection against usurious interest rates in normal times when interest rates are low. Madam Ohairman and members of the subcommittee, the IJAW would like to go on record in opposition to that portion of H.R. 11601 which would provide for emergency control of consumer credit by the President of the United States. This provisioh does not come under the scope of cOnsi1mer credit protection. Rather, it deals with overall economic policy. It is a form. of economié control to which the UAW is opposed. It could 4nly lead to hardships for the individual consumer in need of credit, wh~le the major `borrowers in this country, business and industry, would not be subject to such controls. It would constitute discriminatory legislation, applying only to those with the least ability to overcome the consequences of such legislation. There appears to be no need to enact any ecoonmic controls over credit in the present state of the economy, nor does it appear likely that emergency credit con- trols will be neede~l in the fo'reseeaWe future. The provision i~t H.R. 11601 which prohibits the use of confessions of judgment in consumer credit transactions is `highly deserving of legislative enactrdent. This device, used by predatory merchants to in- duce debtors to w~Ldve their legal rights to contest any judgmenth that: may be entered against them, is an excellent example of how our legal system is perverted to exploit the poor. Typically, such a clause is inserted in the fine print of the contract which the borrower is required to sign. There is no justification for allowing this practice where the typical individual has no knowledge and no bargaining power to enable him to avoid surrendering valuable PAGENO="0227" OONStJMER CR1M~IT PEOTECTION ACT 809 legal rights, and thus become subject to severe finañoial hardship at a later date. In a similar fashion, the IJAW feels additional protection is needed to prohibit entirely the use of wage a~thgnments in the con- sumer credit field. Here is another example where a borrower is placed under extreme pressure, often without any knowledge or full understanding of the consequence, to sign away his rights and allow a creditor to attach his wages at any time in the future that he sees fit. These so-called "voluntary" agreements to attach wages are coercive rather than voluntary in the typical seller-purcknser relationship. Since wage assignments have many of the pernicious effects of wage garnishments, both should be treated the same and abolished in the same legislation. Another area where your committee should act to protect the con- sumer is to regulate the pernicious practices of many merchants in repossessing goods purchased on credit. This is particularly ~ problem in "add-on" purchases, where a merchant sells another item on credit before a purchaser completes payments on the original item that he bought. If the customer misses one payment, merchants have often repos- sessed both items, even though the amount already paid has been, more than enough to completely repay the outstanding debt on the original item. Actual situa:tions have been repoi~ted in the press where four or more items purchased on an add-on installment basis have been repossessed, even though the value of one item alone was sufficient to satisfy the outstanding debt. Legislation should prohibit the repossession of any item whenever full payment has already been made. The language of the legislation could provide that when debt is outstanding on two or more items, payments be allocated to each of the items, based on the ratio of the original purchase price of each of the items to the other items. Fur- ther, repossessions should be limited by statute to the extent neces- sary to satisfy any outstanding debt. Merchants should also be re- quired to return to the purchaser any proceeds gained from the sale of the repossessed items that is over and above the amount of debt still owing. There are a number of additional areas requiring legislative protec- tion which this committee should seriously consider. Many of the abu~e~ and shady practices could be eliminated from the credit field if lenders and merchants offering goods on credit *ere licensed and had to meet adequate standards covering the entire scope of their lending practices. The lack of adequate. legal recourse for consumers who have out- standhig debt on shoddy and defectiv~e merchandise needs to be remedied. The common abuse of using fine print to prevent customers from knowing what they are signing could be abolished by requiring print to be a certain minimum size on credit contracts. Steps might also be taken to simplify the obscure legal language on credit con- tracts so that customers would know exactly what they were agreeing to. Madam Chairman, I want to thank you for the opportunity of ap- pearing here today to express the views of the TJAW. I hope I have spelled out for you very frankly the areas where our union would like PAGENO="0228" 810 CONSU1VIER CIIFJThIT PROTECTION ACT to see positive coi~ressional action. We are aware of political realities, and do not take the position that the bill that comes out of your com- mittee this year n~ed ~contai~ii all of our recommendations, We would leave it up to you and your committee to determine how much can be passed througl~i the Congress this year and how much might be enacted next year and in subsequent years. The members o~ our union are extremely gratified with the efforts of you and your committee to enact long-overdue reforms in the field of consumer credit. You may be assured that the IJAW will stand strongly behind your efforts to adequately protect the American consumer. We `hereby enlist in your crusade for the duration. (The complete statement of Mr. Greathouse follows:) STATEMENT OF PAP GBEATHOUSE, VICE PRESIDENT, UNITED AUTOMOBILE, AERo- SPACE & AGRICULTURAL IMPLEMENT WORKERS OF AMERICA, AFL-CIO Madame Chairman and Members of the Subcommittee,. I am grateful for the opportunity to appear here today to express the strong support of the 1,500,000 members of the UAW and the 5,000,000 other members of the Industrial Union Department, AFL-CIO (IUD) for the measures that you are considering to provide long overdue protection for the American public in the field of con- sumer credit. The bill that you are considering, H.R. 11601, is a piece of pioneering legislation of substantial significance that can be of great benefit to the average American family. This bill not only incorporates strong truth-in-lending provi- sions that should b~1've been enacted at least five years ago, but also contains additional provision~ that can begin to reform other predatory practices in the consumer credit field that have worked untold hardshlps on miljions of American families. The Need for Truth-i~i-Lendifl~9 Truth-in-Lending legislation is sorely needed to protect the consumer's right to know the full faets about credit rates and interest charges so that he can compare all alternatives and make an intelligent choice among the various credit plans `that may be available to him at any given time. President Johnson stated this very simply in his 1967 Message to the Congress on Consumer Protection: "The consumer has the right to know the coat of this key item [crediti in his budget ~iust as muchr as the price of any other commodity he buys.. . The con- sumer should not have to be an actuary~ or mathematician to understand the rate of interest that is being charged." While the poor afid the average factory worker are misled by current credit practices, middle-class and well-educated Americans alsQ need the benefit of truth-in-lending legislation. A recent study revealed that 4 out of every 10 persons with a college education do not know how much they are paying in credit charges. Trutb~in-lending legislation can also make a definite contribution to lowering, `the cost of living fo~ millions of American families. Interest on consumer credit amounted to some $13 billion in 1966. This legislation should result in cheaper credit for the American public. It will have an impact on the pockets and pocket- books of men and women in all walks of life in all parts of the country. Further- more, it will especially help those who are most deceived by present credit prac- tices, the poor anc~ the disadvantaged in the inner city ghettos and in the isolated rural slum areas'. Until now, the laclt of effective price competition bas~d upon accurate informa- tion has allowed bi~b prices, excessive profits, and encouraged inefficient opera- tions in the consuwer credit field. Truth-in-lending will produce invigorated competition in the credit industry. Lenders offering low interest rates should see an increase in their business, as is rightfully due to those who offer the lowest prices in our free economic system. Businessmen extending credit at higher in- terest rates will be under pressure to economize and increase the efficiency of their operations, or, to work under lower profit margins than they have been accustomed to in the past. PAGENO="0229" CONSUMER CREDIT PROTECTION ACT 811 The Poor are Victimized Congress can contribute significantly to the war to eliminate poverty by en- ~cting legislation to protect the consumer from the maipr~ctices andinisinforina- tion that are all too commoh in the field Of cofl~Pnle1r credit. The poor have not escaped the mass media's bombardment of messages to bu~ iloW and pay later. Slogans such as "easy payments" and "no money down" Ifave been very effective in luring even those on extremely limited incomes. The result is that substan- tial numbers of today's poor have been exploited in the marketplace. Many have become hopelessly entangled in problems of installment debt. Too often the consequences have been threath, legal penalties, and even losS of their jobs as a result of missed payments. Because major department stores and other sources of reasonably priced credit are often unreachable and are not usually willing to extend credit to them, the poor usually fall prey to less scrupulous merchants. Numerous studies have revealed bow the poor pay higher prices and receive shoddy merchandise at the same time, On top of this, they pay usurious interest rates so that they wind up paying in total several times the usual retail price. Then, they are faced with the threat of reprossession and losing their mer- chandise entirely if they are not able to keep up with the excessive payments they are required to make. Is it tber~ no wonder that we discover that in the recent catastrophic rioting in Detroit, the victims of burning and arson included 3~l furniture, appliance and hardware stores, ~ 23 clothing and jewelry stores. These types of out- lets in ghetto areas are very often known for their excessive credit practices. Numerous stories on the riots appeared in the ~Detroit press alluding to the systematic burning of stores which were believed to engage in excessive credit practices. One columnist writing for the Detroit News claimed that: "A Negro woman on relief set fire to a furniture store because she felt she would never be able to pay the bill she owed there. Due to the interest rate ~he was being forced to pay ~910.12 to satisfy an original debt of $2S5'~ While our society can never tolerate looting and burning no matter how deep the social injustices that breed these irrational and lawless acts, it seems to me that we can take some elemental steps righ~t now to begin to eliminate the con- ditions that lead men to become looters and burners. The passage of the strong truth-in-lending provisions and other sections of HR. 11601 which help to stamp out shady and immoral practices in the consumer credit field can do more to help maintain law and order in our cities than a dozen repressive anti-riot bills. Ethical Merchants Protected The consumer is not the only one who will benefit fi~om trut~-in-lend~ng legi~- lation, Truth-lit-lending will protect the el~hical lenders and business merchants from losing b~isiness to unscrupulous compftitors. An otherwise honest business- man is subject to tremendous presst~re to adopt unethical credit practices by his unethical competitor in order to stay in business and earn a decent living. By requiring every lender to be truthful and to state the true interest rate in a uniform ~nanner, we can break the endless chain of ini~leading claims and shabby deceptions which now characterize too large a segment of the credit industry. Businessmen would be secure in the knowledge that higher cost com- petitors caimot lure away their customers with deceptive credit ibformätion. ~enate Version Must. Be strengthened While the modified trhtb-in-lencling bill paesed by the Senate represents prog- rem in the 1ong~ efforts to enact meaningful legislation in this area, a number of glaring weaknesses and loopholes are contained in that version whfch can seriously weaken the effectiveness of truth-in-lending protection. I am most happy to see that H,R. 11601, which your committee is considering~ closes most of these loopholes. The basic premise behind truth-in-lending legislation is that the true facts as to interest and financing charges and annual interest rates should be disclosed on all types of credit so that the public can compare and make a sound choice in obtaining credits The omission from coverage In the Senate version of revolving credit accounts, and puCchases where the finance charge is $10 or less, opens up glaring loopholes that could possibly nullify most of the protection provided by this legislation. PAGENO="0230" 812 CO~STTh~ER CREDIT PROTECTION ACT Cover Revolving Cr~dit Revelying credit a4~co~i~s is the, fastest growing form of credit in the c~nntry todayS In addition, t1~e. interest rate charged on tbe~e acooiWts is typjeai~y 18 pere~nt a year, a u~$ exe~~~jv~ rate of 4ntere~t eqi~al to th~ national 1ntere~t rate ceiling TecoWI~nd~1 elsewhere in I~.R, 11601. There is no reason why department stores, q~dit card plans, arkd ç~tb~rs who of~r rey~lvIng credlt accounts cannot state their interest r~te charge on an annual basis, [f they are required to state only the monthly rate of interest, millions of consumers could be 1~cI to believe that the interest yates çn~ tbpsp accounts are among the lowest available to them, wl4lere in aç~tual fact, revolving credit accounts are one of the most costly forms of credit available. The existence qf such a glaring loophole as thjs can only emco,urage installment sellers apd len4ers to abandon other forms of cre~it that they nOw offer and operate on a revolving credit basis. The effect would be to water c~own eonsi~IerabJy the protection that the consumer direly needs, I~u~tliermore, ~t would place in an u~air competitive position those busi- nessmen who would he required tç ~tate interest rates on an annual basis, ~\T0 J~JwoIasion for ~etafl Pt~re1za~e~I~$ The! exclusion froi4 coverage under the ~enat~ bill of debts of small amounts where finance charges are less than $10 is completely un~istified. Tnterest rates are often the highest on these smaller loans, where the coSt of the item is $100 or less. Moreover, these smaller sizq~ purchases make up the bulk `of the credit buying for the avert~ge worker and for those living in poverty. The atgument that the true interest cbar,ges are hard tQ compute lii these cases, or that this would constitute a dosti~r ii~conve~iience to merchants does not hold up when elaborate tables have been prepared which avoid the need for the seller to do any computatio~is. Tl~e only difference in computing interest charges and interest rates on a $100 loan ~s compared to a $1,000 ~1oan or a $10,000 loan is one or two decimal points. I am most happy th see that the bill yç~p~ committee is cons~derlng does net aI]ow such fi~msy rea~otning to stand in the way of providing needed proteo~iion for the low income fa~iiy waking small purchhsps. Critical Need To Cover 4~da~7ertising One of `the greatest sources of credit problems for the working man and the poverty stricken is the oversimplified, confusing, misleading, or blantantly de- ceptive advertising o~ credit and the `sale of goods on credit If truth-in-lending legislation is to be truly effective, the true facts of `the interest charge and the interest rate should be available to the prospective cu~tom'er before be has de- cided where he is `to ~nake a pu~hase or a loan. With the `high presbu;re saie~- man~hip `that exists 1$ fuany retail oatabljshments, the average worker does not have a truly free cho~e t~ deteruili~b `~hem be can make his ~urcbbses' on the most economical ba'si~ if `h~ is initia~ty misled l~y advertising of the cost of credit. While we cannot m~n4ate that `thO t~ue cost of credit be inserted ip `all adver- tisiu~ of con'smher go~ds, we should requiM that an'y adve'rt~sing of cre~i~ 00sts state the truth about interest charges. The omission of advertising frem the coverage in the Senate-passed bill is a grave weakness. The UAW and the IUD strongly supports the provisions of the bill before your committee which bring advertising under the truth-in-lending proteCtion. Other improvements in 11.R. 11001 as compared `to the Senate passed version of `truth-in-lending which the IJAW and the IUD strongly snpports is the pro- vision for full diselo$ur~ on c1~atrges on first mortgages, wber~ discounts and the point system are ~uost confusing to the average home buyer, and the inclu- sion of insurance eha~~ges levied agginst consumer credit as part of total finance charges in computing~ the true cost of credit. F.T.C. ~houki EnforeeLaw I would like to poiflt out o~e area regardiing the, truth-in-lending provi~ions of the excellent bill before your committee that we ii' the UAW and hiD would like to see changed. This is ~he choice of `the Fe~oi~aJ Rpserve Board as the agency charged with enf'orcing the truth-in-lending ~egiisiation. The ~c'dera1 Reserve Board Is an agency that is basically oriented towards the banking husine~s. Fur- thermore, lt has iittie or no experience `in the consumer protection field, and has no staff ready to Carry `out the enforcement provisionis in the bilL In its place, we woijiid recommend that enforcement of consumer credit legis- lation be placed in the hands of the Federal Trade Commis'si'en. The FTC is PAGENO="0231" CONSUMER CREDIT PROTECTION ACT 813 already in the field of a~vising and protecting the consumer. It has far more expertise ft~ the fields of retail selling and advertising, has a histary of dedicated efforts to protect the cQusu~mor fron~ r~just, illegal and fraudulent practices, and has an efficient systen~ fq~, lx~lng advertising for Investigating corn- plaints and for instituting the type of proceedings called for to bring about com- pliance with this legislation. I am sure that the members of this coanmjttee sire aware that p1ae~ng a law on the statute books does not in itself a~complish the end o1~jectivc of pr~vtding adequate protection for the American people. I urge that you make every effiwt to provide the best ulechanianl for vigorous, efficient, ançl fair enforcement in the consumer credit field. We SIhoald Abolish Wage Garaishments 1~he PAW and the I1J~ would: like to go on record in strong support of the provisions of this bill that would outlaw wage garnishments. The device of garnisheeing wages is used with abandon by nuxaerous unethical merchants who prey upon unsuspecting workers with their easy payment schemes. The tragic results are pay envelopes reduced to the point where workers can bar4ly support their families, incQnvenience and extra costs fo~' employers, sn~bstantial court costs imposed on taxpayers, discip1in~ry suspensio~is whiçth make it even ~isirder for workers to repay their debts, and outright dismissal a~id loss of employment. Unscrupulous merchants often use the courts as a cojiectioli ~ey&ce withQut even attempting to use other legitimate means of collection. They often scfl goods on credit when they know a worker is already over-ext~decJ in debt, with the knowledge that they have a sure-fire method of col1e~tiug the `payment. Legitimate businesses with substantial reputations are able to collect on bad debts without resorting to garnishments. Merchants and creditors in Texas, Pennsylvania, and Florida, where garnishments are outlawed, hsive learned to adjust their collection ptactices without ill effects or any noticet~bie reduction in the volume of retail sa1es~ The ~statistics on the extent of garnishments are staggering. In just ~ne court alone in the City of Detroit, the Common Pleas Court, 55,000 garnishments were issued in 1966. It is estimated that 95 percent of these garnishments were issued by default where the defendant never defended himself from becoming gar- nisheed. This took place in spite of the fact that this court is a liberal court in dealing with this issue, and has established a conciliation system to attempt to settle debts without having to attach wages. A most unfortunate side effect of the garnishment system is that the courts often become the "enemy" in the eyes of the poor. They become further con- vinced that the society which they come to know as the "system~' only works against them and grinds them down. A revealing study conducted among low income families In New York City uncovered the fact that one out of every five of the families interviewed had been threatened with garnishments, had their wages garnisheed; or had goods repossessed. Typically, low income families faced a major crisis of this ~`pe whenever the chief breadwinner became ill or unemployed. The problems the poor face arising out of garnishments often go hand in hand with direct exploitation I?y merchants. In the same study In New York City mentioned above, David Caplovits cited as typical this expetience of a 28 year old Puerto Rican man: "I bought a set of pots and pans from a door-to-door salesman. They were of very poor quality and I wanted to give them back but they wouldn't take them. I stopped paying and told them to change them or take them back. I refused to pay. . . . They started bothering me at every job I had. Then they wrote to my current job and my boss is taking ~6 weekly from my pay an4 sending it to pay this." An additiçmal prob1e~ which compounds the consumer problems of low income fan~i1je~ is the fact that these families often do not know where to turn to for help if they are eI~eated I~y merchants. tiven if they do know where to go for help, they qre usually unable to obtain it. The New York City study pointed Qut that 64 percent of the families interviewed did not have any idea ef where to obtaIn help against unscrupulous merchants. Furthermore, only nine per- cent of the families who encountered these problems actually sought professional help, although more than one-third cited a source of help that they knew about. It is `apparent to the PAW and the TUD that Congress must take additional steps to protect the consumer and to eliminate unethical practices in thO mer- PAGENO="0232" 814 `3dNSIYMER CRIDIT PROTECTION ACT chanclising and cred~t fields.. The Commis~ion on Cohsuiner Finatice provided under Title III of tM~ bill appears ~o provide an exc~llei~t rebic~e t~ determine further st~ops ó~ a r~g~~tory ~ legislatiye natijr~ needed to provide the long overdue pvotéctioxi th~it the ç~nsiüu~ng public deseiftes. National Interest )?ate Ceiling The provision of H.~R. 11601 calling fer a national ceiling on interest rates makes extremely geOd sense t~ the U~tW and the IUD. Excessive'prdflts from interest charges for 4fast buck therehants and sthall loan companies who prey primarily on the poOr should rapidly become a thing of the past. However, the ceiling of 18 percenl established in this bill is too high. The 18 percent rate charged by many deplartment stories oil revolving credit is so excessive that it can actually result in a greater profLt o~ the cre~ilt transaction than on the original sale of the item itset~. conventional bank rates and interest rates on commercial credit are very subs~ant1ally lower than 18 percent. Credit unions are able to extend lOans to working people aM to the poor at about half that rate. In itS place we wdtild suggest a flexible ceiling that would be rel&~d to going lhterest rates such as the Federal Eeserve B'oard~s dtseouilt rate. Your committee might investigilte what milltijtje of the discount rate would be most appropriate to provide a flexible and workabl~e ceiling that would relate to changing condi- tions in the national ~ec0nothy. The difficulty with any flat rate is that it would have tO be high enobgh to provide adequate leeway in a tight money market when interest rat~ hre ext1~en~ely high generally. When you do this, however, the ceiling does not ~rovtde any s!~uiflcan't j~rotection agahist usurious interest rates innormed tirne~ when iutere~t rates are lo*. UAW and 1151) Oppc~es Emergency Credit /lontrols Madame (Jhairma4 and members of the subcommittees the UAW and the 1131) would like tO go otii record in c~posiUon to that portion of H.R. 11601 which would provide for ernergency cOntrol of consumer credit by the President of the United `States. This provision does not ~oine under the `scope of consumer credit protection. Bather, it deals with overall economic policy. It is a form Of economic control towIhich the UAW and the 1131) arO opposed. It could only lead to hard- ships for the indh~idual consumer In neOd of credit, while the major borrower's in this country, business and indu'stry would not be subject to such `coiltrol's. It would constitute dis~rimlnatory legislation, applying only to those with the least ability to overcome the consequences of `such legislation. There appear's to be no need to enact any eOonomic controls over credit In the present state of the econ- omy, nor does it appear likely that emergency credit ~ontrolIs, will be needed in the foreseea~bl&future. Ban Confessio'?v8 of ~~dgment The provIsion in KR. 11601 which prohibits the use of confessions of judgments in ~qons'umer ere4it titansactions i's highly deserving of legislative ~nac'tment. This device, ulsed l~y predatory merchants to iu'duce.~1ebtors to `waive!their legal rights to contest any judgmen~s that may `be entered against them, i's ~n excellent example of how our ~legal syste~n is perve~-ted to exploit the poqr. `T~picafly, such a clause is inserted in the fine print of the contract which the borrower is re- quired to sign. T'berç is no justification for allowing this practice where the typ~ ical individual has no knowledge and no bargiining power to eO~b1e l4in to avoid surrendering valuable legal rights', and thus become `sUbject tO `severe financial hardship at a later date. Prohibit WageAssip~wments ` In a `similar fash~ion, the UAW and tile RID feels additional protection is needed to prohibit entirely the use of ~rage assignments In `the `consumer credit field. Heile is another example w'here a borrower is placed under extreme pres- sure, often withofit ~tny knolvledge or full understanding of the cOnsequence, to sign away his right~ and allow a creditor to attach hi's `wages at any tithe in the future that he sees ~lt. These so~called "voluntary" agreements to attach wages are coercive rather than voluntary in the typical `seller-purchaser relatioilsbip. `Since w'age assignments `have many of the pernlcionfi effects of wage garnish- ments, both should `1~e `treated the same arid abolished in the `same legislation. Tfegnlate Repossesskn Practiee~ Another area where your comndttee should act to protect the consumer Is to regulate the pernl'cihils practices of many merchants in repossessing `goods pur- PAGENO="0233" CONSUMER CREDIT PROTECTION ~CT 81& Chased on credit. This is particularly a problem in "add-on'! purc~hases, where a merdhant sells another item on credit before a pur~haser completes payments on tl~e original item that he bought. If ~be customer misses one .~payment, merchants have often reposseshed both itemis; even thoifgth the amount already paid has been more than enough to completely repay the outstand~iug debt on the original item. Actual situations have been reported in the press where four or more items puix~hased on an add-on installment basis~ have been repossessed, even though the value of one item alone was sufficient to satisfy the outstanding debt. Legislation should prohibit the repossession of any item Whenever full pay- merit has already been made. The language of the legislation could provide that when debt is outstanding on two or~ more iteins, payments be allocated to each of the items, based on the ratio of the original purchase price of eaCh of the i~ms to the other items. Further, repossessiofis should be limited by statute to the ex- tent necessary to sati~fy any outstanding debt. Merchants `should also be required to return to the purchaser any proceeds gained from the sale of the repossessed" items that is over and above the amount of debt still owing. Otker Areas for Future Action There area number of additional areas requiring legislative protection which this committee should seriously consider. Many of the abuses and shady pra~tices could be~ eliminated from the credit field if lenders and merchants offering goods on credit were hocused and had to meet adeq~iiate sta~iUards cove~ing t1~e entire scope of their lending practices. The lack of adequate legal recourse for con- sumers who have outstanding debt on shoddy and defective merchan4ise ueeds to be remedied. The common abuse of using fine print to prevent customers from knowing `what they are signing could be abolished by requirhig print to be a certain minimum size on credit contracts. Steps might also be taken to simplify the obscure legal language on credit contracts so that customers would `know exactly what' they were agteeing to. Madame Chairmthl, I v~ant to thank you for the opportunity of appearing here today to express the views of the UAW and the IUD. I hope I have spelled out for you very frankly the areas where our union would like to see positive Oougres- sional action. We a~re aware of political realities, and do not take the position that the bill that comes knit of your committee this year need contain all of our'recom- mendations. We would leave it up to you dud your Committee to determine bow, much hab~ be passed `through the Congress this year and how much might be enacted next year and in subsequent years. The members of our unions are extremely gratified with the effort~ ~ you and your committee to en'act long overdue reforms in the field of consumer c~redit. Yo~ may be assured that the UAW and the IUD will stand strongly behind tour e~*orts to adequately protect the American consumer. We hereby enlist in~your ci~usade for the duration. Mrs. SULLIVAN. Thank you, Mr. Greatháuse. Before Mr. Stephens and IL begin to question ~ou, t ~rant to say t1~t I am~sorry that you gentlemen have not had a better attendance ot members of the subcommittee this morning. You both have giv~n outstanding and important testimony. S I will make sure that all of the members do receive copies of your statements, however, and I will personally urge them to read your testimony. S I would like to call your attention to an article by Sylvia Porter in last night's Washin~'ton Star. It describes how to cut costs on yo~ir mortgage. I think it is one of the best examples of what we are trying ~to accomplish in this legislation-to show people what they are actually paying for credit and to help them, through this knowledge, to make intelligent decisions on how long a period~ for instance, their mortgages sho~i]4 be writte~i for, Without objection, I will place it in the record at this point. PAGENO="0234" 816 COtI'.TSTJMER ~EJ~1~IT PE~OTtCTION ACT (The articI~ r~f~t~e~ to follows:) trron~ tI'e Washington Ø~.) ~Wt4UI~ ~tar, ~iig. 1~, 10671 TIbw Po Crn~ Cosr6 6N Youn MOaTG~GE (B~~ Syr#le Pcirter) ~ Hciw much money ~uld you save by repaying your bçn~ie mortgage in 20 years insteadof3oyears? What is the diffei~ei1ee to you over the long rnl3ge if your home ~iiorbgage interest rate is 6 pesrc~nt as against 6,5 percent. Or if you make a bi* vs. a small clown payment? Phese are three kep questions to explore if you are now shopping ~or a home mortgage. And these are three key areas, in which you can achieve significant savings. As a guide to the right answers for you, this col~imn will give the pertinent dollars-and-cents comparisons. On interest rates, you'll probably find that all major lenders in your area offer h~Ohie moFtgages at similar interest rates. NeverthelesS, a seemingly minor diffef~enee can mean hundreds of dollars in savings over the life of the mortgage. Here's t1I~ n~parisott for a $10,000 mortgage with a 20-year repayment period: ~tctl InterOstr~té ~~tcentj~: interest 6 $7, 194 6.~ 7893 8,607 7.5 4~:,_ Frbm this ta~ble, it'~easy enouglito see that even ~ perrent on a $10,900 loan can mean Savings ii~ the $600-700 range over a 20-year period, and that a d1fferem~e of 1 percent can mean savings of nearly $1,500. If you shorten tb& repayment period ~f your $10,000 mortgage, your savings are even ~m0re dramatic. Here's the comparison for a $10,00tJ mortgage at 6 perc~nt taterest over various repayment periods TotaUnterest Reynie~tit pt~io~t cost 10 ye~~ ~ - $3, 3~ i~ y~a~s - ~ 5,190 20 years 7,193 ~5 yea~ ~ 9,329 80 years - 11, 582 From this table, it's obvious you caz~ save $4,~88. in interest simply by re- paying the mortgage, in 20 instead of 30 years. Of course, if you `gIi~r~l~' reUu~O the repa~nient period of your ~1oan, you'll have to pay more eOcli month. t5sing the examp]W of a $10~00~ n~0rtgage a1~ 6~peroent; ~jont1iijj Repayment period: , ` fIay~~n eat , , t~ ~ea~n `~-----~-`-- ` $111 15 sears ~ ~ 84 20 years - 71 25 years 64 `30 yc4ars P 60 The longer i~epa~iuen~ perIod seems attractive but you've already read how much extra `intêr~t you `~y when you st1-et~h, out. The larger your clown payment, the smaller will be thO amount of your mortgage, and thus t1~0 smal1~r will be the ~mot~nt of f4terest yOu wili pay'over the years, and the cheaper will be the over-all `cost of `the loan ~tp you. The average loan-to~priee ratia in tb~ nation today foi~ tt new borne is 74.9 percent-i.e., The `av~±bge ~iortgage being granted is for aboclt 75 percent of the purchase price and the average down payment Is 25 percent. But averages are Useless in terms of individuals. Your key rules for savings on your home mortgi~ge are: shop for the lowest available interest rate in your area, make the larg~st feasible `down payment, repay your mortgage in the shortest feasible per~od of time. PAGENO="0235" CONSUMER CREDIT PROTECTION AC~f 817 Mrs. SULLIvAN. She has taken a $10,000 mE~rtgage for comparison, starting ~vith a 20-year repayment period. She shows if it is a 6 percent, you pay a total of $7,194 rn 20 years~ If it is at 6~/2 percent, the total is $7,893. If it is at 7 percent~ the iut~rest total is $8,~07. At 7½ percent, the total of interest you pay would be $9,334. Then taking this same $10,000 mortgage at 6 percent, she ~hpw~ what the total interest cost would be for a repayment period o~ 10 years, 15 years, 20 years, 25 years, and 30 years. The ihterest on a $10,000 mortgage at 6 percent runs to $11,582 over a 30-yeai~ period. Then she also points out that for this mortgage of $10,000 at 6 percent for a repayment period of 10 years, The monthly amortization cost would be $111. And she goes on for 15, 20~ 25, up to 30 years. For 30 years the morttlfly payrneht wøuld be ~6Q. In entering into a mort- gage, you sOrt of gage what your income hopes are ~or the next few years, at least, in order to determine how much you can afford tO pay a month and, from that, determine how long you want th~ thortgage to run. It gives the family an opportuiiit.y to look over the various alternatives and make a judgment. We were told by FHA that they do give a very clear picture of the entire co~t of an FITA mortgage for its full term, but I don't know if they break it down this clearly. This information is instructive, and it gives people a choice, They may decide, well, maybe I better not take a aQ-year n~or~gage- maybe a 20-year one would be better, Sand if it only costs $11 wore a month-$71 a montk instead of $60~-maybe we can find some way to ~ that extra $11 a month and cut down the term ~f our mortgage bj~ lO full years and save $4~389 iii interest. There are usually similar choices in any form of credit transaction, but too many people don't realize that in buying on credit they are using sOmebody el~e'~ money to satiSfy their wants ~nd desires and that this is expensive. Credit is pictured in snch a di~rent iight to the public today that people are encouraged to satisfy every desire whether or not they can afford it, not realizing that there is a substan- tial cost to them in such transactions. They just come in~ sign their names~ pay for it as they use the goods Or Sei'vic~s-~wh1eh is gddd,%fpeople are able to carry the finance costs of things they *ant j~b~ bu~-b~ ofter~ these extra costs a~e hIdden and disguised, or deceptively represented as teing fi~eè. Mr. Greathouse, I ~wa5 glad to receive your support on the proposal for an interest rate ceiling for the garnishment provision, and for some of the other things in H.1~. 11601. The feat has be4n expressed, how- ever, that the 18-percent ceiling would result in raising all rates to that level. Do you think that that would happen or do you feel that many consumers are now paying far more than 18 pereent? Mr. GREATHOUSE. There are consuwe~rs that ~re paying move than that, but there are also a number of èonsumers that are paying less than this. We share the fear that setting this at 18 percent, even, would become the flOor as well aS the ceiling. While we think that sometimes 18 per- cent might be proper, there are other times when interest rates gen- erally are lower and there should also be a lower ceiling on interest rates here for consumer credit. Just as there are lower interest rates for other forms of credit. PAGENO="0236" 818 CONSUMER CREDIT PROTECTION ACT Mrs. SULLIVAN. I reali~e that danger in trying to set any Federal interest rate for borrowing. But I think many people just don't realize that they are already paying far more than 1~ percent. Mr. GgEATH0U5E. This is why we tie it to the Feaeral discount rate. We think the ceiling should be related to control of interest rates gen- erally. If you used some multiple of the Federal discount rate this wøuld provide more equity during different periods of woney avail- ability. Mrs. SULLIVAN. As an illustration of how much people can really be paying in interest4 charges, I want to insert an article which appeared in the Boston Herald, the Washington Star, and other papers last Saturday, by a well-known real estate man and writer, Mr. Bernard C~ Meltzer, who tells, abQut a real horror c~se involving what is sup- posed to be a 4-percent mortgage. According to the writer, this 4-per- cent figure coujd go to 344 percent because of the tricks and gimmicks in the deal, (The article referred to follows:) (Fro~n the ~EOston (Mass~~Reral& August 12, 19~7] YOU,L,REAL ESTAtE PROBLEM SOLVEu-TRUE I1~TEREST RATE OFTEN H4nP TO Fiuuan (By Bernard ~. Meltzer) At On~ tithe, ~Inort~ág~' te~flet~ competed `p~r1i~arIIy based On interest i~ates. Ma!fiy ~t1ll do, ~but new financing g~rnmIcks iniroduced in ~ecefit years make it almost impossibte to compute the tzae rate-even by experts. "DRAR Mn. Mnj~rznn; ~ i~eed $5,000 by tl~e first of the year, so J'in going ,to get a mortgage. Since my house is worth over $20,000, this should' be no ,nrob- 1cm. It's only a question of shopping around to get the best Interest rate. "My bank is willir~g to ~Fs~e me the mmlny at 6 percent interest, A local finance company, and I'm a ~complete stranger to them, is wi1iing~ ~o give me the money f,or 4 percemlt. Jt~s t~ue~ tbe~ do haye a few extra charges like insurance, ap- praisals~ etc. (1~'rn~enclosing copies of their papers for your examination.) "I always was pn~ir in math, so~ p1ea~e tell me whether alt these extra tees amotint to more `or `less than the 2 percent difference in interest rates. "Mr. T. T." Answer: A best as can be determined, the extra charges raised the true interest rate from our correspondent's estimate of 4 percent to 344 percent. The papers contain almost ever~t,known giuimick for ra~i~ii~g the true int6re~t rate, For the information and enli~btment of reade~'s, thesO áré enunterated~ bel~w; 1. Five years' interest (4 percent o~' $5,000) âmotu~tiflg to $1,000 ~s added to the amount borrewed~ and th~e face amnunt of the loan tead~ $6,000, and not $~000. 2. The interett rate of 4 percent during the whole perio,d is com~puted based upon $6,000 and the i~emaini~g balan~e or amount owed. 3. The borrower ~s allowed only o~ie day grace period in which to make mortgage payments. ~f he misses that day, the late penalty is then 1 percent a' day. 4. The pre-paymei~t penalty is 20 percent 5. The borrower has to buy life, disa'bilit~, health and accident, and home- owner's insurance,ir$m the lender's agent at very high rates. 6. An inspection'fëe of $100'is charged the first ye1ar and $50 per year there- after. 7. The legal fee Is set at $300 and the annual legal fee thereafter is $100. 8. The appraisal fee is $100 and the annual appraisal fee thereafter is $50. 9. Borrower agrees to pay a 10 percent pleçement fee for securing the ~oan. Mrs. SULLIVAN. Mr.' Stephens, since there are just, the t~vo of us here, we can take turns in questionifig. Why donit you go ahead now? Mr. STEPHENS. ~ would like to make some observations and inquiry at this point on th~ 18 percent. PAGENO="0237" CONSUMER CREDIT PROTECTION ACT 819 You are familiar with the argument on the side of companies that use revolving credit plans, that if they are required to translate the 1½-percent charge into an annual rate it wotild be 18 percent, but that it would not bea true reflection of the transaction. They have provided charts which show that in a great number of instances the actual annual rate after the year is over amounts to 10 or 11 percent, and that in only one instance out of 40 different items the rate would go over 18 pei~cent, based upon an actual way the accounts are paid. Wouldn't that then be a burdeit tin the man who has the revolving credit plan to require him to say that 18 percent is true when he is not charging 18 percent? Mr. GREATHOUSE. As I understand most of these plans-there is no charge for the first 30 days, and after that 30 days the interest rate is 18 percent a year or 1i/2 percent per month. Now, in most cases the original price is a cash price if the price is paid within a 30-day period. But once they start to charge interest they then charge interest at the rate of 18 percent per year. Now, this can be clearly stated that after tite 30-day period is over you then pay interest at the rate of 18 percent per year. * Mr. STEPHENS. They would have to put 18 percent on and they would have to explain that 18 percent only pertains if you carry this all the way through the entire year, provided you pay a specific amount and provided you do ~everal other things, and you add a considerable amount to the bookkeeping and to the explanation and would it help the creditor any? All you have done is cause the man who is using this type o~f credit to think he is paying 18 percent when he is not actually paying 18 per- cent. So you don't have truth-in-lending. Mr. GREATHOUSE, I don't want to argue with you, but it seems it can be simply stated by saying that you pay at the rate of 18 percent a year after the first 30 days, which is really what you are doing. You pay an annual rate of 18 percent after the first 30 days. Mr. STEPHENS. Not necessarily-depends on how much you pay back. Mr. GREATHOUSE. But you are paying at the annual rate of 18 percent. Mr. STEPHENS. No, if you figure it out, it may come out to 10 percent. Mr. GREATHOTISE. If you pay 1l/2 percent a month, once you start paying it, that i~ at the rate of 18 percent a year, even if you only have the money for 6 months. Mr. STEPhENS. If it goes for 12 months. S Mr. GREATHOtTSE. You are paying it at the rate of 18 percent even if you only pay it for 2 months. Mr. STEPHENS. It won't figure out that way if you only have the credit for 10 days. * S * Mr. GREATIIOUSE. As I said, I don't~want to argue with you, but once you start paying interest, if you pay at the rate of 11/2 percent per month, you are paying at the rate of 18 percent peF year, and I don't care whether you pay it for 1 month or 12 months, out of the year. Mr. STEPHENS. Mathematically, though, it doesn't figure out that way. S Mr. GREATHOUSE. I think it does. S PAGENO="0238" 820 CdNSUMER CRK1~IT PR0T~CTION ACT Mra. SULLIVAN. Would the gentleman yield? I would like to put a question to Mr. Bairber at this point. If I am going into the bank as a~depQsitor, to deposit $100 in a sav~ ~ng~ account, and you advertise that you pay 5 percent a year on savmgs, at the end~ of theyear I couhi expeet-~--tbe~e are time 4eposits-~- I can expect thatl I will get $5 in inter~st and that I. ~wpu~J~ h~we a balance of $105 atthe end of the year, is that true? Mr. BAm~ER. Th~tt would be correot. Mrs. SULLIVAN. But if I don't l~'v~e tip to the terms you require, and dQ not leave that $100 in the bank ~or the whole year, p'~ the ~peeifled time, in order to earn any interest, what rate would you i~e paying m&? ]Wr. B4RBER. Well, ii think the law is fairiy ~clear ~pn time certificates of deposit. Time .~ertifi~ate~of deposit are netually coi~ract~-~I am speaking not as an attorney-between the depositor and the bank by which the bank agrees to pay a contract rate of interest for the use of these funds for ar~ agreed period. Mrs. SULLIVAN. If I leave it in fdr that specified period-6 months or a year-I expect to getS perceflt. Mr. BARBER. Tiiatis correct. Mrs, SULLIVAN.' Bu1~ if I don't leave it in for the required period- if I need that money before the period end~-~--I can get it out? Mr. BAnnER, Well- Mrs. SULLIVAN. I can apply formy money and get it back, ca&t I? Mr. BARBER. Probably, but not necessarily. When you purchase your certificate of deposit you are in effect loaning the bank the money for 12 months and the bank agrees to pay you 4.5 percent-it is more com- fortable for me tq say 4.5 percent because that is what we are paying for the 12-month period. Actually, the b~nk normally would return itto you in the even~t that you needed it prior to the end of the year, but banks are restricted somewhat in that, too, because I believe the Federal Deposit Insurance Corporation regulation ~1ipulatesthat we cannot return it to you, even if we wish, unless you sign what is called a certificate of necessity indi- cating that you have need for the funds in advance of maturity. Mr. STEPHENS. J think what she has in mind ~s not the time deposit- that is not a demand deposit--but a savings account. Mrs. SULLIVAN. Within ~0days you can apply for it. Mr. STEPHENS. That is right, but yOu can't get it before the 90 days. But if you have got a savings account, that is çli~erent. You can withdraw the latthr at an~ time but not a time deposit: Mrs. SULLIVAN. On a savings accpunt, you may say you are going to pay 4 percent or wihatever your going rate is~ Mr. BARBER; Yes. Mrs, SULLIVAN, But if I ~lon't leave that mquey~infor. the specified period, what rate do you pay me at the end of the year~ Mr. BARBER. I think there p~otably is quite ~ variable in that and savings aç~count,s wQ~id prçbebly 1~e ~e~sier t,o talk ~about in this way. Many~h~aks reqi~i~re that the cJqii~rs be rn the account bn the day the ii4erest is calpulated. So, if you ~itbdr~w that you wouldn't re~ ceive interest on $hat ~portion which you ~witl*aw and the rationale behind that, I think, is that the bank has agreed to pay 4 percent fo~ a 6-month period~ If it does not have use pf those~funds for a ~moutli PAGENO="0239" CONSUMER CREDIT 1~RQTECTION ACT 821 period, if it is in fact a demand deposit, then it is of much less value to the bank because it has, as a matter of fact, nQt had the use of those funds. However, many banks would, I beli~ve, figure the ii~terest to the date of withdrawal and many banks would, as a matter o~ fact, pay interest starting at the first of the mouth if the depos4t is made as late as, say, the 10th of the month. So, they would be paying a little more than 4 perceat, actually, a little riper. Mrs. SULLIVAN. The only thing that I am trying to ~et at, Mr. Barber, is that, when you take the money from the depositor, you say you will pay so much interest per year. But that all depeuds on what the customer does about that money-whether he leaves it iu to earn the interest or not. The same thing is true when we buy on credit, They say they are going to charge us 11/2 percent a month. We may not pay our bill each month, as we are supposed to do, and they then charge us at a rate of 1% percent per month and there are 12 months in a year so it is 18 percent a year that they are charging us. It all depends-the even- tual charge depends-upon how w~ use that rredit each mouth during the year with this firm. I don't care how long we argue this with the retail people, there is only one answer. If they are going to charge us 1% percent a month, they are charging us 18 percent a year. It may not figure out to that at the end of a year because it depends on the individual's use of the charge account. But we have had arguments for 2 solid weeks on that point. They had the same argument for 7 years in the Senate committee. I sup- pose we are not going to change the minds of the spokesmen for the stores offering revolving credit because they insist upon pointing to the yield from a particular account at the end of a year. But that i.s not what they are telling the customer in signing her up for a charge account. I don't care what kind of terms they make, or when they start their credit charges, the charges are for a period of 1 month. I will never pay credit costs if I can pay cash in 90 days. I think it is still the 9aw of the land" that payment in 90 days is cash. But I have been. told that the department stores just don't tell this to their customers unless they ask-~-or unless they have a strict policy now that they don't give 90-day credit. But nevertheless, this is the argument that I was trying to use on them. In depositing money in your bank, we are told we are going to get a certain rate of interest per year and it is up to the depositor to live up to those conditions in order to earn it. It is up torth~ tiser of credit in the department store to decide how and when he will pay, so he can arrange to avoid ~redit charges, but if he doesn't, they still charge so much per annum, which we figure is 18 percent, when they charge 11/2 percent a montl~. Mr. SPE~ENS. I will try to make an analo~r. I don't ktiow whether I can Or not. The óheeking account that a pe~on has iti a bank is sub je~t~to a serv- ice cha~rge comparable, I think, to the ~c~lvh~g firnd ~èh~rges. Now, are we trying to tell the bank Tha~t th~y muSt put down on the batik monthly statement that the service charge of 5 cents per check, if PAGENO="0240" 822 CONSIJMER CREDIT PROTECTION ACT your balance is u~ider a particular amount, is a charge that the bank is making against ~ou to put your money in the bank~~and~the bank must state that at a percentage of annual interest that it is charging? Now, there is a~ analogy between the fact that what is called 1'/2 percent interest rate on a revolving account is a service charge com- parable to the bitnk service charge for allowing people to use the credit machinery ~nd is like holding ~the merchandise and having the use of it. Should the banks be requii~ed to put down the service charge on my checking account in the annual interest rate? Would you feel1 like that you should be required to put down what your service charge is to let me have a checking account? If yon look at that from one ~standpoint perhaps you are using my money and are charging me ititerest to use my money. But, you don't call it that. You call it a service charge. You are keeping my books for you, that is what you are dding. Mr. BARBER. This is right. The bank service charge is justified, I think, as a paym~nt or more accurately as a partial reimbursement for the service that the bank renders to the customer in doing his bookkeeping for him and in handling his checking account activity. Mrs. SULLIVAN; Would the gentleman yield? Mr. STEPHENS. Yes. Mrs. SULLIVAN. Is it not true, though, that unless the banks have a credit card serviQe, they are not in revolving charge? You are not charging 5 cents a check or 10 cents a check on a loan basis-you are providing a service, not lending money. If they have a small amount in the account, you are going to charge them because your can't make an effective use of their money while it is deposited. But for those who maintain a certain baiance in their accounts, you make no charges. Mr. BARBER. That is correct. Mrs. SULLIVAN. The charge you make on checking accounts is not for the loan of the money it ~is for a service you are giving them for the handling of their checks. Mr. BARBER. The banks are rendering the depositors a service for maintaining his account. If the customer in return leaves an adequate working balance, a portion of which the bank can. in turn invest and earn on, then the hank would not make a service charge, if that balance is low enough th*tt the bank would otherwise incur a loss, then the bank would atter4ipt to levy a service ~hargeto recoup its costs. Mr. STEPHENS. RAnd that service charge is the cost of servicing that account? Mr. BAREER~ That is correct. Mr. STEPHE~S.In that instance, that is a justificntion for starting out on the revelation of ~harges and `the reason for a $10, charge not to be revealed `as an interest charge~ Under the disclosure plan here you have a flnatice charge of $10. Merchants have appeared before this committee and in `the Senate committee who use the revolving plan or don't and it is pretty well es- tablished accordii~g to their costs that the $10 charge is ~he actual cost of putting ~in tlie~books an~ initial charge-whether, it is~n 18-month payment or a 12~mer~th payment or whether it is paid off the first ~of ~the month. That would be ana~logous to the bank service charge more fully than otherwise. PAGENO="0241" CONS1JMER CREDIT PROTRCTION ACT 823 Mr. BARBER. I think sn., I would like to comment, if I could, regard- ing this minimum, We stated in our testimony that, we wo~ild favor exclusions of finan* charges of $10. or less as was in S. 5 and as in the Widnall bill. The reason for that i's because on very small loans for short lengths of time the cost factor is definitely involved. You read many different figures as to what it costs to put a loan on a bank's books. I am thinking now strictly about banking rather `than Mr. Great- house who was referring to merchandisers. In our little bank we charge $1 minimum for a $100 loan. I have read that cost accountants say that this should not be $1 but it should be $5 or $10. That it costs that much.to put a loan on the J~ooks. So we lOan a fellow $100 for 10 days until payday and we charge him $1 for it.. Let's say for a weei~. If my arithmetic~ is right, we are charging him 52-percent interest on an annualized basis. And by so doing we ar~ incurring what a cost accountant says would be. a $4 loss, I wOuld think that it would not be fair to report that as 52 percent simple annual interest. The larger banks, many, would charge $5 for that and would still prefer not to make the loan because it is not a profitmaking credit. Again, if my hurried arithmetic is right, I think that a bank would be charging 260 percent interest if it had a $5 minimum $100 loan for a week. Well, a bank just isn't going to be advertising that it charges 260-percent intei'est. The $5 minimum charge is reasonable and fair. Relating it to an annual rate makes it appear high. So what the bank is going to do, they will say, "I am sorry we don't have that kind of loan any more Mrs. SULLIVAN. If I may interrupt there-you certainly don't ad- vertise that you will lend $100 for only a week, I am sure you don't want that kind o'f business, or go out to stimulate it. You only do that as a favor or accommodation to a regular customer, I imagine. But if a man knew that he was paying 260 percent for a loan he needed so badly, let him know it. Let him know how silly it is to spend that much to use credit for such a short length of time. Mr. BARBER. I should correct my statement perhaps. ,I didn't mean that we would advertise. I `should have perhaps said we wouldn't care to tell the world that we are charging 260 `percent interest if we charged the borrower $5 for the use of $100 for 10.days or whatever the period would be. We would not put that in the form of an advertise- ment obviously, but if we rendered this to him in the disclosure basis we would be. telling the world that he would go down the street and he would say, "I am paying the bank 260 percent interest." However, it would be a service that.the bank would prefer it would- would ~prefer n~t to perform in the first place. I will go back to the $1 minimum because that is what our little bank charges-so we would be accused of ~harging 52 `percent interest. They now accuse us of charging .7 percent and try to give me `a guilty conscience. It doesn't at all. But if they said we charge .5~ percent in- terest on a loan we prefer not to make, and I think it is a legitimate loan, I .don't think he is foolish for borrowing it because he just happens to need $100 before payday. He rants to go on vacation and it is worth $1 to him rather than have the bQs~ forward his cheeks. 83-340-67-pt. 2-16 PAGENO="0242" S24 dONStIMER oREDT~ ?ROPE~PION ACT So, I dou't ththk the charge is ~or thnt.I~d~thi't thii~k the borrow- er~is foolish. I tI~ink the bank is ~~end~ng a serv4ce and this would be ~ very good ex$nple, ~n indie~tion that these small amounts should not be reported on an annual-rate basis. Mr. Sm~im~. One further~ thoug~ht to completely ~ehann81 the thought aJong tl~e line of what ~cs~e ~re ~talking about, and that~is this; In addition to protecting the o~nsumer from exorbitant charges, we must, I think, keep in mind this thought---that these people tell us that it costs an average of $10 to put this credit on the'books: Now, if they xequiFed'tlae creditori to do a great number of things to add to his costs, we may not be doing the consumer a favor by' putting those costs on t~he creditor because the creditor is going to ~pa5W it on te th~consu~ier and i?t is only going ~to raise the price to the c~nsu~ier. ~T~t is what i~ cone~iing me and ap~eais to me about this $W limit b~c~ause if you requir~1wore you are `just adding more costs to the bookkeeping. That is g~oiug into tl~te overhe~a~l Cost o~ the business and th& mercbants are gOing~to raise their pt~ices to the con- sumer. You havtn't done anything for the consumer ex~aept tell him what is the truth and let him ~ay thore. What good h~ve you done the ~onsumei~ You let him know what the truth is but you ~lso have b~en a party to making the price go up. That's why I thinkthe $10 exemptIofi is all right. Mr. GaEA~HoI~L Could I comment'o~n that? I think wbat'~'Mr. Barber is talking about might be a rare individ- ual case of `a person making an individual lo~n. What we are generally concerned with ~s repeated charge account buying where people have charge plates and they go back on a repeat basis. They do this any- way-you buy an item, it is added to your account We are not talk- ing about any additioJmal'1?ookkeeping~ Certainly it is added to your account no~v sand there are' charts~available which says boW much the interest should b~ on this. As a iu~tter of fact, in rkthny j~laces we find that when we buy con- sumer items and thei~ go to make p~yments on them we makepayment to a differ~nt plaóe. Sometimes the nierchant does the bookkeeping work and then turnsitio~~er to a~iiance company anyway.' On the other point, if the 18 percent per year is proper after they start paying intth~st then it' se~th5 to me the 11/2 isn't proper. Senator Douglac ~a~id he ~óuMn't see why merchanth were reluctant to tell peopre there are 12 months in a year. This is what you are talk- ing about, that'there are 12 months in a year. One other thiij~ that I would lile to comment on. I think the com- mittee shpuld ktiç~w what we are ~unnh~g on to-even o~i the basis of paying cash in 90d~ys. I recent~yi~iâde a purchase and I inquired as to whether ~ not there was n cash p~'icW if I paid within 90 day~'and was told ~ was a~service charge of $8 or $10 that you had ~o pay. So even t1~en, even though they do~not quote thterest charges for tbe first 90 ~ays,~hey'want'you'to~p~y a servieC charge. S So, the be tthi~ig to do is to pay ca~h. One other ~o~i*ieht~f Imay~this. T Thhtk~there isa big d'iffer~~ce `b~tween What w~ are tAIkhig ab~it here and~he chai~ges mede by banks for a servk~& that~the banltperferths for you. ~I3ut fii~t of all, every bank that I know of dOes outline to you theh' `procedure fOr charging yOu for PAGENO="0243" CO~S~JMER CR1~IT PROTECTION ACT 825 writing cheeks and forthe matter of handling deposits. They also out- line to you- Mr. S PIIENS. The ~xereentage figure? Mr. G~~ILoUsE. Banks do it on the basis of how much it costs per transaction, but in this ease it seems to ~e to be completely different. It is not a matter of you using the bank's money. This is a service charge, ~s I understand it, that the banks make for handling paperwork, of paying out your money to somebody else, and not for the use of the money at all. So, this is the charge that they make to pay out your money against a cheek that you have written to someone else or to make a deposit. It would be a service like a normal~ service and not reially for using the money. I dou't'think it is a good comparison. I think certainly there does need to be real protection in all of these fields. Mrs. SULLIVAN. I certainly agree with you on that, Mr. Greathouse. I have never looked on any service charge in using a checking account as anything but a `charge for the work the bank has to do. You are not borrowing money from the bank, because the minute you are overdrawn in your account, you are told about it. So, the banks are not lending the checking account customer anything. You are mere- ly doing him a service. So there shouldn't be any percentage rate re- quired on checking account service charges because you are not extend- ing credit. But when we get into the $10 exemption in the Senate bill, I am heartily against exempting the $10 credit charge from an annual per- centage rate djselosttre requirement. When `a person goes into an ap- pliance store or any other store and buys an article costing $100 or so or goes to a loan company and makes a loan of $50, or $100 or in that area of cost, such a person should ~know what he is paying in interest on that transaction-whether it be a loan or whether he is pur- chasing something. He should know what the percentage is that he is paying. This is the area in which I think the highest rates of interest are actually charged. The cost is just as much to make a $10 loan or $100 loan as to make a $1,000 loan. When people want to buy an appliance for $100 or so, and if th~ credit charge for $100 or less is under $10, I think the stores should have to show that individual exa~tly what he has to pay in percentage, as well as in money, for the period of time they want that credit. Undoixbtedly, we are fighting iri~behalf of ~ople ~ko, in mauy in- stances, could not card less what they have to pay~All they want to know is how much they must pay a month. But I think sometimes we have tO p1~otect `people from themselves. And if they are' given an honest and ful~aecount of what it costs them to bny on credit, they might un to Shop more intelligently. It is not g~oing to stop them from buying. However, it might stop them from going to the person who is going to gouge them onthe Oredit terms, We have been told by some of the wi~n~sses that whaI the un- scrupulous retailer would do would be to raise the basi~c price of his PAGENO="0244" 826 ~ONSIJM~R CREDIT ?ROTECTIO~ ACT product if he felt he co~1dii't compete percenta~ewise in the charge for credit. But again, the customer would have a choice-.--if he scan get the same television se~ in one plac~ `as in another, and if there i~ $50 or $100 difference in the irice? if he is. foolish enough to pay the higher price because he can get' credit there and couldn't get it in the legitimate store, at least he kriows what he is doing and he is doing it with his eyes open. This is~ what we ar& trying to accomplish in this 1~gislation. That is why we want to put back into the bill as it passed the Senate the revolving charge and~ the items on which the credit costs are $10 or less. Mr. Barber, we had Mr Bailey, of the'Marine Midhmncl Corp. of Buffalo, testify before us arid he suggested that a bank which makes a loan for $50 for 1 month and charges the eustomer $5 for ~the loan would note want tb reveal, or ~wbuld be to~embarrassed to `i'eveal, that they were charging an annual rate of 120 percent. If they were re- quired to state that rate, he said they would stop making such loans. Do you concur in that? Mr. BARBER. Indeed I do. As I s~iid when I misused the word "adver- tise," banks would not like' to tell the world that they were charging in our little instance 52 percent or 260 percent if you charged a $5 minimum, although it costs you $5 to put that loan on the books. So, rather thai~ do that we ~would say we have rio more $100 loans. We would then be going so far in protecting our customer that we made credit unavailable to him. That would be of no service at all. If banks are willing to make loans with `no profit as a service I would think they should probably be encouraged to do that. Mr. Greathouse indicated that we `were talking about `different things and this we are, However, as far as our 6,500 m~mber banks are concerned, this is not a unique instance. it is quite a common one. We are very, very frequently called upon to make $25 loans~ $50 loans, $100 loans to wage earners, reputable honest people. We are not the least bit concerned about collecting credits We know they are going to repay it and we ~re happy to make thema loan and we charge them $1 for it. I `have been using the $100 for an example, if we make it $25 we are charging 208 percent interest. I wouldn't like to have that"done. I don't think it is fair th ask the bank to say: "We are annuaii~ing that at 208 per~ent because we `~tre müing an abcommodatiori loan." I would suggest possibly On these4 ~i±ems bearin~' a oharge' of $10 or less, that cer~ain1y~ the dollar ~anndun~ should ~bp di~losed. There is nothing wrong with that. `We would be delighted and we do now tell our cus- torner: "Surely ~e~wii~l~loan you $3~ until payday and we will charge you $1 for it." 1E[~ is~happy about it b~carise he is getting: in fact a bargain~ i `, Mrs. SULLivAN. When yo~ru state therborrower is e~titledtto an accu- rate understand&3le statement of 4the costs of borroLwiri~, is what you really mean that i~e is entitled to~ ~uóh ini~orrii'a/tiGn~ Only. to ~the extent that it doesn't emk~arraes you ~ :` ~ Mr. BARBER. It is not going to embarrass us becattse4 we ~re not going to do it. The: person that ~oui are trying to protect is not going to be able tobo~row mO~iey on those terms. PAGENO="0245" CONSVMER CIU~DIT PROTECTION ACT 827 Mrs. SULLIVAN. You repeated that you wouldn't want to advertise things of that, sort, and yet you 1~ave said, too~ that these are not the usual loans-these are unusual. Mr. BARBER. Mr. Greathouse said these are the unusual things. I, as a matter~of fact, said they are quite common, quite customary and in the vast majority of our banks throughout the country they are mak- incr little short-term loans all the time. ~frs. SULLIVAN. You are not in business for making small loans like that to people who are in temporary distress. You are in the business, primarily, of longer term loans, such as mortgages and business loans which are the big part of your business. Mr. BARBER. Yes; it is indeed. But I have~alw~ys been of the opinion that a small person in financial stature is as ~ntiUed to have credit avail- able to him as the very large borrower and I believe that. And I think this would very likely mean that the little fellow wouldn't be able to borrow l~is $10 or $50 until payday. Mrs. SULLIVAN. I don't see why you would refuse to lend him money under these circumstances~simp1y because you would be obliged to show the rate of inter~ he has t~ pay, Mr. BARBER. I would ~ay because oi the unfavorable~publicity that we would get that was costing us money in `the first pl'ace~ Mrs. SULLIVAN, Don't thecredit unions offer$100 loai~s for short pe- riods for only 1,~2percer~t ~ns~ead of 200 percent?, Mr. ~ni~n~ That wduld wean witl~ ~ minimuw-rj~ percent of $100 for 2 days? I am not a mathematician. Let's figure out what it is. MrS.~SUL~IVAN. Qu~r counse1~ just sa~d that credit unions do lend up to $100 loans at 12 percent annual rate, ,~eg~rdJess of the period. Mr. BARBRR. $100 at, 6 percent for ~$0 days is $1. Fçr 6 days it is 10 cents. So for 1 day it is 12/3 cents. I 4qubt th~t any credit union or any other lender would loan for less tb,ai~ a 2-cent wterest charge. Mrs., SULLIV~N~ I am,.not certain of' thi~. Counsel saj4 there is x~o minimum rate, ~ut I would have to check on that, because I, am not sure. `, / ,` `` ` Mr. BARBER. If there were no minimum rate then I cou1c1b~r~ow `from my ~i~ndly credit union, my iion,~t~x~paying credit uniqn, $~0Q for 1 day an~ they éh~rge me~pen~y and we would s~y, let~s~ round that down to not~hing. I question tha1~ ~whether they will do that. Mrs. SULLIVAN. Credit unions have been formed to take care of these teniporary small loans that people need for a short time. Normally, unless they are used to going to the bank fo~ many othcr thiiigs, they don't go to th~ banks for this kind of loan, from the information we have. I have no idea what percentage of your banking business is attributed to this type of loan but I imagine it would be a small percentage. Mr. BARBER. A small perceRtage 1?ut all of our customers who need $100 for 7 days would come to us. Maybe before they went to their brother-in-law or the credit union if ~they will do it for a penny. Mr. GREATIIOIJSE. If .1 couJ1çl just comment on the credit unions-I know in the credit union which we have/there is 1 percent per montk which i~ prorated for any part of the moflth that you, use the money and also our credit union then rebates 25 percent of the 1 percent that you paid for interest. PAGENO="0246" 828 OONSUM1~R CRI~t~[P PROTECTION AC~ Mrs. SutLIv~u~ Thank yoth ~ , ~ You say, Mr Barbers that th~ t~imin~tI provisions ~f the b~i1 are too severe and that violations should only b~ ediisid~r~d subject to piosecu- tion~ when they ar~ repeated; Now, really, Mr. Barber, we are talking about a criminal statute. How many mtird~rs or armed robberies wOuld you condone before you would have the criminal laws apply ~ Or, perhaps more to the point, how many bank robberies would you sanction before you believe that the felon should be arrested and brought to justice ~ Two ~ Three g ~f we are imposing criminal penalties, then, certainly, they sh~tild be enfoi ced on the first violation and every time a vio1ati~n occurs Mr BARt~IR Our only thought about that is that we think that the violatioft should be rep~athd and it should be knowing and it should be willful and that an uthntentional infraction shouldn't ope~the door to prosecution and lerider~ ~houldn t be treated as though they were guilty, whatever the bill shows-if it were just an oversight or an iso~ lated instance. Mrs. SuLLIvAi~. We ~ertainiy ~wonld not Want this power used to prosecute anyone criminally for a mmor eversight But I don't think we want to give unscrupulous lenders a clear field to "one bite" as with abitingdog~ Mr. Barber~I am delighted tosee your statement, that- We believe there Is no valid reason wh~ a custotner or bQrI~'ower should not have an accurate ai~id understandable st5tement of the cost of borrowing and credit. ~ 3 We are all agreed on the principle you state The only difference would seem to be ~s to how we will implement that principle. I would be particularly iñt~rested ui au expression of your views on why you do not favor provision for administrative enforcement contained in my bill, but puefer to leave such matters to civil suits brought by debtors-who can~'t afford tO bring them-or criminal suits brought by the Department of Justice-Who will be toorbusy to bring them-rather than requiring that the responsible administrative agency act to piotect the ~iublic ~ Mr BARBIIIi Well, as I mider~tand it, the tT S disfrkt attorney would Iiandhf the bfifninal aspect of it and I think would handle it well Mrs SU~LLIVAN I am not a lawyer, I can't argue this part of it with you. Mr. BARBEn. I am not, either, I should probably refei~ this question to oftr counsel, Mr. Hansen. Mrs. SULLIVAN; The only thing we know is that someone ~ho is in trouble hasn't the money, if they are terribly in debt, to bring a law- suit. This is why we feel that we need an agency to protect the pub- lic frOm violations. Mr STEPHENS As I understand the position of the independent baftke~ it is ñ9t that you don't~ believe an~r penalties ~hould be as- sessed against the violators Of the rules and regulathins, as set out in the bill, you just don't believe there ought to be the heavy criminal penalties ass~sed~ in the Su1li~an bill. Do you agree with the pOsition that penalties th~t are in the S. 5 bill are all right? PAGENO="0247" CONSUMER CREDIT PROTECTION ACT 829 Mr. BARBER. Not entirely. We believe as fa~r,as the crimitial aspects are concerned that the penalty should be ~t, at least at the outset should be a fine rather thbn imprisonment and we believ&-- Mr. Smrn~s. In both bills? Mr. BARB~R~ Yes, and the offense should be repeated and kfiow-~ rngly and willful and that goes right along with the bill on page 19 in which it says "however, any creditor who willfu1i~y and knowingly uses such tables and charts in such a manner ~s to consistently under~ state the annualpercentage rate." So, we have no objection to penalizing the c~nisistent violator We do object to penalizing an isolated infraction and ~ tbject to being guilty until proven innocent-to assuming that the lender is, in fact, dishonest. Because we think our lenders are basically not dishonest and that any infractions that have been made really have not come from the banking segment of the industry. We think we are clean and we have ~ot gouged the public and we are doing a good job of disclosing We don't want to be burdened. with a tremendous amount of additiona~i administrative work that isn't going to be really worth while Mrs SULLIVAN Gentlemen, 1 have seveçal questions I would like to read into the record that I thmk you and your counsel, Mr1 Earber, could answer when you get yont aai~ri~t and the dame with you, Mr Greathonse We are running against time I didn't think Mr Stephens and I could keep this going so long this morning, but we have. I have several questions for you, Mr. Barber. 1~e, first one is this; You say that the requirements of stating an annual percentage rate- assuming the bill were to take effect July 1, 1968~-~doesn't give the Federal Reserve Board adequate time to pre~re regiilation~, tables,. and so forth. However, Mr. Barber, are you aware of th,e fact that the Massachusetts truth in lending law went into effect 90 days after it was signed by the Governor of the State.? Massachusetts' officia~1s were here before the committee last Monday and they indicated that 90 da'~s gave them plenty of time to prepare the necessary regulations and chai~ts July 1, 1968, is more than 300 days away Don't you think that, if we ena~ted this law within the next 2 months, that the Federal Reserve Board would have ample time to issue regulations, prepare charts, and so fdrth? (The `reply of Mr. Barber follows:) We feel that a~tually~ it would be most ditlicult to have tbi~ law take effect by July 1, 1068. The ~`ederal ~eser~d Board is not familiar with this and has not had the opportunity to study in depth the entire area of interest rate d's closure It is our opinion that they will surely desire and should be afforded ample time in which th detelop the i'egulations. This could well r~uire hearings as well as extensive research and study. We think that a flexible effective date should be permitted in order that the Fed itself copld determine when it was ready which in no event would be later than January 1, 1972. Mrs. SULLIVAN. Next, Mr. Barber, you stated that credit life insur- ance is n~t a charge for lending money. However, isn't it true that banks extend loans, telling' the individual what his p~yments are in PAGENO="0248" 830 CONSTJMER CREDIT PROTECTION ACT dollars and cents withôuti*evealing to him what purt ~f that payment is payment c~n th~e principal, what part is paymei1t~ on interest, and what part of the1 pa~ym~nt is for credit .lif6 insurance or other char~es? Isn't it also ti~ue that banks and other financial institutions often require that the bor w~r1n~it only pü*'ehase credit life i~nsuraüce, but that su6h insura~ice be p~re~hase&lfr~m the lender or from a sp&~ific agent of the lei~dep? And, i~n't it still further true ~that ~uch lenders hiwe ties with, re- c~ive kickbacks from, and indeed~ make a substantial profit ~ut of their forced sale oferedit lifei~asurance? ~(The reply of ]~Er. Barber f~1l~ws:) Permit me to a~swer these quésti&ns. by first statthg ti~á1 ~ knOW of no bank which requit~eé that the borro*ei~ purchase credit hfe~iiisuranee. It is strictly voluntary ki ~ur bank and hi fact we believe it must; legally be kept on a voluntary ba~is. The ban1~ a~e~1cy oi~ ~ndividuals in the bank normally act as, the insurance ag~it and in j~act so far as we know credit life ins~ir- ance is riot availl~b~e except t~htou~h süeii ar~ ~f'rangØfnei~ between alendet and an insurance eon&arjy. As to the receipt of sn-caUed~hlekbaé1~s and the earningi of~a sithstantial profit on this business, I can only state th~twe believe co~njssio~s~on t1~~ sale of insurance are completely i~~rmal, l~it~mate, aOceptOd, and desirable. We believe iri the pi~olit system and *e do~ziot apolo~1ze tbr being 111 bu~ipes~ to ear~i a' ~rofit. Iflsi~án~e is, iti~'ønt epinik!n, a proper sideline Thr bknks and credit life is a desirable servie attwtE~ucley ~an offerthe borit~ower~ - In answer to the first pai~ of your q~~t~op (at the b~ttom of page 1211), I will state as I did in my preparei~E ~estimQny that t b1eheve~b~nks d~ a good Job of disclosing. ~et ~ne giv~ ~~ou~an e~ainple rit WlMt wO ~Tthi~xt t~pe~ on a typical note of $2,0~0.0O for 24 months to finance say a new automobile: Net advance (or nOtto~borro~yr) __L L_!~I L $2 OtlO 00 Finance chais~e (tl1~i La figuitd ~t the sO~alled 4ercent!*dd~on~ rate and~we n~w quote itas $6 ~er ~ Credit life (if he c~ioose to have ~ 4~ ~ ~ riote~ ~ ~ Monthly payn1e~at ~tor 24 month&__J~J~_i We do not relate the finara~e ehargé~to ~ sfin~pie' ~n~th~a1 rate as ~Ik?d h~ re- quired by the Pr~th4n-Lendlhg ~BiIl: Itwenid be 11.fi% or thereabouts~ We believe w~ give the torrower all lie wants 1~o knOW, ~ fi~l1disclos~~~ As p~ey~ousl~ st~e1, the charge for ç'c~~it lire should not ~ ~1neluded as part of the interest ehá~ge because interest i~fr charge for the use o~ móney and is' ii&t and never Yias i~eWn~a eha~rge for insuranCe: The charge for i~redit life ahóuld be disclosed to the borrower and we now do this. He should npt be required to buy credit life and we know of nobanks that require this~ Mrs. SULLIVAN. In this connection, and at this point in the record, I should like to introduce an unsolicitød l~tter receivedby a member of the staff froimtheFirst National Bank of Washington;It is obviously a form letter. It is addressed to "Dear Customer" and is ~igned'b~ an assistant vie pr~siaent of the bank. Let me read portions of this letter to you. The letter ~begins: This is `vacation time. Wheth~r~ you plan to take a trip or stay at home ithd make home improvements . . . or if you just need funds topay off sothe nuisan~e bills . . . or for any sound reason . . wØ are ready to serve your needs. The letter then sets forth a number of typical `loans that may' be obtained. The informatiOn is se1~ forth uh~der the following headiiigs: "Advance" which tells you the amount of money you will get; "Gross Loan" which tells you the amount of money the bank says you will owe PAGENO="0249" bO~cSVMEfl CREDIT PROTECTION ACT 831 them; "Number of Equal Monthly P~tyments" which tells you over what period of time the loan must be repaid; and "Monthly Pay- ment including Credit Insurance". Let me state that again: "Monthly Payment Including Credit In- surance." There you receive a single figure with no breakdown for principal, interest, or insurance. This is certoàly a reputable bank. It is advertised as Washington's oldest national bank and yet, this single solicitation, it seems to me, demonstrates the need for truth-in- lending-and also the need for including credit life insurance in the definition of the finance charge. (The letter referred to follows:) THE FIRST NATIONAL BANK OF WASHINGTON, Washington,D,C. DEAR CUSToMER: This is vacation time. Whether you plan to take a trip or stay at home and make home improvements . . . or if you just need funds to pay off some nuisance bills . . . or for any mound reason. . we are ready to serve your needs. Subject to approval of your application, we will provide you with the money requested. Processing can be handled without delay. All you need do is fill in the brief form and promissory note on the reverse side of this letter and sign the note. When approved, we will forward the pro- ceeds by check or deposit the funds to your account, if you have a checking account with tts, Below are several typical repayment schedules available. We suggest you review these to determine the most desirable for you. Advance Gross loan Number of equal monthly payments Monthly payment including credit insurance $500 $600 $800 $1,000 $1,500~.~_ $537.60 645.12 893.70 1,117.26 1,744.08 12 12 18 18 24 $44.80 53.76 49,65 62.07 72.67 If your requirements are for more than $1,500.00, please call me at i'37-1700, extension 264. We value the opportunity to offer this service to you and we appreciate your business. Sincerely, C. A. ELRDSOE, Assistant Vice President. PAGENO="0250" 832 CONSUMER CREDIT ?ROTECTION ~CT ..j ~. Sijnatoee_____~_~... PROMISSORY NOTE E P 000 60 lt~ Thftpy t ddSdyt hde proceeds ArC issced. Soksuquunt paynreses see due on the same day of each month thereafter. FOR VhUJb RECEIVED, the ondeysgnrd, herein called the maker or borrawer, jointly and yceerelly proqrise ep to tIle First blatiopa! pay of Wsohiooeov, ha av~ypy.r cc loan stated uboon with precialculoled charges added ;hereeo at threats of 6% Discount per annum. Repayment of said loan shalt be madp in pccçtrd- oath tile schedule set forth aboyn. Interest after matuçiey shall becomponed ae the legal rate. botycinter may prepay than nwt~ n fall or in peel as an~ into. In the event efpoopaymrnt to foil, or, in tht earst of eccalrration of payment for nvy rppsen, a nnoulcolonctn pad/or rebind ci prrculculstfd chargenchall be made in occordunon with the Rule of 70. Defaull in she mukang of asytpayncct doe hereunder, an asy pars ehtrsnf, shall at the option of the holder, and ceithout eoeioe or demand foe peefxrm;cun, render eke settee unpaid smcunt dun sad payshlOus ence. Iv the avant of delinque'soy, tHe lnndrn may collect and the bnrrcwer ageera to pay delin qoeecy charges at the ease stOVe per moeth, bun colts exceed $5.00, nc_any annual in smears. Alan, is tIle ruent suit is brought toe the collection nt thin note, the hoer acre aerasu tn paya tensomable attorney's fee in sock amount; cc may bcfiued by ;hc Cocsl. Maker and endcrset' hereaf, j~intty and oeverot4~, wetue prenentlnent (or payment, peotest, notice of eon'payment and prntest, end the eeteneioae `Inc ci poymrns before, at, er eft4 maturity. All meke~s, indorsees and gushaarioen, icintly led severally: have glees hpl4uy a lteapnpon all Betty end other property of every sect ef each of dccv, row or hsaeafter in ~uptedy ar penuensins a~i1xla(aler, fclrutheteoee pnrpthse delineeed and in bch~&n~el~3psçit~, held, and sp~os ant' hctatruea at any of tjyhjte With holder, fec Ike pnynuvc of ehcs and all othee dbltealtons cC every sort of etch maker; value, defaced, pr000nemrme, protest, all entices of corey soet abd tho brnrfiv of All hcmnctecd uxal other eoemplaoesae4 waluntawv and appraisement sos; and waine eny ~mpedimeict to suitit th, Dialciut of Cclumbiu en this attbwciable wolf trot paid obey due by ieteeocebly appetnyang Fiscal Genreat Ceepneaeinn, Woehiogtrn, D.C. as Iheif agent ts receive seevice of any peoce,s within cold ttisltiat sod cntice foetlauciak by csrtIfied~muil tc the lust kncas addessu of the pait(y) (ira) sued. han lh~ Iutectacsy of the besrotIjr~ ted she lendnr,and they hereby agere, that the noeslruclion, validity, and effece ilt this nntq shall ha gnvcmrd by the man nf the Disteius of Cnlnaebio. Sbi0ATURE OF MAKER (RORROwER)-mu(l)_ - (Ynsr Signaeorn$ Dnle_ (2)____ (Synuse's Sictatoti) (If married, bath husband and wife must sign.) Mrs. SULLIVA~r. That will be a lot to answer. Mr. BARBER. ] will be delighted to answer it. I can scarcely contain myself until I get home to write the answers, I would love to answer them now. (Mr. Barber submitted the following comment on the unsolicited letter from First National Bank of Washington:) The letter you cite on pages 1212 and 1213 from the First National Bank of Washington appears to me to be an ethical and legitimate solicitation for con- sumer credit loans. From it the borrower easily determines the number of dollars he is paying for th~ credit. There would be no objection on our part to breaking PAGENO="0251" CONSUMER CREDIT PROTECTION ACT S33 down the amount that was going to Interest and the amount going to pay for credit life and I would be reasonably sure that the bank in question would feel the same way. You object to their inclusion of credit life premiums and interest as a single figure and ~vet in your bill you would require that disclosure of interest and credit life be incluied as a single rate. This is all we object to. We think they should be disclosed but should be separate and we think further that credit life ~reminms should not be related to a pei~ceutage figure anymore than any other insurance premium should be related to a ~ereéntage figure. Mrs. SULLIVAN. Mr. Greathouse, you can answer this question ~lso for the record when you go over your transcript: How do we get across to the public the full story `of predatory con- sumer credit practices so that we can deal with them? The Distf4ct of Columbia Commissioners announced yesterday that they now want to do something abQut the problem here in Washington but I think we need national laws with teeth, such as H.R. 11601. Can you help us get some real support for it? If we were to pass the Senate bill, Mr. Greathouse, with no annual percentage rate required on revoJving charge, no percentage rate dis- closure requirement on most transactions under $100, no disclosure of any kind r~quired on first mortgages; no discl9si~re required on any- thing until July 1969, and then no required discios~re on an annual percentage rate on `anything whatsoever until 5 years from now, what would that bill actually do for the consumer? I wish you would answer those for the record, Mr. Greathouse. I want to say again that Mr. Annunzio was most disappointed not to be here' to hear' you this morning. He was most faithful, as Mr. Stephens has also been, in attending nearly all of these hearings. Mr. Annunzio Jias been one of the best advocates on the subcommittee of the garnish- ment provision of H.R, 11~Q1 and he will be delighted with your sup~. port on this, and the support also of the industrial union department of the AFL-CIO. lie was very unhappy, as were some of the others of us, when Mr. Beimiller testified about tli~ lack of an AFL-CIO position on this. There `has `been mention made here of the packaging bill. As weak as it is, it nevertheless allows the Food and Drug Administration and the Federal Trade CommissiQn to specify the sizes of type for information required on labels. I third~ that i~ one of the most important things the packaging law does. (Mr. Greathouse submitted the following comments in reply to Mrs. Sullivan's questions:) I believe `that the loopholes now existing in the Senate passed version of truth- in-lending would no doubt cost the American consumer hundreds of millions of dollars yearly. Total interest on consumer credit amounts to some $13 billion yearly, and a substantial portion of that credit relates to areas such as first mortgages, purchases under $100 and revolving credit accounts that are excluded from coverage in the Senate pa~sed bill. Disclosure provisions should hkve the effect of compelling creditors who charge high interest rat~s to reduce their charges, and the availability of adequate information should lead `the typical consumer to utilize credit sources with lower intereSt charges. `These hundreds of millions of dollars will largely come out of the pockets of the disadvantaged, the least educated, those with incomes well `below the poverty line, where the presence or absence of a few dollars can have a significant impact on their lives. As I indicated in my prepared statement, the UAW and the fliP would whole- heartedly support legislation to eliminate small print in credit contracts `by re- quiring that no type smaller than 8 `poInt type be used in such contracts. Mrs. SULLIVAN. Do you gentlemen think-I would like to have both of you answer this for the record-do you gentlemen think that the PAGENO="0252" 834 dO~NsnM~ dEE~bIT ~kitE~é~IoN~ ~ Federal Reserve Board, uñde~ ~Tii~ bil1,~io~dd be~ á)~1e~ t ~ecif~ th~t no type size smaller than, say, 8 prnp~ type, can 1~4 used ~in any credit contract? Just a~Id ~tour~thotrghts' on ~h~tiaLyour~transcinJpts. (The reply of Mi~ Barber ~ôllo~s ~) Concerning yo~ir ~ type s~ze ~w~e have no~ objection to sp~cify- ing the type else be large enough to be clearly legLble to a person with normaL vision. Mrs. SULLIVAN. `Before we close, I want to tak~ care of a few details for the record. I received a lqtter from the attorney general of the State of New York, Mr. Louis J. ,Lefkowitz, who has been very active in behalf of consumer cause~ He urges the passage of those provisions of H.R. 11601 dealing with diselo~ure of credit costs in preference to the pro~ visions of the bill passed by the Senate. Congressman Halpern, a cosponsor~ of H.R. 11601,~has asked me to place Mr. Lefkowitz' letter i~a the record at this point. He was unable to be here this morning or he would, `i~ave read it into the record, for it is an excellent letter from a public o~1lcial with wide experience in the subject ~natJter of this legislation. (The `letter referred to follows:) NEW `YORK, N.Y., August 10,1967. Hon. LEONOR K. SITRLIVAN, House of ReDre~entkz~tiveg, Washin.gto~, flfJ. D~u~ MRS. `SuLLIVAN: The "truth in lending" bill, passed by the ~Uni'ted States Senate, or the bill propose4 by you, both of which are now' before your committee, is a most urgently needed step toward protectiu~ co'i~sumers' `and bçrro~e~rs. Your bill offers, in my o~inion, thore~ protection to the public Inasmuch as it~ calls for full disclosure of `th~ c~dM of revolving credit and full diselosii1re~on other interest rates, such as those on first mortgages. I urge your committee, if it reports o~it the Senate `bill, to include therein a ,provisi~~ requiring full djsclosure of the annual interest rates with respect to revolving charge ,accounts. The purpose of thes~ `bills-to make sure' that the borrower or installment buyer or anyone using credit will know exactly how much he is' paying in4nterOst, acid-ons or other ç~arrying charges--is essential to the `achieveznen1~' of ade- quate consupier protection. ` ,. ` Oo'n'sume~, nredit~ie essential to the uatio'n'e economy `and u~e of credit is re- sponsible for much of the standard o~ living Americans enjoy. It is only fair, `tbei'efO're, that the Iuetallntent ~urcha'ser oi~ borrower should be told by the lead- ing institution his credit charges. This Information should permit consumers to make more intelligent decisions about what they bny'and `borrow and on, what terms. It `has been the experience of the Bureau of Consumer Fraud's and Protection of `my office that there is `a glaring lack of knowledge `on the' part of most `con- seniors of the actual cost `of credit to them. Few families know `how much interest they: are paying and, tragica1ly~ the bInge of ~o~rowiug has ,emholdened loan sharks `and `slippery `salesmen to take advantage of p~i `often ~ public. Pbe proposed le*isiation `will be, of primary beaeflt to,tbe ,po'cr~ who are the ones ,eredit sharkS~'flnd easiest to gouge. It won't eliminate m~scr,upulou's sales- man, hu't'i's,wil'l cdn~p their styl'e~'a~id.l1el9'to,~generate a n'ew Credit~c~nseiousness among shoppers. ` ` In hundreds' `of Fases brought to the attention of my office, consumers who, being unaware `of the `full interest and credit charges, undertook payments far beyond `their finanCial mean's. This `resulted `often In defaults `by' consumers after some payments had been made followed `by `the repossOs'sion of the mercbCndise and also the payment `of deficiency judgments. `I have previousl~ supported similar bill's introduced in the Comgros's'in recent years and `I strongly urge support of the p're~ent measures with the revolving PAGENO="0253" CONSUMEE CREDIT PROTECTION ACT 835 eharge accounts provision included. The passage o~ the bill introduced by you or the Senate bill with s'i~ch included provision, will be in the public interest. Best wishes, Sincerely, Louis f. LnrEowIPz, Attorae~/ General, Mrs. SULLIVAN. We have receive~cl numerous communicati'&ns from organizations and business firms interested in this legislation, or which would be affected by it, and, to the fullest extent possible, and where appropriate, we will make sure that such `material goes into the record. Some of these statements came from associations which we invited to testify but which instead decided only to file statements. We would have preferred to hear their witnesses, sc~ that we could raise questions based on their testimony or on facts in our possession, but at least we will have their statement in the record. Some of the members, I am sure, have or will have communications or other material they will want placed in the record and, of course, to the extent it is feasible and practical, we will be glad to cooperate on that. Let us set next Friday, August 25, for receipt of material for the record. This concludes our scheduled hearings on H.R. 11601 and related bili~ dealing with consumer credit. We have been in almost continuous session for 2 weeks-thout 15 sesSions. We have amassed well over 1.000 pages of spoken testimony, and additional material in the form of written statements also `was su1bmltted for the record. `So we will have a very substantial record to digest before going into executive session to mark up the `bilL I think an objective summary of all of the testimony we have re- ceived would show that the bill passed by the Senate by the remark- able vote of 92 to 0 on July 11 has so many exemptions in it that it would leave out a very substantial portion of consumer credit trans- actions, and would not require an annual percentage rate disclosure on any `transac~tionS for a period of 5 years. I think it can safely `be said that the Senate bill is the very least we should be able to get out of the subcommittee because every member of the subcommittee has introduced legislation which contains at least the provisions of the Senate bill. Most of us go some distance-and half of us a great distance-beyond the Senate bill. I sincerely hope that ~what we end up with is not "the least.", I think that would be very little indeed, compared to `whM is needed. These hearings are recessed subject to call of the Chair, in case further hearings are desired or required to help us complete action on the legislation. Again, I want to thank everyone who has helped us on `this important `assignment. Mr. SrErirENs. Madam Chairman, I want to say this before you close. I want to ~oongratulate you first, as our chairman, in bringing up a terrific panel of `witnesses in the 2 weeks in these hearings. I don't think there has been the possibility of anyone who really wanted to come who has been prevented from making a presentation. I have said many `times the job of a Congressman is a job `that gives u~ the greatest opportunity for the greatest education that a person could possibly have. It is also a frustrating job because knowing that PAGENO="0254" 836 ÔON~StJMER CItEJMT PROTECTION ACT you have the opportunity to be so well educated you do not have both the mental and physical ability to absorb the education at the time you need it most. But you gentlemen have been an example of those trying to educate us and I am, of course, willing to learn. I am sorry that I was late this morning, Madam Chairman, so that I could say a special word to the members of the Independent Bankers Association because I have been friends of these gentlemen and as- sociated with them. I think I have 42 banks in my district and only three of them are independent banks. I ~vant to say this further, that you have a local~ representative, Mr. Schooley, here and he h~s been attending these h~arings very faithfully. Without depr~eating Mr. Hanson or Mr. Bell, I ~would say Mr. Sehooley has been a most helpful person in pqrtraying to the menibers of the committee the positions of the Independent Bankers Association on legislation and that he is the kind of person you need to help. He doesn't try to tell you what you have got to believe, lie jhst tells you his position. I appreciate that kind of help. Mrs. STILLTVAN. Thank you. Mr. GREATHOUSE. Before you close could I make a request? Mrs. SULLIYAN.~ Yes. Mr. GREATHOU~E. As I stated in the beginning this morning, that while our testimdny had been prepared just for the UAW, and Mr. Clayman Was scheduled to appear for the IUD, the Industrial Union Department, that after preparation of our testimouy We Went over it with the officers of the IUD and they requested that We ~l~b re~re- sent them. I would like, therefore, to request that where UAW appears in the body of the statement that I pres~nted, that this be followed by the IUD, soit will be a joint staMeui~nt. Mrs. SULLIVA~T~ That will be~ done without objection. You have been very helpful, Mr. Greathouse. I join Mr. Stephens in what he Said about the ihdependent bknks as well as about the IBA's Washimgton representative, Mr. Schooley. I have known him over a period of some 15 years. The independent banks have always been among my favorites. I have worked hard for legislation to enable them to compete, and I intend to continue to work in that dire~tion because we need good independent banks. I thank you all for coming-for giving us your time and sharing your knowledge with us. Before we adjourn, there is some congressional testimony to be in- cluded. A number of the Members have requested an opportunity to testify, but becau~e of our very heavy schedule over the past 2 weeks, I persuaded the thmbers to prepare written statements which could be incorporated ir~ the record, and these are ei~cellent statements. First, we will abcept at this point the statement of the Honorable Warren G. Magnuson, chairman of the Senate Commerce Committee, and also chairman of a new subcommittee which he established this year on consumer legislation coming before the Senate Commerce Committee. Senator Magnuson has been one of the most effective lead- ers of the Senate on consumer issues and was responsible for initiating the section of H.R. 11601 which deals with credit advertising. We wrote that section of the bill largely on the basis of Senator Mag- nuson's draft of lbgislation on this subject, and we are delighted to have his comment~ on our bill. PAGENO="0255" CONSUMER CREDIT PROTECTION ACT 837 STATEMENT BY HON. WARREN G. MAGNIISON, S~NA~OR PRO~ THE STATE OF WASHING1~ON, CEAIRMA~ SENATE CO~fl~TTTER ON CO1YDYIERCE Senator MAGNtJSON. Madam Chairman and members of the commit- tee, I appreciate this opportunity to go on record before this distin- guished committee in support of truth-in-lending legislation and, in particular, the credit advertising provisions of H.R. 11601. The dis- closure provisions of your bill are identical to those in S. 22~68, the Fair Credit Advertising Act, a bill which I had the honor to intro- duce and which is cosponsored by Senators Bartlett, Brewster, Clark,. Dodd, Hart, Inouye, Kennedy of Massachusetts, McGee, Mondale, Proxmire, Scott, Pydings, and Young of Ohio. The fair credit advertising provisions are designed to insure the. meaningful disclosure of the cost of credit in any advertising which promotes a retail installment sale, an installment loan, or an open- end credit plan. With this legislation, we move another step forward toward our goal of securing the consumer's baSic right "~ * * to be given the facts he need to make an informed choice" when contem- plating a loan or purchase-in this case a purchase under an install- ment sale contract. The obligations imposed by this measure are simple. It requires that where a person advertises to make an installment loan or an in- stallment sale to a would-be buyer, he must disclose the cash sale price; the number, amount, and period of each installment payment; the amount of the downpayment required, if any; the time sale price ~ and the finance charge, expressed as an annual percentage rate. Where the advertisement involves an open-end credit plan, there must be a meaningful disclosure of the details of that plan. The scope of the legislation is narrow. It does not apply to credit sellers who do not advertise specific credit terms. It does not attempt to regulate the cost of credit. It merely requires that where specific credit terms are advertised, the advertiser must disclose enough infor- mation to enable a consumer to decide intelligently whether to buy for cash or credit, and, if he decides to buy on time, where to obtain the most favorable credit terms. In so doing, it extends to all consumers the basic protection which the Department of Defense has already afforded servicemen through the standards it has promulgated for all persons who advertise credit terms in unofficial military publications~ The need for this legislation is great. Since 1945, the outstanding amount of consumer debt, excluding long-term-mortgage debt, has multiplied nearly 17 times. Today, it totals about $94 bi]lion-well over one-fourth the size of the national debt. A 1959 "Survey of Consumer Finance" published in the Federal Reserve Bulletin revealed that &~ percent of all "spending units" in the ~[Tnited St.ates today have some amount of personal debt-which excludes mortgage debt-and nearly 50 percent of these units have installment debt. Personal debts for 30 percent of these families exceeded $500, and for those families af- fected by unemployment, the percentage with some amount of personal debt climbed even higher to 70 percent. As a suggestion of the large number of credit buyers who have greatly overextended themselves, we should note that families and individuals incurred 170,000 or 9C~ percent of all bankruptcies last year. PAGENO="0256" 838 C~NSUMER CREDIT PR0T~CTI0N ACT When credit ~plays such' a prominent role' in the li's~es of so many consumers, it is e~sential that they have some knowledge of the `various credit terms available to them. Yet, studies indk~ate that no area of retail selling is as confusing to the American consumer, regardless of education or income level, as the co~t of ciedit, A survey of the 10 most popular department and appliance stQres inBaltimore conducted by Prof. Samue~ Myers of Morgan State College and reported by David Caplovitz~ in his book, "The Poor Pay More," revealed, for example, that thp cash price of each item "~ * ~ was pr~ctically the same in the variOus stores, but that there were wide variations in the credit terms leading to sizable differences in the final cost to the con- sumer." In short~ those retailerS who sell on credit are no longer com- peting on the basis of price, in the tradition of a truly competitive econ- omy, but are taking advantage of the, consumer's lack of knowledge and information, to compete on the basis of their ability to conceal what may be unconscionable time sale prices in apparent bargain credit terms. IVe should no longer permit such unethical business prac- tices to prevail in the marketplace. Last month the Senate took the first step towar4 promoting true credit competition among retailers by passing the Tituth in Lending Act. It is the purpoSe of this legislation to strike at another aspect of this problem-the advertisii~g of credit terms. In imposing minimum dis- closure requirements in advertising, which today has become an inte- gral part of most retail selling, the consumer, now hopelessly lost in the jungle of confusing credit terms, may be given enough guidance to enable him to seek out the most advantageous credit offer available to him. No longer will he be lured by the uninformative ad: "new TV- easy credit terms-just $2.50 per week," or the ad which positively misleads him in ~tating: "new TV-$130 cash or just $2.50 per week" without revealing that the payments, will continue for 70 weeks. In- stead, the consumer will be furnished with pertinent information en- abling him to make an intelligent chOice among differing products and terms with revised ads such as "ne~w TV-$142 cash or $156 on time with easy pa~tthGnt of $3 per ~e~eek for 1 year-18.77 percent annual percentage rate," or "new TV- $142 cash or $150 on time-just $20 clown and $2.50 per week for one year-11.84 percent annual percentage rate." - Since the protection afforded by this legislation will complemei~,t that provided by truth in lending, I have followed very closely the hearings and debate on 5.5 in order to insure that the terminology and the disclosure re4uirements of these bills will be consistent. I was par- ticularly please4 to see that the experi~ences of Massachusetts and Washington, under their recently enacted truth-in-lending legislation,' had' demonstratdd that i~quired discI~isure of an "annuaTi percentage rate" did not re~ider their legislation unworkable. In fact, disclosure of this figure had apparently provided the most useful single standard for comparing va~rious credit offers. It is remarkable to me that the present credit system with its various methods for expressing-or ~onceaiing-interest rates has existed for so long. In a surprisingly analogous situation, this country discovered very early in its history, when government under the Articles of Con- federation, that business could not easily be carried on when each State PAGENO="0257" CONSUMER CREDIT PROTECTION ACT 839 established and issued its own currency-currency whose value was not uniform from State to State. The drafters of the Constitution met this problem by specifically providing that Congress would have the sole power "to coin money [and] regulate the value thereof," and one of the first actions undertaken by the newly established Congress was to create a decimal currency based on a dollar standard. In short, they assured that there would be a single national currency with a uniform value. A person traveling from State to State need not laboriously con~ vert his money at each border as he would when traveling between foreign countries, and the prices or all commodities would be quoted in terms of a single medium of exchange-the dollar. There are definite parallels between the development of our cur- rency system, and the emergence of our system of credit. Just as a person shopping in Washington, D.C., or Seattle would be confused if one store offered its merchandise for pounds sterling, another for U.S. dollars, and a third for Greek drachmas, especially when there was little indication that different currencies were involved, so the credit shopper today must be baffled when interest charges are quoted to him on a monthly, semimonthly, or annual basis, particularly when these rates are complicated by discount or add-on provisions. He has no meaningful yardstick with which to compare the various credit terms actually available to him. Yet never before have so many shoppers needed such a unifOrm standard. With all credit offers quoted in a single terminology-the annual percentage rater-the consumer can begin to compare easily and readily various credit terms available to him. Passage of "truth in lending" is the first step toward this goal. Full disclosure of credit terms in credit advertising is the next step. It will help a consumer to iwoid many of the misleading half-truths in current credit advertising, and it will enable him to begin his credit shopping when he picks up his newspaper rather than when he arrives at a store and prepares to sign a contract. In summary, the minimum disclosure required in all advertising by this bill will upgrade the quality of competition in the marketplace and help protect the consumer from unethical business practices. It will permit him to compare meaningfully both the cash and time prices offered him and to weigh the varying credit terms available to him. It will furnish him with the information with which he can make intelligent purchasing decisions. We cannot default on our obligation to afford this important protection to the Amercan consumer. If we do, he's the one who will pay our delinquency charges. Madam Chairman, we are extremely pleased that you decided to incorporate the disclosure provisions of our draft proposal in your omnibus truth-in-lending bill, H.R. 11601. It wa~ encouraging to note that on the opening day of the hearings before your subcommittee, the President's Special Assistant for Consumer Affairs, Miss Betty Furness, enthusiastically endorsed the advertising provisions of H.R. 11601. Also, the "father" of the truth-in-lending bill, former Senator Douglas, in testifying before this committee, not only wel- comed the credit advertising additions to the truth-in-lending package, but praised your wisdom and courage in including these provisions in the bill. The only change which I would suggest l~ere, wou'd be to recommend that the authority to enforce these advertising provisions 83-840-67-Pt. 2-17 PAGENO="0258" 840 CONSUMER CREDIT PROTECTION ACT be vested in the Federal Trade Commission which currently has the responsibility for policing false and misleading advertising. This would appear to me to be a more practicable solution than to provide for enforcement by private persons or by the Federal Reserve Board which currently has no machinery set up to undertake such activites. We shall follow the progress of the truth-in-lending hearings in the House with great interest. I hope that the House will ado/pt the credit advertising provis~*ions and that the Senate conferees can accept such provisions in conference. Should this effort fail, however, we shall certainly schedule hearings in the Commerce Committee and press for enactment. Mrs. SULLIVAN. Next, we will have the statement of Congressman Matsunaga, of Hawaii, a member of the Committee on Rules and an outstanding Representative. Congressman Matsunaga is secretary' of the House Democratic Steering Committee. He is one of our leaders in the House of Representatives, and a cosponsor of the Consumer Credit Protectior~ Act. STATEMENT OP HON. `SPARK MATS'UNAGA, A REPRESENTATIVE IN CONGRESS PRO1VZ THE STATE OP HAWAII Mr. MATSUNAGA. Madam Chairman and `members of the subcommit- tee, I thank you for this opportunity to testify in support of H.R. 11~06; a bill which would provide comprehensive consumer credit protection, of whith I am a cosponsor. H.R. 11806 is identical with H.R. 11601, which was introduced by the distinguished chairman and several members of this subcommittee. It is a matter of common knowledge that billions of dollars of credit are extended to consumers every year. `Some of this credit takes the form of contracts which run from payday to payday, and some of it extends over several decades of repayment with interest. Credit, how- ever, has come to mean something more than a means for retailers to sell their merchandise. For thousands of financial institutions as well as retailers, credit itself is something to be sold at a profit which sometimes exceeds that realized from the sale of the merchandise involved. The practices which are followed in the extension of consumer cred- it are designed to emphasize any features of the credit contract which will make the contract appear inexpensive and easy to pay off. Some States by statute regulate credit contracts with respect to the infor- mation which must be disclosed, and with respect to the maximum rates which may he charged. But, shocking as it may seem, many States at present do not require the creditor to tell the debtor what the total amount of his debt is, nor the number of payments he must make, nor the rate of interest he is being charged. And only in exceptional in- stances do the States which have disclosure statutes require disclosure of all the information which is necessary to a rational use of credit by the customer. Moreover, many States permit rates of charge for con- sumer credit which are unconscionable. The truly exorbitant rates which may be charged are at the very foundation of opposition to truth in lending-no questionable retailer and no questionable lending institution would want to tell a customer that it is charging him 18 PAGENO="0259" CONSUMER CREDIT PROTECTION ACT 841 percent, 30 percent, 42 percent, or even 75 percent per year for easy credit. Even if such rates are charged, the creditor would prefer to phrase the contract in such terms that the rate is not clearly stated to the consumer. Many States, either by statute or by the absence of any statute, permit the rate of the finance charge to be hidden by omis- sion or by statement in terms of a monthly rate or a rate on th~ original balance of the debt. Such practices are misleading. Banks will clearly state the annual rate of interest that they will pay on a depositor's money. Businessmen who borrow from banks know exactly the annual rate of interest that they are paying on their loans. In their dealings with the consumer, however, both banks and businessmen often aban- don the practice of stating the annual interest rate clearly and simply. Any statement of the cost of credit which does not include this annual rate is incomplete and deceptive. On the other hand, the laws of some States do require disclosure of the annual rate of charge for the use of credit, and on particular kinds of credit as, for example, small loans, revolving credit, automobile credit, and installment credit on other goods. RB. 11806 would require such disclosures on all consumer credit transactions. The requirement is as simple as requiring meat markets to state the price per pound on veal roast, and to state the whole price of the roast. The bill would require all creditors to give the consumer the information which the laws of a few States now require to be given on a few types of credit transactions. By the enactment of this bill, the Federal Government would be able to raise the level of com- petition in the consumer credit field by finding the best existing prac- tices and making them general rather than isolated piactices. I believe that the House bills relating to consumer credit are superior to the measure which the Senate has passed, especially with respect to finance charge disclosure. Proposed House legislation would allow no exemptions, whereas the Senate-passed bill allows exemptions for revolving credit, which is the fastest growing type of credit at retail stores and among banks; for payday loans, which often border on the extortionate even under State laws, and for any other credit which can be broken down into a series of credits, each of which imposes a charge of less than $10; and for first mortgages, which are both the largest single debt ever incurred by most families and a means of obtaining credit for many purposes other than home purchase. The disclosure provisions of the House bills give the consumer the information which he needs for rational choice between paying cash or buying on credit, and for choice among competing offers of credit. It provides a foundation for individual choice as the controlling ele- ment in the use of the Nation's credit and money resources. But it goes further than arming the consumer with information. It gives the consumer the protection of limitations on the rate which he may be charged by a creditor. The rate which it sets as an upper limit-18 percent per annum-has been found a profitable rate by retailers on the small transactions for which revolving credit has been used. For larger purchasers on credit where a regular installment plan is used, States often set maximum rates which are substantially below 18 percent. Bank loans to finance purchases usually are below this limit, and their personal loans often PAGENO="0260" 842 C~NSUMER CI~EDIT PROTECTION ACT run ~ to 7 percentage points below the limit which H.R. 11806 would establish. Credit unions charge rates which are only one-half to two- thirds as high as the maximum allowed by this bill. The maximum rate is a rate under which an adequate volume of credit can be sup- plied to consumers. It offers protection against higher rates to the poor and to the youthful credit buyer who has not yet learned to shop for credit. The bill protects the consumer further by withdrawing the most deadly of collection devices-the garnishment of wages. The creditor who now pushes credit sales of shoddy furniture, frozen foods, and other goods with complete disregard of the carrying capacity of the debtor because he can garnish the consumer's wages to assure repay- ment, would have to exercise restraint in order not to oversell credit to his customers, as he would no longer be able to get his payments from the con-~umer's employer. Perhaps the most interesting innovation in the proposed consumer credit legislation is its direction to the Federal Reserve Board to set up guides to reasonable use of credit for the commodity futures mar- kets as well as fo~ the stock markets. The use of credit for speculation in commodity futures now is completely uncontrolled, Credit for speculation in futures is fraught with risk to the user, who can sus- tain considerable losses, and it is also disadvantageous to consumers as buyers of goods because it encourages the raising of prices on the commodities they buy. Madam Chairman and members of the subcommittee, H.R. 11~806 offers consumers, a substantial range of protection against misuse of their money and of the Nation's credit and related economic resources. It is by no means a complete consumer credit code. But the protection which it would provide is basic to a sound economic system; all of the features have well tested and approved precedents, and all are con- sistent with each other. For the reasons I have stated, I urge the early favorable considera- tion of H.R. 11806, or similar legislation, to provide comprehensive coi~sumer protection to the American buying public. Thank you very much. Mrs. SULLIVAN. The next statement will be that of Congressman Rosenthal of New York, a sponsor of the Consumer Credit Protection Act and one of t1~ie leading spokesmen for consumer causes in the Con- gress. Congresswan Rosenthal has conducted some very effective hear- ings on consume~ issues for the Committee on Government Operations in connection with his bill to establish a Cabinet Department of Con- sumer Affairs. STATEMENT OF HON. BENThMIN S. ROSENTHAL, A REPRESENTA- TIVE IN CONGRESS FROM THE EIGHTH CONGRESSIONAL DIS- TRICT OF THE STATE OP NEW YORK Mr. ROSENTHAL. Madame Chairman, I am happy to testify in favor of the truth-in-lending princples of your bill, H.R. 11601, and to com- mend your inittiative in broadening the concept of consumer credit protection to cover garnishment of wages~ limit of interest rates and advertising of credit terms. These, and other additions, make your bill a much stronger defense for the consumer than the Senate bill. PAGENO="0261" C0NSt~ER CREDIT PROTECTION A~T 843 Because I sponsored legislation identical with }I.E. 11601, I would like to comment on some of the principles involved. I favor, in principle, limiting wage garnishment but I fear that such a goal might be better achieved by a complete revision of the idea of garnishment instead of by its outright abolition. Garnishment can be made to serve the debtor instead of constituting a modern debtor's prison, as it presently does. If we can limit garnishment, for example, to those transactions where repossession is impossible or excluded and can further limit it to a small percentage of the employee's wages, garnishment becomes a means of protecting him against even greater evils like bankruptcy and garnishment of his other assets. To make such a revision in our present system of garnishment would reqiure- (1) A strict limitation of garnishment of wages to the excess over a realistic and current living wage; (2) Protection against firing workers under wage garnish- ment or from revealing information about such garnishment to subsequent employers; (3) A uniform garnishment law to protect wages from garnish- ment in another State where the employer does business ~d where garnishment laws are more lax. There are many ways to exempt, from garliishment, a wage needed to support a worker and his family. Present State laws provide, for example, a variety of exemptions. Many of these are outdated. Others are inadequate in protecting too small a percentage of wages above a meager dollar exemption. I don't know the proper formula but I believe that one can be devel- oped. Some of the excellent testimony your committee has heard cam be the basis for such a study. The administration's current investiga- tion of garnishment may be another source. But whether the national minimum wage or. the amounts covered by social security deductions or some other basis is used for exempted wages, I hope we do not forget that the basic problem in garnishment law revision is protection of the worker's livelihood. No matter how we protect wages from garnishment, loss of a job or "blacklisting" for past garnishments can compound the debtor's problems beyond the possibility of solution. Garnishments are an extra burden for employers also. I suggest consideration of a multiple-garnishment provision limiting this bur- den by allowing only one garnishment, perhaps payable to a creditors' pool. Wage assignments can be an evil as great as garnishment. I believe they should be covered by similar exemptions and restrictions. By correcting present practices, we can make garnishment ~ tool which can help people in debt, instead of making the court system an ally of unscrupulous creditors as it now is. There are other very important aspects of H.R. 11601 which I would like to discuss. In general, we should be wary of expecting too much of the "truth- in lending" provisions while insisting that the most comprehensive version be maintained. PAGENO="0262" 844 C~NSIJMER CREDIT PROTECTION ACT I believe that it is possible to overstate the effects of full disclosure. For the consumer-debtor who needs help most, full disclosure may be insignificant. I speak of the poor consumer to whom debt is the way of life and for whom percentages, dollar amounts of interest and other facts are obscure and incomprehensible elements of an alien system. The poor oonsiamer, like many of his more affluent neighbors, often asks only: "How much a month will that b.c?" We can anticipate long- term educational effects of full disclosure but we should continue efforts toward wider concepts of consumer education which, a~iiong other revelations, will show consumers that there are times to avoid credit entirely. To make H.R. 11601 the best possible disclosure law, however, it is necessary to include revolving credit which unfortunately was largely exempted from S. 5. We have been showered with confusing, misleading, and misguided nonsense on thi~ question. Som.e defenders of the exemption, who should know better, have indulged in rhetoric of a kind which should rattle the walls o~ even these well-constructed rooms. Simple arithme- tic is denied and debased. Schoolchildren who are taught to compute simple and compound interest would be amazed at the "new math" this committee has endured recently. I would ask one simple question of these revolving creditors. If interest on revolving charge accounts is so difficult to compute and to express, why do banks state simply that they pay, for example, 4% percent interest on savings `accounts which are revolving credit accounts in reverse? Savings accomlits, like revolving credit, also have fluctuating bal- ances; there are wide yarieties among banks on how savings interest is computed. Some give interest from the first of the month, others from the 15th or 20th, some give a "free ride" by granting interest for the whole month if deposits are received by a certain date. Yet despite these variations, which correspond to revolving credit systems, no bank I have ever heard of fails to state flatly that it pays a certain rate of ii~terest on savings. Nor does any savings depositor fail to understand `that a 4½-percent rate annually means less than 4% percent when the savings are left for only a few months. I would ask creditors to give borrowers the same credit for understending that they already display as savers. The inclusion ~f first mortgages in your bill, Madam Chairman, is also valuable. Although mortgage bankers insist they are better lenders than the rest since they describe mortgages in interest rates on the unpaid balance, home buyers should know what credit costs for the largest investment most of us ever make. They should know, for example, that it cost $8,800 more in interest to borrow $20,000 for 30 years instead of for 20 years. They should be advised that it costs $2,800 more to borrow the same amount for 30 years at 6 percent than it does at 5% percent. They should also be aware that when they borrow for 25 or 30 years at 6 percent interest they will pay about $20,000 in interest on a $20,000 mortgage. The home buyers need these facts, some of which he will get from your first mortgage provision. PAGENO="0263" CONSUMER CREDIT PROTECTION ACT 845 I hope that the committee will continue to insist on the inclusion of small loans and credits, including those where finance charges are less than $10. Here we are dealing again in an area of the poor, and often ignorant, borrower who is limited in his opportunities to get credit. Are we helping the poor by stating that they need no protection when they pay "only" $10 for credit? How many $10 charges must a man pay before he deserves such protection? I submit that this small borrower needs more, not less, protection. Another reason for including these small transactions is to help the corrsumer make comparisons between the varieties of credit available. If the overall goal of this bill is comparative shopping for credit, the borrower needs information on all kinds of loans. For example, the small credit seekers might decide that it is better to borrow $100 at a true interest rate of 11 percent than to borrow $50 twice when the rate is 20 percent. Yet the latter transaction, if they cost only $9.90 each, would not be covered by the exclusion in S. 5. I will not comment in detail on the other provisions of your bill, Madam Chairman. I believe you have produced a most progressive piece of legislation which will be remembered for its willingness to consider some of the hardest areas of consumer protection. I believe the American consumer, and his advocates, in whose group I am proud to be counted, can take great satisfaction in your leadership. Mrs. SULLIVAN. Next, we will have the statement of Congressman Ryan of New York, who is a cosponsor of H.R. 11806 introduced by Mr. Multer of New York which is identical to H.R. 11601. Congress- man Ryan is vitally interested in the "truth-in-lending" issue an4d has long supported the legislation first introduced in 1960 by former Senator Paul Douglas. STATEMENT OP HON. WILLIAM P. RYAN, A REPRESENTATIVE IN CONGRESS PROM THE 20TH OONGRESS!ONAL DISTRICT OP ~flE STATE OP NEW YO~X Mr. BrAN. Madam Chairman, for a number øf years I have in- troduced "truth-in-lending" legislation. I was pleased to join Sena- tor Douglas in his early' efforts for legislative action in this area. Now I have cosponsored the bill proposed by your committee, by introducing `H.R. 11806. The consumer `credit bill which the subcommittee has drafted, recog- nizes that action must be taken in an area which has gone unregulated and in which abuse has grown as credit `has expanded. The bill recog- nizes the necessity for a full disclosure ~f the facts about the cost of credit. Consumers cannot rationally decide whether to incur debt or to save, and whether to take one credit offer or a~ competing offer, unless they are able to consider all the relevant facts : the total amount of the credit, the `total `charge for the credit, and the common denominator of the annual rate charged for the use of credit. H.R. 11806 is superior to the credit disclosure bill passed by the' Senate as a means of enabling consumers to use `credIt wisely; it makes no exceptions for revolving credit, for small-figure charges, or for first mortgages. PAGENO="0264" 846 CONSUMER CREDIT PROTECTION ACT Revolving credit is becoming a leading form of consumer credit at retail stores. And within the past year, the commercial banks have been stampeding into this form of credit. A few dozen banks offered revolv- ing credit a year or so ago; now more than one-tenth of the number of banks, and a mtich higher percentage in terms of bank resources, offer revolving cheek credit or finance retailers' revolving accounts. If extensions of this kind of credit are not required to indicate the annual rate of charge, and they are not required to state the annual rate under the Senate bill, revolving credit merchants and bankers will gain a competitive advantage, and the consumer will be uninformed about the true price of a growing segment of the credit offered to him. H.R. 11806 makes no exceptions for small-figure credit charges, be- cause evasion of the purpose of full disclosure can easily be achieved by breaking credits into pieces, each of which costs less than the minimum exempt amount. By not allowing exemptions for small charges, evasion is irevented. The bill does not permit an exemption for creditors who extend credit against first mortgages~-whether the mortgage finances the pur- chase of a house, or has been rewritten to provide the funds for educa- tion, automobile purchase, or any other purpose. The homeowner should know the total cost of his credit, so that he can figure the ad- vantages of paying for his home as quickly as possible, and so that he can compare the cost of financing purchases through adding on to his mortgage as against other methods of finance. Through disclosures of the facts needed for rational use of the credits available to the consumer, and of the consumer's income, the consumer credit world will begin to change from a maze of incom- plete information and misinformation into a system where the efficient and inexpensive source of credit will predominate, and the deceptive and costly will be ~liminated. However, disclosure of information alone is not sufficient to protect consumers. It is not unusual to require that the maximum rate charged on credit shall be limited. Usury statutes have done this for centuries, and special rate limitation statutes of the States have been doii~g so in every-increasing numbers for the last half century. But the ex~ orbitant rates, often running above 30 or 40 percent, or even higher, which. the States have allowed for credit on used automobiles, payday loans, and so forth, are unjustified. A limit on annual rates of charge on consumer credit will protect the neediest debtor and also the young family, new to credit buying and unfamiliar with the range of avail- able rates. The consumer's income will go further by reducing excessive specu- lative swings in commodity futures contracts which affect consumer prices. While the speculator in stocks and bonds is required to meet margin requirements of the Federal Reserve Board, the speculator in commodities is under no such restraint. With a few hundred dollars he can buy and sçil futures contract for many thousands of dollars worth of commodities. The bill takes a step towards parity of treat- merit of stock specplators and investors and speeulators~in commodity futures, by authorizing the Federal Resers~e to regulate the use of credit for commodity futures trading. The proposed legislation should contribute substantially to economic stabilization at all times. But in times of national emergency, it is PAGENO="0265" CONSUMER CREDIT PROTECTION ACT 847 dangerous to leave private buying and selling, and use of credit, with- out restraint. The bill authorizes temporary controls which will re- strain the use of credit to conform with the current incomes and with uvailability of commodities, so that excessive purchases, shortages, and rising prices may be avoided. The burden of keeping the use of credit within such bounds as are beneficial to consumers and to the national economy is not placed en- tirely on consumers and on Federal regulatory agencies. The legisla- tion also puts some of that burden on the businesses which extend credit. It does that by prohibiting the garnishment of wages. The tragedies which follow the zealous use of garnishment have been, cited time and again in truth-in-lending hearings, and in the work of legal aid groups in New York and elsewhere. The bill simply prohibits the garnishment, placing upon the creditor the burden of restraining his overselling, and limiting himself to credits arid rates of charge on credits which are within the reach of his customers. Finally, the bill proposes the creation of a National Commission on Consumer Finance. Such a Commission should have been authorized years ago when the truth~-in-lending movement began, but at that time there were many obstacles. With a consumer credit protection law in effect, the consumer finance industry could participate in providing the details of its operation which would assist in the formulation of regulations. Let me commend the subcommittee for its constructive efforts in this area. Consumer interests are by nature disorganized. Therefore, they depend for their protection upon the public-mindedness of legislators such as the members of this subcommittee. It is a privilege~ for me to cosponsor what should become landmark legislation. Mrs. SULLIVAN. Congressman Scheuer of New York, whose state- ment will follow, brings to his membership in the House of Representa- tives an impressive background in law, public administration, and private business. As a businessman he made a notable contribution to the redevelopment of our cities through his redevelopment and housing activities, including the Southwest area here in Washington. He is very close to the problems of moderate- and low-income families. STATEMENT OP HON. JAMES H. SCHEUER, A REPRESENTATIVE IN CONGRESS PROM THE 21ST CONGRESSIONAL DISTRICT OP THE STATE OP NEW YORK Mr. SOHEUER. Last month, the Senate passed S. 5, the Truth in Lend- ing Act, which brought to fruition a proposal first advanced by Sena- tor Paul Douglas in 1960. For years, Mr. Douglas maintained interest in and actively worked toward gaining support for this proposal. We now are the beneficft~ries of his labor. The concept of truth in lending grew from an awareness of a need to enlighten consumers about the cost of their credit transactions. The volume of consumer credit increases yearly and yet the indi- vidual consumer does not understand just how much it costs him. There have been instances where individuals have paid up to 289 percent interest on used automobiles or 285 percent on television sets. When rates are expressed on a monthly payment basis, the average person does not know the mathematics involved in arriving at a PAGENO="0266" 848 CONSUMER CREDIT PROTECTION ACT realistic figure for their total interest. Full credit disclosure would enable the consumer to compare prices and effective interest rates in order to decide how best to spend his money. S. 5 is not a regulatory measure but an informational one. I have serious doubts about whether this bill effectively regulates the total range of problems. For this reason, I am a cosponsor of a bill introduced' by Representative Multer, ER. 11806, which is iden- tical to H.R. 11601 introduced by Mrs. Sullivan. The bill I support provides for credit disclosure, and more. A creditor must alert a buyer as to price, finance charges incident to credit extension, and the annual interest rate on credit transactions. This includes advertisements of such transactions as well. The bill also fixes a maximum finance charge of 18 percent a year or the rate prescribed by State law, whichever is less. It is splendid to put consumers in a position of choice but where the choice is for the lesser of two evils, the effect of the legislation diminishes in value. The only exemption to the disclosure provisions of H.R. 11806 is with regard to commercial transactions. Disclosure thus applies to all home mortgages. While first-mortgage laws contain some disclosure requirements, there is still abuse in this area. Therefore it is advisable for the bill to include first mortgages as well as second and third mortgages. There has been a great deal of controversy over the question of revolving credit. There seems to be no persuasive reasons for exempt- ing ordinary revolving credit accounts from the provisions of the `bill. The same explanation used to justify an exemption to the disclosure pr~posai can be utilized to bring revolving credit within the bill. The annual rate of interest can be determined from the time the credit charges begin and thus be exact and' meaningful, as opposed to the sttem~pf to state~ it from the time of purchase where the free-ride period is brought into play. To differentiate between simple revolving credit and the installment type, will lead to drawing very fine lines and will encourage the converting of the latter type to the former in order to avoid disclosure. The safeguards incorporated by the Seiiate bill might mitigste, but would not eliminate~ this problem. The basic purpose behind the legislation is to aid and protect the consumer from One particular pitfall in his complex environment. There is no justification for any exception to full disclosure, regardless of amount or type of credit. Aside from disclosure, the bill has additional provisions to protect the individual debtor. Use by creditors of judgment confessions is prohibited as is garnishment of wages. The Federal Reserve Board is also given regulatory powers to limit credit extention in emergency situations~ I fully support H.R. 1180g. After 7 years of struggle, Mr. Douglas' tnith~in-lending concept passed the Senate in compromised form and the bill now appears before this body for approval or for restoration to its original form. Disclosure could give the public a realistic awareness of price and interest rates. The other provisions `of H.R. 11806 would greatly enhance the effect of disclosure and. give to it a more practical value. The dilemma of the American consumer caused by the sophisticated techniques of the credit world in which he deals demands our sympa- PAGENO="0267" CONSUMER CREDIT PROTECTION ACT 849 thetie concern and best efforts. We cannot afford to compromise where the consumer is involved. Mrs. SULLIVAN. Our next statement will be from Congressman Farb- stein, of New York. I am glad to see so many Members of the House from New York taking a very strong and active interest in this legis- lation. Congressman Farbstein serves on the Foreign Affairs Com- mittee but does not permit his heavy workload on that committee to deter him from taking a very vigorous interest in all issues in the House which concern his constituents as consumers. STATEMENT OP HON. LEONARD PARBSTEIN, A REPRESENTATIVE IN CONGRESS PROM THE 19TH CONGRESSIONAL DISTRICT OP THE STATE OP NEW YORK Mr. FARBSTEIN. Madam Chairman, credit has become an integral part of our economic way of life. It allows the consumer to enjoy a variety of goods while paying for them over a period of time. How- ever, the innumerable credit plans offer a bewildering assortment of rates and terminology. The result has been public confusion and mis- understanding. I believe it is time that the Congress passed compre- hensive legislation aimed at ending this confusion by assuring the coil- sumer easily understood credit standards. Basic to any consumer legislation is a provision requiring full dis- closure of credit terms. In my opinion, this should include disclosure of finance charges by annual percentage rates as well as in dollars and cents. Contrary to the Senate passed truth-in-lending legislation, I believe full disclosure should include such areas as revolving charge accounts and first mortgages on homes. Although revolving charge accounts represent only a small part of the total consumer debt, it is the fastest growing form of credit used, particularly by the small pur- chaser who can least afford excessive credit rates. Additionally, I be- lieve there should not be a minimum limit on the dollar size of a credit transaction covered under this legislation. Again, low-income citizens would be the ones most injured by abuse of credit practices on small dollar purchases. Full disclosure of finance charges will enable the prudent consumer to match credit plans with personal needs. It will also make it easier for him to compare different sources of credit. I believe the Congress has a responsibility to assure the American consumer adequate infor- mation on which to make wise credit decisions. Such informed use of credit can increase the competition among credit institutions to the general benefit of the consumer. One of the most alarming trends in American life is the growth of personal financial failures. This is particularly true in States where the garnishment of wages to pay overdue credit debts is allowed. Such a practice often leads to the filing of bankruptcy by individuals, forcing them to claim poverty in court. This can disrupt a person's life. It could even cost a person his job at a time when be needs it most. It will not guarantee the creditor his money back. In my opinion, we should move to prohibit the practice of garnishment of wages as detrimental to sound credit relations. The size and complexity of the consumer credit industry requires that we know much more about it then is presently true. I believe PAGENO="0268" 850 CONSUMER CREDIT PROTECTION ACT the creation of a nine-man National Comrnis~ion off Consumer Finance, to study the credit industry, is essential to th~ deyelopwent of efl~ectiv~ legislation. The appointment to the commission of three members of the Senate and three members of the House will assure the Congress a nTiaj~r role in proposing recommendations for future legislation. The three legislative provisions I have outlined in this statement ar~ basic to any sound consumer protection program. There are, addi~ tiortally, issues to which the Subcommittee on Consumer Affairs should give careful consideration. They include the regulation of trading in commodity future contracts affecting consumer prices, a system of controls to prevent inflationary spirals, and the establishment of maxi- mum rates of finance charges. These are all complicated problems. I know the subcommittee will study them carefully before acting. Madam Chairman, the members of the Subcommittee on Consumer Affairs should be commended for the work they are doing to assure the consumer fair and understandable cre.dit standards. I support your efforts and urge early passage of legislation aimed particularly at guaranteeing the consumer full disclosure of credit information. Mrs. SULLIVAN. Congressman Lester L. Wolff, of New York, lYre- pared a statement for presentation to the subcommittee on this legisla- tion and would have appeared in person if we had been able to schedule time for congressional witnesses. Congressman Wolff has always been a strong and effective advocate of consumer causes in the Congress and we are pleased to have his statement appear at this point. STATEMENT OP 1~ON. LESTER L WOLFF, A REPRESENTATIVE IN CONGRESS PROM THE THIRD CONGRESSIONAL DISTRICT OP THE STATE OP NEW YORK Mr. WOLFF. Mr. Chairman~ I am greatly encouraged to see the House consider the Senate-passed version of a long-needed truth-in- lending bill. Such legislation will be an important and necessary mile- stone in consumer protection and I look forward to passage of a truth-in-lending biU by this House during this session. Together with truth-in-packaging legislation the bill now before you can serve honest businessmen and consumers by ending the ancient practice of caveat emptor. Legislation such as that now before your committee is most im- portant. In the area of consumer credit, hidden charges, add-on rates, and low sounding "monthly rates" require acute financial understand- ing. It would be tqo much to expect all those who use our vast credit facilities to be knowledgeable in this area. It is important to note that I do not for an instance charge inten- tional deception; the vast majority of credit institutions and retail stores are scrupulously honest. However the confusion created by the current credit alternatives makes it very difficult for most consumers to make an intelligent decision on where and how to borrow. Recent polls have shown that most people believe their interest rate to be only one-third of what it really it. The consumer is confused and we can and should help to correct that confusion. PAGENO="0269" CONSUMER CREDIT PROTECTION ACT 851 Since retail credit is growing four and a half times faster than our economy and since the retail credit business now grosses $92.5 billion annually, the confusion that exists in this field is rightly the concern of the Federal Government. We are dealing here with a significant and major factor in our economy. The solution to the very real and very serious problem facing us is not regulation-the solution is education. The small print must be clarified, the actualities explained. The consumer need not be told where and how to borrow. However, he does deserve to be informed about the borrowing options open to him and the `cost of the options. This is what S. 5 does and this is what is needed. This point helps to clarify the discussions about the inclusion of revolving credit in the House bill. The goal of the legislation, to extend what I said a minute ago, is to make the consumer aware of the range and type of credit charges and to express these charges on an annual basis for clarity and comparison. Such action should also include revolving credit. \?STithin the next 5 years, estimates are, revolving credit will repre- sent 50 percent of all consumer credit. Because of its importance it is imperative that revolving credit be included in the scope of the truth- in-lending bill. Thus, I strongly support the reinstatement of full dis- closure provisions for revolving credit accounts as outlined in the original version of 5. 5 considered in the Senate. The public has the right to know of the credit charges involved in revolving credit. Those who take the other position are justified in urging that consumers be made aware of the "free ride" period and other means of avoiding credit charges. But only through complete disclosure, including revolving accounts, can we properly protect the consumer, fulfill the objective of this legislation, and bring order and clarity into the confused and chaotic marketplace. Passage of this legislation will be an important step, but it must be accompanied by an increase in public education. An excellent study by Dr. Monroe Friedman and Dr. Alfred H. Lieverly of Eastern Michigan U~iversity of the short-term effects of truth-in-lending legislation concludes that sudden, unannounced replacement of vari- able rate information with uniform rate information will not at first help the consumers. Borrowing decisions are currently made on such peripheral issues as location and size of the lending institution. Unless a complete and planned education campaign accompanies truth-in- lending legislation the potential good of such legislation will be long and slow in coming. Your committee, Madam Chairman, must con- sider the implications of the Friedman-Lieverly study. I recommend that the committee, in its consideration, make plans for the most effec- tive and widespread education campaign to accompany passage of a truth-in-lending bill during this session. The buyer should not be beware-he should be aware. He should be aware of the value of standardized criteria as a means for choosing among credit opportunities. Education is the key, first through the inclusion of revolving credit in the pending legislation, and second through a campaign to inform the public of the service provided by truth-in-lending legislation. PAGENO="0270" 852 CO~ISUMER CREDIT PROTECTION ACT I urge your attention to these matters in your consideration of truth-in-lending legislation and when you make your report to the House. Thank you. Mrs. SIJLLIVAN. That completes the statements I have from Members of Congress for inclusion in the record at this point. There are addi- tional statements for the record which will be inserted either at this point or in the appendix. With that, the hearings are recessed subject to the call of the Chair. (Whereupon, at 12 noon, the subcommittee adjourned, subject to call of the Chair.) (The following statements and letters were submitted for inclusion in the record:) CONGRESS OF THE UNITED STATES, HOUSE OF REPRESENTATIVES, Washirtgton, D.C., August 25, 1967. Mrs. LEONOR K. SULI~IVAN, Chairman, Subcom~m4ttee on Consumer Affairs, House Baeking and Carrency Committee, Rayburn House Office Buildtng. DEAR MADAME CHAIRMAN: I am writing with respect to the disclosure terms of the Truth-In-Lending legislation now being considered by your Subeom- mittee. I am concerned about a change made in the original Senate bill and I want to express my hope that the same change will not be made in H.R. 11601. After studying the Senate hearings, I have come to the conclusion that exempting certain credit grantor~ from annual-percentage-rate disclosure is discriminatory, confusing and unjustified. This exemption wot~ld discriminate against small, independent specialty store retailers in favor of large department and chain stores. It would be confusing to the consumer and defeat the basic purpose of the bill-to make it easier for a prospective customer to compare credit service charges. Small business should not be placed at a disadvantage particularly when the result is less protection to the consumer. I support Truth-In-Lending legislation but I cannot support the Senate pro- vision of differential ~Iisclosure methods. Uniform methods of disclosure would enable consumer comparison and determination of the best available rate on the market. As you kliow, California already has consumer protection laws in- sofar as credit rate 4isclosure is concerned, and I would oppose any federal legislation which operated in a discriminatory way against the s~iialler retailer. Sincerely, DON EDWARDS, Member of Congress. STATEMENT OF U.S. SAVINGS & LOAN LEAGUE The United States Savings and Loan League1 supports the principle of truth- In-lending and the general objectives of H.R. 11601 and H.R. 11602 (S. 5). Most Americans are not experts in computing interest rates and it is important that they be advised of interest charges on some basis of uniformity that permits comparison of the con~peting financing arrangements. The U.S. League ht~s specifically endorsed HR. 11602 (S. 5), the Senate passed measure and Would specifically endorse H.R. 11601 if it were amended to (a) exempt first mortgage lending and (b) eliminate the 18 percent usury provision. 1 The United States Savings & Loan League has a membership of 5,100 savings and loan associations, representing over 95% of the assets of the savings and loan business. League membership inclpdes all types of associations.~-lrederal and state chartered, in- sured and uninsured, stock and mutual. The principal offie~rs are Otto Preisler, President, Chicago, Illinois; Hans nehrke, Jr., Vice President, Detroit, Michigan; C. It. Mitchell, Legislative Chairman, i~ansas City, Missouri; Norman Strunk, Ezecutive Vice President, Chicago, Illinois; and Steve Slipher, Legislative Director, Washington, D.C. League head. quarters is at 221 N. La~alle Street, Chicago, Illinois; and the Washington Office is main- tained at 425 13th Street, NW., Washington, D.C. Telephone: 638-6334. PAGENO="0271" CONSUMER CREDIT PROTECT[ON ACT 8~3 The case for exempting first mortgage real estate lending was well stated by the Federal Reserve on August 10 by Vice Chairman J. L. RObertson. The Federal Reserve, of course, is an independent agency and is obviously not a special advocate of the savings and loan viewpoint. The Federal Reserve statement says: "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 gnd 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 ~nd 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 pay- able over the whole life of the contract, might be more misleading than helpful. The present value of a dollar of interest to be paid 20 to 30 years hence is sub- stantially less than one dollar, and relatively few first mortgage contracts appear to be carried all the way to maturity." Mortgage lending has been the only major type of non-business lending which has traditionally been on a simple annual interest rate basis. The rate stated in the contract to the home buyer is either exactly or within a few hundredths of a point of the actuarially computed interest rate. It would seem most ironic if those who have aleady pioneeded in "truth-in-lending" would be blanketed in the provisions of the bill. There are about 5 million mortgages made each year and the disclosure requirements would unnecessarily place this major burden on the lending institutions and on the Federal Reserve which must administer the program. Our objection to the 18% Federal usury ceiling is a matter of principle rather than substance. Obviously, no mortgage lenders are charging rates anywhere near 18%. However, we must respectfully raise objection to the concept of any Federal ceiling on interest rates. State usury laws have generally proved ineffective at protecting the public interest. Where the ceiling is higher than the market rate, it is meaningless. Where the ceiling is lower than the market rate, all lenders with an option to lend in other states will tend to do so, reducing the amount of credit available In the usury state. It does no service to a prospective borrower to protect him against higher interest rates if the result is that he gets no loan at all. More specifically, it is inevitable that those lenders affected by an 18% ceil- ing-"small loan" lenders-will argue that it is discriminatory to place an~ effec- tive ceiling on them without placing an effective ceiling, such as 6% or 7%, on mortgage lenders. The logical conclusion would be for Congress to attempt to set appropriate ceilings on all classes and sizes of loans to which we (and un- doubtedly all other lenders) would be unalterably opposed. We believe that S. 5 or HR. 11601, with the amendments we have recom- mended, will do a tremendous job in accomplishing the objectives of "truth-in- lending". Under the provisions of H.R. 11601, loans made on a "discount basis" or on an add-on basis would be converted to an approximate simple interest rate. First mortgage loans are already stated to within a fraction of the true annual interest rate. We urge that the modified bill be passed at this time and if further refinements are necessary they certainly can be made by the Congress upon the basis of experience gained under this legislation. STATEMENT OF CHAMBER OF COMMFROE OF TIlE UNITED STATES By F. TURNER HOGAN1 The Obamber of Commerce of the United States presents the follo'Wing com- ments on HR. 11601, the Consumer Credit Protection Act: It is the view of the National Chamber that Consumer credit disclosure legisla- tion is a matter for the states rather than the federal government. 1 ~* Turner Hogan, Staff Attorney, Banking and Monetary Policy Committee National Economic Development Group, Chamber of Commerce of the United States. PAGENO="0272" S54 CdNSUMER CREDIT PROTECTION ACT Traditionally, statk governments have exercised authority for regulating con- sumer credit. Legislation relating exclusively to One or more aspects of consumer credit is in force in every state. Forty states have enacted retail installment sales acts. These laws provide extensive protection to over 80% of the total population. Most of these statutes require1 everything that the Senate-passed S. 5 does except for a statement of charges as an annual rate. Any needed changes in credit law will undoubtedly be covered in the project of the National Conference of Commissioners on Uniform State Laws to develop a model state law which will deal with all phases of ~onsumer credit. It is our understanding that this project is more than half completed and a model law should be ready for consideration by the state legislators no later than 1969. The Conference has been working on this project for nearly three years in a deliberate but effective manner. Its members and workers are some of the most experience and knowledgeable people in the consumer credit field and both the consumer and extender of credit are represented. The Conference's methodical procedure for developing a uniform statute is far more likely to produce a work- able, effective law than any other body or organization that has approached the problem so far. The National Chamber, therefore, opposes HR. 11601 since federal action is unwarranted. We also believe that all proposed consumer credit legislation should be suspended until the work of the Uniform Consumer Credit Code project of the National Conference of Commissioners on state laws is completed. DISCLOSURE PROVISIONS Comparison of 2. 5 with H.R. 11601, the Consumer Credit Protection Act Insofar as disclosure is concerned, HR. 11601 goes much too far. HR. 11601 does not exempt first mortgages as does 5. 5. Since the rate of interest on first mortgages is already clearly stated and the various charges are itemized, it is not necessary to subject this type of financing to the special re- quirements set forth in HR. 11601. Finance charges of less than $10 on consumer credit sales and loans are ex- empted from disclosure by 5. 5, but not by H.R. 11601. To include transactions of this amount or less would be an undue burden on business and in many cases the cost of compliance would rule out the financing of small purchases. Charges for pren4ums for credit life and accident and health insurance, if itemized, are excluded as finance charges by S. 5 but not by HR. 11601. Insur- ance premiums are not a part of finance charges and should not be shown as such. The statement of rate on revolving credit plans is required only as a percent- age rate per period under 8. 5, whereas H.R. 11601 requires the annual rate at which the charge is computed. The annual rate a revolving credit customer will pay cannot be calculated in advance since the time that will elapse between date of purchase and date of payment cannot be determined in advance. Requiring the creditor to give the annual rate in advance would force him to rely on guess- work and in many cases to quote a false rate. Under S. 5, until January 1, 1972, the annual rate may be expressed as a per- centage rate per year or as a dollars per hundred per year rate of the average unpaid balance. After this date all rates are to be expressed as percentage rates. Under HR. 11601, all rates are to be expressed as percentage rates after June 30, 1968. We prefer that this alternative continue indefinitely, but at least it should continue until 1972, OTHER PROVISIONS In addition to the above disclosure provisions, H.R. 11601 differs from 5. 5 in that it departs completely from consumer credit disclosure and includes provi- sions which should be removed from current consideration. Among these are: Establishment of a Federal ceiling of 18% on the. annual percentage rate of ani' credit transaction As with consumer credit disclosure, enactment of usury laws should continue to be the province of the states. Usury laws differ from state to state and right- thlly so because each state knows its own circumstances and is entitled to write its usury law acco~dingly. Enforcement and administration of such laws can be handled locally. A Federal usury law such as suggested in H.R. 11601, could nol PAGENO="0273" CONSUMER CREDIT PROTECTION ACT 855 cope with or adequately adjust to the availability of funds for consumer credit in the various states. It could substantially reduce the availability of fRnds for consumer credit from responsible thiancial institutions and force poorer bor- rowers into the hands of loan sharks operating outside the bounds of law. This is not part of consumer credit disclosure. Prohibition of the garnishment of wages for the satisfaction of debts HR. 11601 would prohibit wage and salary garnishment. Again, this has been historically considered solely within the jurisdiction of the states. If it is con- sidered at all, it should be the subject of a separate study. This, too, is not part of consumer credit disclosure. Creation of a National Commission on Consumer Finance to make an investiga- tion of the entire consumer credit industry H.R. 11601 establishes a nine-member National Commission on Consumer Finance. Its purpose would be to study and evaluate the functions and structure of the consumer finance industry. The National Conference of Commissioners on Uniform State Laws has and is continuing to make such a study for the purpose of determining what should be included in its model state code. Its study 4eals with all phases of consumer credit. It is not necessary to duplicate this work by establishment of a nine-member National Commission sponsored by the Federal Government. Granting of standby powers to the Federal Reserve Board of Governors to restrict or regulate consumer credit in periods of national emergency H.R. 11601 would give authority to regulate consumer credit along the lines of Regulation W. The National Chamber deems it vital to recognize that direct government controls of consumer credit are not justified except as a war measure for limitation of nonessential production. Consumer `credit performs an essential function in the processes of production and distribution. Interference with its normal flow offers an obstruction to effective o'peration of the free enterprise system. In 166 an effort was made, as part o'f the extension of the Defense Production Act, to reinstate consumer credit regulation, on a standby basis. This effort was overwhelmingly defeated by the House. There were greater and more immediate inflationary pressures at that time than at present. The House determined that such regulation was not needed then. The National Chamber does not believe it is needed now. Establishment of minimum margins for trading in commodity futures `The bill authorizes regulation o'f credit and credit `margins `on commodity ex- changes. In 1950, regulation of commodity exchange credit was proposed by the Administration as part of its stabilization program in the Defense Production Act. The measure was not `ad'o'p'ted. Like consumer credit regulation this proposal has nothing to do with disclosure of cost of consumer credit. SUMMARY The Chamber o'f Commerce of the United State~ believes that S. 5 as passed by the Senate is preferable to HR. 11601. However, we believe that consumer credit legislation can best be handled `by the state's. STATEMENT or THE FARM AND INDUSTRIAL EQUIPMENT INSTITUTE This statement is submitted on behalf o'f the Farm and Industrial Equipment Institute (FI1~lI) whose 220 active member companies make more than 90% of all farm and industrial equipment manufactured in the United States. A sub- stantial portion of this equipment is sold by dealers on an installment basis. Many of our members would be affected by S-5 or H.R. 11601 because they pur- chase such installment paper from dealers. Substantial amounts of such paper are also financed thro'ugh sales finance companies and banks. Even members who do no financing would be affected by S-5 or HR. 11601 in that they want financing to be available to ultimate pur- chasers in satisfactory and sufficiently flexible forms regardless of who the ulti- mate financer is. section 202(n) of H.R. 11601 (which is ideiitical with Section 8 of 8-5) pro- vides that the rate disclosure requirements of the bill shall no't apply to': "(1) Credit transactions involving extensions of credit for business or com- mercial purposes * * 83-340-67-pt. 2-18 PAGENO="0274" ~856 C~NS~JMER CREDIT PROTECTION ACT Section 202(b) (Which is identical with Section 3(b) of 5-5) defines "credit" to mean debts contrasted by the obligor: `Primarily for personal, family, household or agricultural purposes." Similarly, Section 202(c) (whidh is identical with Section 3(c) of 5-5) de- fines "consumer credit sale" to include sales of goods which are purchased "pri- marily for a personal, family, household or agricultural purpose." Commercial farmers are businessmen. The equipment manufactured by FIEI members and purchased by farmers is acquired for business or commercial pur- poses just as much as production equipment in `any other industry. Farmers purchase equipment when they conclude that the investment is a good one in -terms of greater efficiency, lower costs, or greater capacity. They are at least as astute in analyzing the needs of their enterprise `and the best way to finance these needs as other; businessmen who ~re exempted from the bills. If Section 202(n) stood alone, extensions of credit to farmers for the pur- chase of equipment would clearly be exempted from the rate disclosure require- ments of the Act along with other kinds of commercial credit. However, the ex- press reference in Subsections (b) and (c) of Section 202 to "personal, family, household or agricultural purposes" singles out this particular commercial trans- action and subjects it to rules otherwise applicable only to consumer transac- tions. We think the reasons for excluding comniercial credit from `these bills are sound, and these reasons apply to 1~arm credit just as much as other commercial credit. The most important reasons, as we see them, are: (a) It is only in the consumer area that a need for regulation has been shown. `The large number of different ways in which credit is offered to consumers makes it especially difficult for them to make intelligent choices-e.g., sales finance companies, banks, credit unions, Morris Plan companies, revolving ~credit accounts and consumer `loan companies all express their charge for credit in differing ways. Sipee some consumers present a much greater degree of risk than others, some consumer credit carries very high rates. Therefore, it is im- portant that consumers eligible for less expensive credit understand what their ~choices are. Many consumers are both necessitous and unsophisticated and may be misled by some ways in which the charge for consumer credit is some- `times expressed. For these reasons, helping the consumer compare credit costs is so important that a law requiring everyone who finances consumers to state Ibis charge in exactly the same way may `be justified. (b) No such need has been shown in the case of commercial financing. No one has established that commercial borrowers are making unwise choices or borrowing too much l~ecause they do not understand their credit costs. There h'a~ been no showing that present methods of computing and expressing the cost of credit have misled or confused any commercial `borrowers. (c) The need for flexibility in commercial financing methods is more im- portant than supplying the business borrower with a single yardstick for com- paring credit costs. Credit procedures must fit the peculiar practices of particular industries and in our dynamic economy these are constantly changing. Innova- `tion and imagination should not be impeded by the need to always charge for credit in a way which conveniently permits computation of a rate per annum. We therefore urge that Sections 202(b) and 201 (c) be amended by omitting the specific reference to agricultural credit so that agricultural financing will be included in the exemption of business and commercial credit contained in Setion 202(n). (The following statement was submitted by The Reverend Shirley E. Greene, director for economic concerns, Department of Social Justice, National Council of the Churches of Christ in the U.S.A., of which The Honorable Arthur S. Flemming is president, 475 Riverside Drive, New York, N.Y.:) DEPARTMRNT OF SOCIAL JUSTICE, NATIONAL COUNCIL OF TIlE Cllrmcirus or CHRIST IN ¶F~~ U.S.A., New York, N.Y., August 16, 1967. Mrs. LEoron K. SULLIVAN, House of Representatives, Washington, D.C. DEAR Mus. SuLLIvAN: I am pleased to enclose a statement on behalf of the National Council of the Churches of Christ in the U.S.A. regarding the "Truth-in- PAGENO="0275" CONSUMER CREDIT PROTECTION ACT 857 Lending" 13111 (H.R. 11601) which is currently in hearings before your Sub- Committee on Consumer Affairs. This statement which, in general terms, supports the bill is for your informa- tion, and I trust that it may be made a part of the record of these hearings. You will note particularly that it is our feeling that the modifications which were made by the Senate to their original bill, S. 5, had the effect of seriously weakening the legislation. It is our urgent hope that your Sub-Committee will bring forth a bill which is at least as strong and broad in coverage as the original S. 5; and that subsequent passage of such a bill by the House of Representatives the Conference Committee may retain essentially the stronger version. Thank you for your attention to the views of the National Council of Churches in this important matter. Cordially yours, Rev. SHIRLEY B. GREENE. STATEMENT OF THE NATIONAL COUNCIL OF THE CHURCHES OF CHRIST IN THE U.S.A. IDENTIFICATION The National Council of the Churches of Christ in the U.S.A. is a council composed of thirty-four Protestant, Anglican and Orthodox communions whose aggregate membership is about 42,000,000. Only the General Assembly or the General Board can approve policy statements on behalf of the Oouncil. The ~Genera1 Assembly meets every three years; the General Board meets three times a year. The Assembly numbers about 800; both lay church members and clergy are represented. They are appointed as representatives by the member commun- ions according to their own procedures. About 270 General Assembly repre- sentatives are elected by that body to sit as the General Board. Obviously the General Board does not, nor does it profess, to speak for the constituent communions or for the millions of individual church members. It does have the authority to formulate and state the policy of the Council arrived at through a deliberative process designed to give all points of view within the ~churches a careful hearing. RESOLUTION In its meeting on February 21, 1067, the General Board passed the following Resolution on the subject of truth in lending: Whereas consumer credit has become an important and increasing factor in maintaining the viability of the American economy; and Whereas many Americans, and most particularly persons of limited educa- ~Lional attainment and low income, are regularly victimized by excessive rates of interest, by lack of information or by misinformation regarding the true cost to them of the money which they borrow; and Whereas the National Council of Churches has affirmed that motives of eco- nomic self-interest "must be kept in harmony with concern for the welfare of the ~community" and that "the Church should keep under the strongest criticism any economic institutions and practices which emphasize self-interest above social responsibility"; Therefore, be it resolved: that the General Board of the National Council of Churches supports in principle the passage of legislation which will require all lenders to inform all borrowers in clear and unmistakable terms of both the dollar cost and the approximate annual percentage rate of interest on each and (every loan. COMMENTARY In view of the position stated in this resolution, we expressed to the Senate Sub-Committee on Financial Institutions our satisfaction with 5. 5 when it was before them a few months ago. We are gratified that the Senate subsequently passed 5. 5, although we were regretful of the several exemptions which the Senate wrote into the bill. In our opinion the exemption of interest charges of less than $10.00, of revolving charge accounts, and of first mortgages seriously curtails the effectiveness of the bill. It is our hope that your action will result in reporting out a bill which is at least as strong and as broad in coverage as the original S. 5. In further comment on this situation and on our resolution, permit us to spell out in a little more detail the nature of the National Council's concern for full disclosure in relation to consumer credit. Our concern is two-fold. On the one PAGENO="0276" 858 CONSIJMER CREDIT PROTECTION ACT band, we would be prone to support full and frank disclosure of all pertinent information in any `aspect of buying and selling, lending and borrowing, or other financial transaction. On the other hand, we are particularly concerned about' truth in lending as it bears on the poor. Small loan borrowing and installment buying has become increasingly the means by which the American people avail themselves of the benefits of our abundant national productivity. Nearly all levels of our society are heavily in- volved. We assume that your committee will be thoroughly briefed on the volume and composition of the credit market. We mention it only to emphasize the very great importance of creating and maintaining `adequate safeguards around this institution which has become so vital a part of our total economy. We are convinced that our whole society will benefit from the passage of legis- lation which Will require lenders to provide each borrower in writing with full disclosure of the cost to the borrower of `the credit being extended to him. Al- though we understand that nothing in this proposed legislation is designed to alter or limit the rates Of interest charged by lenders, we do believe that bor- rowers will `be greatly sided in money management if they are in possession of full information as to the cost to them of loans they may be considering. All that we have said regarding the value of this legislation for the general population applies with peculiar force with respect to persons of low income and low educational attainment. Because of their lack of financial resources, such people may find borrowing even more necessary than do the majority of us who are more economically secure. Because of their poverty, the same rate of interest represents a higher percentage charge on their income than is the case with bor- rowers in higher income brackets. Because of their poverty, they constitute a higher risk to the lepder. This tends to force them to patronize the type of loan company which specializes in high risk loans and charges correspondingly high' rates of interest. Because these people are often of relatively low educational attainment, their ability to figure interest rates or understand them or to compre- hend the implications of the often obscure and sometimes misleading interest rate quotations offered them is apt to be very limited. For all of these reasons, we believe that the passage of legislation compelling full disclosure of true interest charges, both in dollar amounts and in annual percentage rate will be a great boon to the poor and an important weapon in the' arsenal of our current war on poverty. Poverty is essentia'ly measured by the gap between funds available and the cost of the basic necessities of life. By this measure excessive costs contribute just as surely to poverty as do inadequate income. Oftentimes for the poor it is the cost of credit which holds them below the poverty line as truly as joblessness or lack of income. Again we realize that this legislation does nothing in itself to reduce the cost of credit to the poor. It will, however, increase the awareness of that cost on the part of the poor; and by so doing the legislation may well have a secondary influence on the rates of interest charged to them where these have been excessive. Both the administration and the Congress have committed this nation to a total war against poverty. That war is progressing with varying degree of success' on many fronts. Fai1u~,e to pass such legislation as that now under consideration by this committee will be to default on a vital sector of that total war. We appreciate this Opportunity to present our views to the Sub-committee, MORTGAGE BANKEuS ASSOCIATION OF AMERICA, Washington, D.C., August 10, 1967. Re H.R. 11601 and H.R. 11602. lion. LEONOR K. SULLIVAN, Honse of Representatives, Rayburn House Office Buiiding, Washington, D.C. D~n MRS. SULLIVAN: We~appreeiate this opportunity to present the views of our members on HR. 11601 and H.R. 11602. For many years, Mortgage Bankers have favored the full disclosure of finance charges in connection with real' `estate financing. In fact, the practice of making full disclosure has been so widely followed in this industry that the Senate in considering similar legislaition felt justified in exempting first mortgage loans from the provisions of its bill. PAGENO="0277" CONSIJMER CREDIT PROTECTION ACT 859 As you know, closing statements are universally utilized in real estate truns- :actions. They provide a complete dollars and centS discloSure of all charges, -and the loan proceeds, for both buyer and seller. The mortgage instruments set forth the simple annual interest rate to apply on the outstanding principal amount of the loan. In earlier hearings on Truth-in-Lending which were held by the Senate COin- inittee, it was suggested that, despite the completeness of this information, there was still some lack of public understanding of the total costs of mortgage credit. As a result, the Federal Houuing A~1ministPation asked that mortgagee5 orig- inating FHA insured loans attempt to provide borrowers with additional in- formation. Mortgage Bankers have cooperated wholeheartedly with this effort and continue to do so. Perhaps itt is worth noting that what this industry is doing in this regard goes beyond any reasonable definition of "disclosure". It constitutes a form ~of credit counseling which benefits borrower and lender alike. A real estate loan is a good investment only if it is sound, that is to say that it is well related to the value Of the property and `the borrOweris ability to repay. Elaborate~ proce- dures to establish the appropriateness of these relationships have been estab- lished and are followed in every case. Where deficiencies in these relationships are noted, and cannot be corrected after consultation wi'th the affected parties, credit is not extended. It is in light of this background that we have considered the proposed legis- lation. As we understand it, the objective of this legislation is to provide users of credit with an awareness of its costs so they can make informed judgments before they are committed. Although the Senate has concurred with our belief that we have for many years followed procedures which have achieved this objective, it may be the consensus of `thi's Committee that misunderstandings continue to exist in the minds of miortgage borrowers that might be removed `by an improvement in procedures. Real estate credit, however, is so different from other formis of consumer credit that the~ principal benefits of disclosure lie not `in comparing the costs of real estate finance with those of revolving credit or personal loans, but in making comphrisons among various real estate lenders. Real estate loans customarily involve large sums of money. For the majority of people, the home or homes they may purchase involve the largest credit trans- actions they will experience. Despite the `magnitude of the loans, real estate credit is widely extended to people of all income groups. The principal amounts often exceed twice the borrower's annual income. No other form of consumer credit involves such major sums for the borrower, bears such a high relation- ship of loan to income, or is utilized so infrequently by `the average person. We are, therefore, talking about something unique when we discuss real estate finance. It is almost inconceivable that anyone would make the choice between the purchase of a house and a small item such as a TV set on the basis of relative costs of credit. (We might add that if be did he would probably purchase a house.) If then it is the Committee's judgment that further disclosure of real estate finance charges are needed, we recommend that they be designed to fa- cilitate the borrower's consideration of `the relative costs of credit offered by (1) competing mortgage lenders; (2) those providing corollary services; (3) minimum and maximum downpayments; (4) minimum and maxi'um term; (5) various purchase arrangements, e.g., contract for deed or an FHA-insured mortgage purchase. It is our conviction that the only value of this legislation to the American public will be in further facilitating informed judgment on these five points, rather than in comparing costs of real esta'te credit, consumer credit, or revolving account credit. If real estate first mortgage credit is to be covered by full disclosure legisla- tion, we `urge that it be covered by in a separate section of the law designed to achieve the above objectives. A suggested amendmerd to H.E. 11601 WhIch would accomplish this is attached. However, we wish this committee to note that while we have expressed our willingness `to make disclosure in accordance with the provisions of this amendment, we sincerely believe the provisions of H.R. 11602 are sufficient `to protect borrowers against any abuses which may exist in the real estate credit field. Therefore, we support the enactment of H.R. 11602. Sincerely, JOHN A. GILLILAND, President. PAGENO="0278" 860 CONSUMER CREDIT PROTECTION MDT AMaruMn~p ro ILR. 11601 In Sec. 203, on p~ge 13 after lIne 21, Insert the following paragraph "(e)" and reletter those paragraphs following in this section. (e) Any creditor agreeing to extend credit secured by an interest In real property shall furnish to the borrower to whom the credit is to be extended, prior to the consnm~tnation of the credit agreement, a clear statement in writing setting forth, to the extent applicable and ascertainable and in accordance with rules and regulat~ns prescribed by the Board, the following information- (.1) the total price of the real property being purchased and of any per- sonal property being purchased which is included in the agreement for the purchase of the real property; (2) an itemized list, according to the following categories, showing in dollars and cents all of the chai~ges (other than Interest) to be paid by~ the borrower iii connection with the transaction whether or not Incident to the extension of credit: (A) those charges fixed by law and not subject to the discretion of the lender (such as real estate tax esorows, real estate transfer taxes, and front footage assessments); (B) those charges required by the lender to be made prior to the extension o~ credit which are imposed to safeguard the Investment (such as credit reports, surveys, appraisals, deed preparation, and title searches), aiiid loan origination fees not exceeding in amount those per- mitted by t~ie Federal Housing Administration for comparable loans; (C) those charges on which the borrower has some option as to' placement or coverage (such as casualty insurance, title Insurance, and customer credit life Insurance), including a statement of the minimum amount of insurance, if any, required to be carried as a condition for the extension of credit; and (D) all other charges of any nature paid by the borrower and not specified in subparagraph (A), (B), or (C); (3) the sum of (1) and (2); (4) the total amount to be financed; (5) the cash required to be provided by the borrower (the difference between (3) and (4);) (6) the annual percentage rate specified In the note or other instrument evidencing the indebtedness of the borrower, and the annual percentage rate represented by' the total amount of the charges listed under (2) (D) (con.~ verted to an annual percentage rate under a formula prescribed by the Board), computed to the nearest 14 of 1 percent; (7) the monthly payments required to amortize principal and interest, plus any unusual payments to be required, or any contemplated changes in' monthly payments anticipated by contracts for deeds or similar arrahge- ments; and (8) the penalties by percentage, or dollars and cents, for late payments or prepayments; or, in the ease of variable interest rate loans, the condi- tions under which the rate may be changed and an estimate of the dollar difference in payI~ients per 14 percent difference in rate. In prescribing rule~ and regulations to carry out the provisions of this sub-. section, the Board shall give recognition to the divergent practices of creditors engaged in the business of extending credit secured `by interests in real property, but insofar as possible shall prescribe uniform procedures for complying with the provisions of this Subsection. INTERNATION4~j. CONSUMER CnEDIT AS500IATION, ~t. Louis, Mo., August 18, 1967. lIon. LEGN0R K. SULLIVAN, Chairman, Subcommittee on Consumer Affairs of the Committee on Banking and Currency, Raybu~1n House Office Buikiinq, Washington, D.C. DEAR MIIS. SULLIVAN: Ph~~~k you very P~ueh for your recent letter ln~ting us to file a statement pertaining to H.R. 11601, the Consumer Protection Act. At first I planned to prepare a statement pertaining to H.R. 11601. However, due to the fact that ICCA is not a "lobbying" association, on second thought I have decided to forego your invitation. Should you desire answers to any specific questions, I shall be pleased to attexppt to answer them. PAGENO="0279" CONSUMER CREDIT PROTECTION ACT 861 I do want to express my appreciation for the kindness shown to me- during, the two days I was able to spend at the hearings In Washington. Unfortunately, Mrs. Blake became quite ill during my absence and it became necessary for me to return to St. Louis. She got out of the hospital on Saturday of last week.. She is feeling much bettei~, but I have to watch her very carefully. My best personal regards. Sincerely yours, WM. HENRY BLAKE, Ewecu~tive Vice Preth,lent. NATIONAL Coxrnnaxcu or CoMMIssIoNERs ox UNITOEM STATE LAWS, Augwst 25, 1067. Hon. LuoNon K. SULLIVAN, Chairm~a~i, ~ubeommittee on Consumer AffaLrs, House of Representatives Banking and Currency Committee, House Office Building, Washington, D.C. DuAR Mns. SULLIVAN: Prof. William J. Pierce, President of the National Con- ference of Commissioners on Uniform State Laws, has requested me to thank you for and reply to your letter to him of August 2. President Pierce and the National Conference appreciate your invitation to testify on the above bill, but regret that circumstances preclude the acceptance of your invitation. In accordance with your request, this Special Committee of the National Con-S ference is pleased to file with you the enclosed statement on the above bill. For a summary of the work of the National Conference and of the work and views of this Special Committee, I refer you to the statement of Prof. Pierce, beginning at page 282 of the transcript of the "Truth in Lending-~-1967" hearings~ before the Subcommittee on Financial Institutions of the Senate Committee on Banking and Currency. The Second Tentative Draft of the proposed Uniform Consumer Credit Code was considered at the recent annual meeting of the National Conference. A copy of the draft appears in the transcript of the "Truth in Lendlng-1967" hearings beginning at page 717. Whatever the views of the members of the National Conference, as State offi- cials, on the appropriateness or desirability of federal legislation on disclosure' in consumer credit transactions, the imminence of federal legislation makes de- sirable that we render whatever assistance we can in helping to make such legis- lation practicable and workable. The enclosed statement suggests various revisions in H.R. 11601 to that end. Permit me the following general observations if there Is to be federal legisla- tion on disclosure in consumer credit transactions: 1. The legislation should have, to avoid qtie5tion, the broadest constitutional basis. We approve, therefore, of the invocation in HR. 11601 of the constitu- tional powers of the Congress to regulate the value of money as well as to regulate commerce among the several States. 2. To serve theiv maximum useful purpose, disclosure requirements should be uniform as to all classes of consumer credit transactions. We approve, therefore, of the requirement in H.R. 11601 for equivalent annual percentage rate disclo- sure with respect to all open end credit transactions. 3. Also to serve their maximum useful purpose, disclosure requirettients should apply to advertising of consumer credit rates and terms. We approve, therefore, of the theory, as distinguished from the substance, of the provisions in subsection (j) of SEC. 203 on pages 15-17 of H.R. 11601. On the other hand, we are con- cerned about the requirements of that subsection and recommend the revisions set forth In Item 14 of the enclosed statement as being less detailed, more clear and unequivocal, and requiring no administrative machinery for their enforce- ment. 4. Annual percentage rate disclosure requirements should apply to loans secured by a first mortgage or similar lien on real estate. Otherwise, it becomes mean- ingless to impose a requirement for incluston in the finance charge of "any amount payable under a point, discount, or other system of additional chorges" as in SEC. 202(d) of TI.Tt. 11601 fat p. 5, tines 2-~1 in SEC. 8.(d) (1 of S. S (Report No. 392) rat t. 13, Lines 10-111, and In SEC. 3(d) (t of HR. 11602 fat p. 8, Lines 11-12). We approve, therefore, the provisions of H.R. 11601 requir- ing annual percentage rate disclosure as to mortgage loans. PAGENO="0280" 862 CONSUMER CREDIT PROTECTION ACT 5. Dollar, but not rate, disclosure of closing costs of loans secured by a mort- gage or similar lien on real estate should be required. See Item 5 of the enclosed statement. 6. The effective date of the legislation should be postponed at least until July 1, 1969, except for the provision granting authority to the Board of Goyernors of the Federal Reserv~ System to adopt implementing regulations, which should be made effective upon enactment, to conform to S. 5 (Report No. 392) and H.R. 11602. In addition, the Board should be given power to postpone the effective date of the legislation for a 12-month period to encourage the States to enact comprehensive consumer credit legislation. In this connection, it should be noted that: a. enactment of federal disclosure legislation will require a complete re- view and revisiOn by the States of their existing consumer credit legislation, preferably along the lines of the proposed Uniform Consumer Credit Code to be promulgated by the National Conference of Commissioners on Uniform State Laws; b. The Natioiial Conference will be unable to complete the Ilnal draft of its proposed Uniform Consumer Credit Code prior to mid-1968 for presenta- tion to State Legislatures in their 1969 sessions; and c. the Legislatures of some States do not have sessions, with plenary au- thority, meeting in 1969; to enable and encourage the Legislatures of those States to enact the proposed Uniform Consumer Credit Code, either the Board should have power to postpone the effective date of the legislation until July 1, 1970, or preferably, the effective date of the legislation should be July 1, 1970. Considerations of time have precluded the submission of this letter and the accompanying statement to the members of the National Conference of Commis- sioners on Uniform State Laws or of this Special Committee for their approval. Consequently, this letter and the accompanying statement must be regarded as an expression of my personal views, although I believe that the views expressed will meet with the approval of the members of this Special Committee. I shall be happy, if you wish, to meet with you or the staff of the Subcommittee on Consumer Affairs and the Committee en Banking and Currency to discuss fur- ther the contents of this letter and the accompanying statement. We appreciate yoflr request to comment on the above bill. Very truly yours, ALFRED A. Bmmom~, Cha~trman. RECOMMENDED REvIsIoNS OF H.R. 11601 The following recommended revision of H.R. 11601 are submitted subject to `the accompanying letter of transmittal, dated August 25, 1967, to Hon. Leonor K. Sullivan, Chairman of the Subcommittee on Consumer Affairs of the House of Representatives Committee on Banking and Currency. The recommended revisions are divided into two classes, I and II. The Special Committee believes that the recommended revisions in each class are equally nec- essary and desirable, but has included in Class II revisions which might prove controversial and hence might delay enactment of a "Truth in Lending Act" or a "Consumer Credit Protection Act." The supplementary comments following the recommended revisions further ex- plain and elaborate upon the purposes and reasons for some of the revisions. I Iteifli Page I-Title of Bill-~-Delete all after "A BILL" and insert: "To assist in pro- moting the stabilization of the economy and of the value of money by requiring disclosure of financ~ charges in connection with extensions of credit and ad- vertisements therefo~." Purpose of Revision: 1. Po conform title of bill to title of S. 5 and H.R. 11602; 2. to add reference to "stabilization of the value of money" so as to invoke the constitutional powers of the Congress to regulate the value of money; and 3. to eliminate references to provisions of H.R. 11601 proposed to be deleted. PAGENO="0281" CONSUMER CREDIT PROTECTION ACT 863 Item 2 Page 3, Lines 14-19-Sec. 201 (b)-Delete in their entirety. Purpose of Revision: 1. To eliminate reference~ to finding relating to provi- sions of ER. 11601 proposed to be deleted. ItemS Page 4, Lines 11-12-Sec. 202. (c)-Revise to read: "chased primarily for per- sonal, family, household, or agricultural purposes. The term does not include any contract in". Purpose of Revision: To conform pbraseolo~y to that in SEC. 202. (b) at p. 4, Lines 2-3. Item 4 Page 5, Line 12-Sec. 202.(d) (1)-Revise to read: "(B) taxes; or "(C) charges ~r premiums for insurance against loss or damage to property related to a credit transaction or against liability arising out of the ownership or use of such property; or "(D) charges or premiums for credit life and accident and health insurance; and". Purpose of Revision: To conform to SEc. 3. (d). (2) of S. 5 and H.R. 11602, at p. 13, lAnes 1&-22 of S. 5 [Report No. 392], and p. 3, Lines 19-23 of H.R. 11602 Item 5 Page 5, Lines 13-17-Sec. 202. (d) (2)-Revise to read: "(2) if itemized and disclosed under section 203, and if the credit is secured in whole or in part by an interest in real property, the term `finance charge' does not include amounts collected by a creditor, or included in the credit, for, in addition to the duly itemized and disclosed costs referred to in clauses (A), (B), (C), and (D) of paragraph (1), the costs of". Purpose of Revision: 1. To require the disclosure of the dollar amount of clos- ing costs on extensions of credit secured by an interest in real property; and 2. to conform to the revisions proposed in Item 4, above. Item 6 Page 8, Lines 3-17-Sec. 202. (i)-Delete in their entirety and insert: "(i) (1) `advertisement' includes any publication, printed matter, display, broadcast, solicitation, or representation for the purpose or having the effect of promoting or inducing, directly or, indirectly, any extension of credit, consumer credit sale or open end credit plan. "(2) `an advertisement containing specific credit terms' means any ad- vertisement which states any of the following: "(A) a rate or rates of finance c1~arge; "(B) the amount of finance charge; or "(C) the amount of a~ny installment or installments." Purpose of Revision: 1. To broaden the definition of advertisement so as not to limit it to `an advertisement in interstate commerce or affecting interstate commerce' by taking advantage of the invocation of the currency powers of the Congress in Szc. 201. (a) ; and 2. to define more clearly what is prohibited so that only criminal sanctions will be required for enforcement. Item 7 Page 9, Lines 19-20-Sec. 203. (b) (7)-Revise to read: "(7) the finance charge expressed as an anr~iial percentage rate, if the amount of such charge is $10.00 or more;". Purpose of Revision: To ëonform to SEC. 4(b) (7) of 5. 5 and H.R. 11602, at p 17, LInes 22-24 of S. 5 [Report No. 392], and p. 7, Lines 2~-24 of HR. 11602. Item 8 Page 10, Line 25-Sec. 203. (c) (4)-Revise to read: "(4) the amount of the finance charge, unless the loan or other extension of credit is securedby a first morfgdgeor other first lien such as is commonly given to secure advances on, or the unpaid purchase price of, real estate under the laws of the State in which the real estate is located ". Purpose of Revision: To eliminate as unnecessary the requirement for dis- closure of the total dollar amount of interest charges on first mortgage loans for personal, family, household, or agricultural purposes. PAGENO="0282" 864 CONSUMER CREDIT PROTECTION ACT Item 9 Page 11, Lines 1-2--eec. 20$. (c) (5)-Revise to read: "(5) the finar~ce charge expressed as an annual percentage nate, if the amount of such charge is $10.00 or more ;". Purpose of Revisiorn.: To conform to Sue. 4. (c) (5) of S. 5 and H.R. 11602, at p. 19, Lines 6-8 of S. 5 [Report No. ~92], and p. 9, Lines 6-8, of H.R. 11602. Item 10 Page 12, Lines fJ-11-~eo. 203.(d) (2) (0)-Revise to read: "(C) the method of determining the amopnt of the finance charge, any minimum or fixed amount to be imposed as a finance charge, and, if other than a minimum or fixed charge, the percentage rate or rates per perIod to be used in computing the finance charge to be imposed and the amount of balance to which each such periodIc percentage rate applies, and the equiv- alent annual percentage rate of each such periodic percentage rate; and". Purpose of Revision.: 1. To eliminate the erroneous reference to "installment open ed credit plan"; 2. to make clear that a minimum or lixed amount pf finance charge need not be expressed as .a percentage rate; B. to permit the disclosure of more than one percentage rate per period to be applied to specified balances (as, for example, in New York, 1%% per month on the first $500. of balance and 1% per month on the excess of balance over $500.); and 4. to require equivalent annual percentage rates to be disclosed as to all open end credit plan accounts. Item 11 Page 13, Lines 1-10, EIcc. 203. (4) (3) (D) (E) and (F)-Revise to read: (D) the amount of any finance charge added to the account during the period due to the application of a percentage rate or rates, if any, and the amount of any fi~iance charge added to the account during the period im posed as a minimum or fixed charge; "(E) the balance on which the finance charge was computed and a state- ment of how the balance was determined; "(F) If an amount was addod to the account during the period due to the application of a fercentage rate or rates, the percentage rate or rates per period used in cimputing the finance charge and the amount of balance to which each such percentage rate applied, and the equivalent annual per- centage rate of e~tc~u such periodic percentage rate;". Purpose of Revisions: As to clause (L?): 1. To require, as do Sac. 203.(d) (3) (D) of HR. 11601 and SEc. 4. (d) (3) (D) of S. 5 and H.R. 11602, separate disclosures of the amounts of finance charge added a. due to application of a percentage rate, and b as a minimum or fixed charge but to avoid any implication of a requirement for disclosure of the total of the charges so added because such a requirement cannot be met by computers now in general use; and 2. where step rates are used depending on the amount of balance (as, for example, in New York, where ceil- ing rates are 11/2% per month on the first $500. of balance, and 1% per month on the excess of balance over $500) to require disclosure of both periodic per centage rates and the dollar amounts of balances to which they apply, As to clause (E) To reletter clause (F) of Sac 203 (4) (3) of HR 11601 to conform to clause (E) of SEc. 4. (6) (3) of S. 5 and H.Tt. 11602. As to clause (F): 1. To make clear that a minimum or fixed amount of finance charge need not be expressed as a percentage rate; 2. to permit the disclosure of more than one percentage rate per period to be applied to specified balances (as, for example in New York 11/~% per month on `the firqt $500 of balance suud 1% per month on the excess of balance over $500.); and 8. to require equiv~ient annual per~ntage rates to be disclosed as to all open end credit plan accounts. Item 12 Page 15, Lines 3-7-Eec. 230. (ij) (1)-~--Revlse to read: "(1) (1) Prior to January 1, 1972, whenever an annual percentage rate is required to be disclosed by this section, the rate may be expressed either as an annual percentage rate, or as a dollars per hundred per year rate of the average unpaid balance." PAGENO="0283" CONSUMER CREDIT PROTECTION ACT 865 Item 13 Page 15, Lines 8-9-Sec. 230. (i) (2)-Revise to read: "(2) After December 31, 1971, all rates required to be disclosed by this section shall be expressed as percentage rates." Purpose of Revisions (Items 12 and 13): ~o conform to Sac.(i) (2) of S. 5. and H.R. 11602, at p. 23, Line 24 of S. 5 [Report No. 392J, and p. 14, Line 4 of H.R. 11602. Item 14 Page 15, Lines 10-25; Page 16, Lines .1-24; Page 17, Lines 1-8-Sec. 208. (5) and (lc)-Delete in their entirety and insert: "(j) (1) No person in an advertisement containing specific credit terms shall state- "(A) a rate or rates of finance charge unless expressed in terms of an annual percentage rate or equivalent annual percentage rate; or "(B) the amount of any finance charge, which is not a minimum or fixed amount imposed as a finance charge under an open end credit plan, or, otherwise, $10.00 or more, unless the annual percentage rate or equivalent annual percentage rate Is also stated; or "(C) the amount of any Installment payment unless the number, amount, and due dates or periods, and the total amount of installment and other payments are also stated; "(2) No person shall state in an advertisement- "(A) that specified amounts of credit or specified installment payment terms can be arranged, unless he usually and customarily extends credit in such amounts or upon such payment terms. "(B) that, in a consumer credit sale, no down payment is or will be re- quired, unless he usually and customarily requires no part payment of the price; or "(C) that, In a consumer credit sale, a down payment no larger than a specified amount is required, unless be usually and c~st~marily requires down payments no larger than the amount specified. "(3) This subsection does not apply to any television or sound broadcasting station or to any publisher or printer of a newspaper, magazine, or aOher farm of printed advertising, who broadcasts, publishes or prints an advertisement." Parpose of Revision: 1. To state clear and precise rules as to advertising which can be enforced by criminal sanctions only; 2. not to require ~o much disclosure in advertisements that the disclosure of the annual percentage rate or 9qulvalent annual percentage rate will be lost in a maze of fine print and escape the atten- tion of the reader or watcher; 3. in (j) (1) (0) to prohibit "a dollar down and a dollar a week" advertising, without disclosing the number of weeks and the total amount of installments; and 4. in (j) (3), to ma1~e the subsection Inap- plicable to printers, publishers and broadcasters who past experience shows will strenuously oppose any legislation which places upon them the burden of policing the content of advertisements. Item 15 Page 17, Lines 4-13-Sec. 203. (1) and (m)-Delete in their entirety. Purpose of Revision: 1. To delete from the bill provisions for ceilings on finance charges and prohibitions against confession of judgment previsions which many consider unwise and unconstitutional and ~h1ch at the very least are highly controversial. Many of our consumers are not i~l1glble for sales or loan credit at 18% per annum. Confession of judgment provisions In debt obligations must be considered in the light of the entire package of ereditor~' r~nu4slies and debtors' rights In a particular jur1~diction. Item 16 Page 17, Line 14-Sec. 203. (n)-Revise to read: "(k) The provisions of this section shall not apply to". Purpose of Revision: To reletter this subsection to reflect the omission of sub- sections (k), (1) and (rn). item 17 Page 20-See. 204. (e)-Revise Line 13 to read: "to advise and consult with it in the exercise of its functions". Purpose of Revision: To correct typographical error. PAGENO="0284" 866 CONSUMER CREi~IT PROTECTIO~ ACT Item 18 Page 21-Sec. 205~(b)-Revise Lines 16-20 to reid: "(b) The Board sbaii by regulation exempt from the requirements of this title any class of credit tt-ansactions which it determines are subject to any State law or regulation which. requires disclosures substantially similar to those required by section 203, and contains adequate provisions for enforcement." Purpose of Revision: To comform to Sec. 6. (b) of S. 5 and H.R. 11602, at p. 27, Lines 16-21, of S. 5 [Report No. 3921, and p. 17, Lines 21-24 and p. 18, Lines 1-2 of H.R. 11602. The formulation of Sac. 6. (b) is considered preferable. Item 19 Page 22-S'ec. 206.(a) (1)-Revise Line 4 to read: "any provision, except sub- section (j), of sectio~i 203, or any regulation issued thereunder, to disclose". Purpose of Revision: To avoid application of civil penalties to violations of subsection (j), relating to advertising. Otherwise, conceivably, anyone who reads a newspaper or mag4zine or listens to or sees a radio or television broadcast con- taining a noncomplying advertisement might have the right to recover the prescribed civil penalty of $100 plus attorneys' fees. Moreover, a subsequent dis- clospre to a buyer or borrower otherwise fully complying with the title might not negate his possible right to recover the civil penalty based on a nondisclosure in an advertisement. Item 20 Page 22-Sec. 206. (a) (2)-Revise Line 13 to read: "amount less than that required to be dlseloued by any Provision, except subsection (j), of section 203". Item 21 Page 24, Lines 6-25, Pages 25-33, Page 33, Lines 1-3--Sec. 207., Sec. 208. and Sec. 209.-Delete in their entirety. Pur~iose of Revision: To avoid further controversy and delay in the enact- ment of a "Truth in* Lending Act" or a "Consumer Credit Protection Act". Item 22 Page 32, Line 5~-Sec. 2l0.-Renumber as SEC. 207. Purpose of Revision: To reflect omission of Szc. 207., Sac. 208., and Sac. 209. Item 23 Page 33, Lines ll-l8-Sec. 211.-Revise to read: "Sno. 208. The provisions of this title shall take effect on July 1, 1969, Pro- vided, That the Board may by regulation postpone the effective data of this title for an additional twelve-month period on the basis of a finding that such a post- ponement is required Ito enable one or more States to enact a comprehensive revision and modernj~ation of its laws for the regulation of consumer credit, including provisions requiring disclosures as to credit transactions substantially similar to those required by section 203 of this title and containing adequate provisions for enforcement, to take effect on or prior to the effective date of thi~ title, and Further Provided, That section 204 of this title shall take effect imme- dia'tely upon enactment." Purpose of Revision,: 1. To conform the effective date of the title to the effective date of S. 5 and H.R. 11602; 2. to make the powers of the Board to adopt imple- menting regulations effective immediately; and 3, to enable the Board to post- pone the effective date of the title by twelve months and thereby to encourage those States, which d~ not have anm~al sessions of their Legislatu~es with ple- nary authority, `to enact a comprehensive revision and modernization of its laws for the regulation of consumer credit. [Note: The Uniform C~nsumer Credit Code, proposed by the National Conference of Commissioners on Uniform State Laws, will not be ready for introduction in State Legislatures until Legislative sessions beginning in ~9i9.] Item 24 Page 33, Lin,es 19-2~; Pages 34-41-De'ete in their entirety. Purpose of Revision: To avoid further controversy and delay in the enactment of a "Truth in Lending Act" or a "Consumer Credit Protection Act." PAGENO="0285" CONSUMER CREDIT PROTECTION ACT 867 II Item 25 In lieu of Items 7 and 9: Page 9, Lines 19-20-eec. 203. (b) (7)-Revise to read: "(7) the finance charge expressed as an annual percentage rate, if the amount of such charge is $25.00 or more ;". Page 11, Lines 1-2-See. 203.(c) (5)-Revise to read: "(5) the finance charge expressed as an annual percentage rate, if the amount of such charge is $25.00 or more ;". Ia lieu of subsection (5) (1) (B) of ~Sec. 203. as proposed in Item 14: "(B) the amount of any finance charge, which is not a minimum or fixed amount imposed as a finance charge under an open end credit plan, or, otherwise, $25.00 or more, unless the annual percentage rate or equivalent annual percentage rate is also stated; or". Purpose of Revisions: To increase from $10 to $25 the amount of finance charge which need not be disclosed as an annual percentage rate. It is believed that the reasons for exempting from an annual percentage rate disclosure requirement of a finance charge of $10 or more apply equally to a finance charge of $25 or more. SUPPLEMENTARY COMMENTS RE ITEM 4 Item 4 proposes to amend Sac. 302. (d) (1) to exclude from the definition of "finance charge" charges or premiums for insurance against loss or damage to property related to a credit transaction o~ against liability arising out of the ownership or use of such property and charges or premiums for credit life and accident and health insurance, to conform to Sac. 3. (d) (2) of S. 5 and H.R. 11602. The following excerpts from the transcript [hereinafter called "S. 5 Transcript"] of the hearings on "Truth in Lending-1967" before the Subcom- mittee on Financial Institutions of the Senate Committee on Banking and Currency relate to this proposal: EXCERPTS FROM STATEMENT OF WILLIAM J. PIERCE, PRESIDENT OF NATIONAL CON- FERENCE OF COMMISSIONERS ON UNIFORM 5TATE LAWS, AT PAGE 285 "5. The amount of credit service Or finance charge to be included in the base for computing a uniform time rate to be disclosed should comprise only items like `pure interest,' compensation for the creditor's risk of not being paid, and service charges for the credit extension and should not include other charges not directly related to these items. "The credit service or finance charge should not include such items as govern- mental fees and taxes and insurance which is of benefit to the debtor. These, of course, must be carefully defined and limited in order to prevent possible overreaching. Their itemized disclosure, both as to nature and dollar cost involved, should be required. It is the opinion of the committee at this time that inclusion of charges not attributable to the cost of the credit in the credit service or finance charge would make a time rate comparison meaningless. "For example, if these items are included in the credjt service or finonce charge, two auto dealers quoting the same total charges would be required to quote the same time rate although one dealer's total charges include insurance and the other dealer's only the credit service or finance charge." EXCERPTS FROM STATEMENT OF HON. J. L. ROBERTSON, VICE CHAIRMAN OF THE BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM, AT PAGE 665 "EXCLUSION FROM FINANCE CHARGE OF INSURANCE PREMIUMS, TAXES, AND OFFICIAL ~FEES "One of the issues that has proved troublesome during these bearings has been the question of how to treat insurance premiums on policies taken out by borrowers as a condition of, and covering the amount of, the credit contract. * * * "The fact remains, however, that any insurance provides a benefit to the borrower over and above the use of credit. To require that the finance charge PAGENO="0286" 868 CONSUMER CREDIT PROTECTION ACT include insurance premiums would overstate the actual charge for credit. Therefore, we thir~k that the cost of any kind of insurance is not properly regarded as part of the finance charge, and should be specifically excluded in S. 5. Similarly, we feel that the statute should specifically exclude official fees and taxes fro~n the finance chrage, since generally they benefit neither creditor nor borrower, are not within their control, and are the same regardless of the source and terms of the credit. Both types of charge should be required to be Itemized among the nonfinance charges that must be disclosed pursuant to section 4(a) (4)." En ITEMS 6 AND 14 Item 6 proposes to define "advertisement" and "an advertisement containing specific credit terms"; Item 14 proposes to impose requiremnets for advertise- ments. These provisions follow generally the provisions relating to advertising in Sections 2.303. and 3.303. of the Second Tentative Draft of the proposed Uniform Consumer Credit Code, appearing at pp. 731 and 745 of the S. 5 Tran- script. RE ITEMS 7 AND 9, AND PROPOSED SUBSECTIONS (~)(i) (B) OF SEC. 203. IN ITEM 14 These Items propose to eliminate requirements for the expression of the finance charge as an annual percentage rate and for any similar disclosure in an advertisement, if the amount of the fii~ance charge is $10 or more. The following excerpts from the 8. 5 Transcript relate to these Items: EXCERPTS FROM STATEMENT OF WILLIAM J. PIERCE, PRESIDENT OF NATIONAL CON- FERENCE OF COMMISSIONERS ON UNIFORM STATE LAWS, AT PAGES 285-~286: "6. Where the amount involved in the credit transaction is relatively small and has a short maturity, time rate disclosure is meaningless and only dollar disclosure should be required. For example, consider the sale of a $60 vacumn cleaner with a minimum $10 credit service charge and a total, time price of $7Q payable in 8 monthly installments of $8.75 each. To be told that the credit serv- ice charge is at the rate of $25 per hundred of principal per year or 42.6 percent per year does not help the customer in making a value judgment." STATEMENT OF HON. 3. B. ROBERTSON, VICE CHAIRMAN OF THE BOARD OF GOVERNORS OF THE FRDERAL RESERVE SYSTEM, AT PAGES 668 AND ~364: "EXEMPTION OF SMALL CREDITS AND CHARGES "I am Sure that noire of us wants to press disclosure of credit costs to the point where borrowers are denied access to credit at any price. But there is one area where disclosure of an annual percentage rate might do just that. In a closed end credit transaction involving a small amount, a high effective rate may be justified to compensate the creditor for the relatively high out-of-pocket costs of handling the transaction. However, he may be understandably reluctant to disclose the very high rate-perhaps 50 or 100 percent-and might decide in- stead simply to discontinue this type of credit transaction. "For some borrowers, unable to obtain open-end credit accommodation or not having access to small cash loans, the need to make relatively small purchases on credit may be great indeed. It may also be argued that a small finance charge-in dollar amount-Is not of great significance to the credit user re- gardless of the effective rate of finance charge. Therefore, we would be disposed to see closed-end credit transactions involving a small amount-perhaps under $100-and a small total finance charge-perhaps under $10-exempted from the disclosure requirements. But we think Congress should make the decision and, if it agrees, should incorporate the specific exemption in S. 5." RE ITEM 23 Item 23 proposes to renumber SEC. 211. as SEC. 208. and to revise it to pro- vide July 1, 1969 as the effective date of the legislation, and to grant authority to the Board of Governors of the Federal Reserve System to postpone the ef- fective date to July 1, 1970. PAGENO="0287" CONSUMER CREDIT PROTECTION ACT 869 The enactment of the legislation by the Congress will provide a tremendous impetus to the revision and modernization by the States of their consumèi~ credit laws. The National Conferende of Commlss1ober~ on UnIfoThTi State Laws believes that its proposed Uniform Consumer Credit Code will provide the best vehicle for such a revision and modernisation. The scope of the pvopOsed Code and the protection it will give consumers are indicated by the Secofid Tentative Draft whkth appears in the transcript of the "Truth in Lending-1967" hearings of the Subcommittee on Financial Institu- tions of the Senate Committee on Banking and Currency, beginning at page 717. The proposed Code will not be completed until August 1968 nor ready for in- troduction in State Legislatures until their sessions in 1969. Unfortunately, not all State Legislatures meet in plenary sessions in 1969; some will not meet in such sessions until 1970. Consequently, to encourage maximum State enactment of the proposed Uni- form Consumer Credit Code, either the effective da-te of federal legislation to require consumer credit disclosure should be postponed until July 1, 1970, or the Board of Governors of the Federal Reserve System should be given authority to postpone the effective date until that date. RE ITEM 2~ We strongly recommend that the exemption from annual percentage rate dis- closure requirements be increased from $10.00, as in S. 5 and HR. 11602, to $25.00. When smaller amounts are involved, an annual percentage rate becomes meaningless and more confusing than helpful to the consumer. The discussions of the Second Tentative Draft of the proposed Uniform Consumer Credit Code in the Committee of the Whole of the National Conference of Commissioners on Uniform State Laws. support this recommendation. STATEMENT OF PAUL J. KREBS, EXECUTIVE DIRECTOR, OFFICE OF CONSUMER PROTECTION, DEPARTMENT OF LAW ANB PUBLIC SAFETY, STATE OF NEW JERSEY Madam Chairman and members of the subcommittee, I am grateful for this opportunity to Submit a statement attesting to the excellent beginning made by this Consumer Credit Protection Act in affording Some measure of relief to the consumers from the predatory practices that have been common in the con- sumer credit field. I have deliberately chosen the word beginning because I feel this measure, however excellent, is just that-the first step on a long road to careful and considered consumer protection. I have every confidence that, given this good beginning, the Congress of these United States can take all of the steps that are necessary to make credit a useful tool of both the consumer and the business economy. I believe the need for truth in lending legislation has been attested to by the statements of hundreds of qualified men and Women who have appeared before your Subcommittee. I will not belabor this point because I believe it has been very well documented that the need for such legislation cannot be overestimated. I believe that most ethical business concerns have recognized the need for this legislation as a self-protective device. There are only so many dollars in the economy. Every dollar that is siphoned off b~ unethical credit merchants is a dollar lost to legitimate and ethical financing Institutions. Moreover, those who have strived to remain ethical must recognize this measure as a means toward ending the unfair competition which they face from less ethical financiers. Businessmen would be secure in the knowledge that higher cost competitors can- not lure away their customers with deceptive credit information. I should like to devote the bulk of my statement to poifiting out the strengths and weaknesses of H.R. 11601 and suggesting how further legislation or amend- ment to the present bill can afford truly effective protection to the consumer. DI5OLO5URE PEOvIMONS The provisions of KR. 11601 which cover the dIsclosure in writing of all possible charges, expressed both in dollar amounts and annual percentages, of consumer credit sales, extensions of credit and open end credit plans are com- PAGENO="0288" 870 CONSUMER CREDIT PROTECTION ACT prehensive and shoW a fine understanding of the problems attendant to each of the three separat~ forms of financing. The inclusion of open enj credit plans, a form of credit wittich is becoming prevalent in our economy, Is probably the most significant step taken by this measure. Moreover, the inclusion of "service and carrying charges" in the definition of `finance charge' should Insure that no form of charge account plan can escape regulation under this act. The open end credit plan is or~e of the most unregulated forms of credit common to today's marketplace. Under no circumstances should it be deleted from this bill, or lost during conference with the Senate. CREDIT RAPE CEILING The sponsors of this Act show great courage and' understanding of the con- sumer credit field ifl limiting any finance charge to 18 per centurn per annum. This is a fair rate for small loan companies whose risk is high. Even greater courage would have been demonstrated, however, if `the maximum for open end credit plans was fixed at 12% and if the maximum for consumer credit sales was fixed at 8%. The same fine understanding of the three forms of credit that is displayed in those provisions regulating disclosure of finance charges has, unfortunately, been lost by the imposition of a single, inflexible national ceiling on all interest rates. WAGE GARNISHMENTS I can not be too strong in my support for the provision which abolishes wage garnishments. The practice of garnishment is the only remaining vestige of the archaic system that began with debtor's prisons. Legitimate businesses have long ago learned how to collect funds without relying on garnishment. The device of garnisbir~g wages has fed the growth of. unscrupulous merchants. They readily extenc~ credit to workers who are obviously already over-extended only because they know they have a guaranteed method for collection. REGULATION OF ADVERTISEMENTS So far, I have addressed myself, in the main, to the strengths of this measure. As I see it, there are three major shortcomings as the bill is presently written. I would urge that serious consideration be given to amending provision (D) of Section 203 (j) (1) so that time sale differential is substituted for time sale price. If this .&ct is to insure "that the consumer will be able to compare more readily the various credit terms available to him," then the advertisement of finance charges Is perhaps even more important than is disclosure at the time of the sale. `l!'he disclosure and advertisement of time sale differential means that the con~trmer is advised of the exact dollars and cents cost of the finance charge. Time sale price is a total of the cash sale price plus the finance charge and can be misleading. This error should be corrected as soon as possible. SUBSTITUTE LANGUAGE The second shortcoming of this bill is contained In Section 202: (4) (f) on Page 14, lines 10 through 13. This Section s~llows the creditor to word his dis- closure of rates in apy language he so desires, as long as it "conveys substantially the same meaning." Who is to determine whether or not his substitute language does indeed convey substantially the same meaning? Is he the one to decide or is the consumer? Consumers today are confused enough without letting every businessman decide on hi~ own terminology for basically the same technical credit transaction. T~Jvery business should have to use the exact same terminology as any ether business in disclosing or advertising credit rates, fees, etc. Let me give yo~ an example of how consumers can be confused by technical terminology. Usually, when a used car is being sold in the same condition as it was in when originally bought by the used car dealer the contract Is marked with the words "as is." Recently we had a complaint in our office where such an auto- mobile was sold with the contract marked "as traded." The dealer insists that "as traded" conveys the same meaning as does the words "as is." Our question is, conveys to whom? He may have understood what he meant, but it was pretty obvious that the purchaser had no idea what these words means. There should be no objection to ~equlring that all teChnical terminology be standardized. I strongly urge that lines 10 through 13 on Page' 4 l~e eliminated. PAGENO="0289" CONSUMER CREDIT PROTECTION ACT 871 ADMINISTRATION The third shortcoming of this bill concerns the provisions for administration and is, if possible, even more important. What good is a law if the agency chosen to administer it has neither the staff nor the consumer experience necessary for fair and efficient enforcement. As this bill is presently constituted, a consumer can obtain the allowed civil penalties only by hiring an attorney and filing suit in a United States District Court. The Board of Governors of the Federal Reserve System can issue regulations and can serve orders requiring persons not to engage in the violation, but they have no authority to prosecute for criminal penalties. Criminal penalties are enforced by the Attorney General. Would it not be far simpler and much more effective for Congress to establish a national Office of Consumer Protection within the Department of Justice? The staff of this office would be devoted not to banking interests hut to consumer interests and consumer interests alone. They would have the expertise in con- sumer credit needed for fair and efficient administration and all of the criminal and civil penalties could be enforced by one agency. I am not suggesting that the civil jurisprudence system be abolished, but I'm suggesting that this o~l1ce have the authority to file civil suit on behalf of indigent complainants. The effects of administration by one agency are readily apparent. There would be rio mounds of infamous Washington red tape for the average consumer to be bogged down in. There would be created an effective one-stop agency to which the consumer could go with his credit problems. If this measure is totally intended to aid and protect the consumer, then the present provisions for admin- istration must be changed. FUTURE LEGISLATION I began this statement by calling the Consumer Credit Protection Act a begin- ning. Let me now enumerate a few of the many other steps which it is necessary to take before credit can truly be a useful tool for the consumer. UOmp'ata~tion of interest rrites It has been our experience in the New Jersey Office of Consumer Protection that even where the consumer knew full well the annual interest rate and dollars and cents cost of his loan, he experienced great difficulty in checking the ac- curacy of the monthly calculations made by the finance company for each pay- ment. Let me illustrate this problem. Recently a new small loan act went into effect in the State of New Jersey. It requires disclosure of interest stated In annual terms and dollars and cents. A member of my staff, who is expert in such calculations, put herself in the position of a consumer who goes to one of the finance companies covered by this new act and borrows $1000 for two years. The manager of the company informs her that the interest rate is calculated monthly and that the total unpaid balance can be paid at. any time. Monthly payments are quoted at a figure of $52.57 without creditor life insurance. As an avei~age consumer, she would like to know whether this is the proper monthly payment so she sits down and attempts to compute it herself. After six hours of work with the computer she was still $17.24 in error. I ask you, gentlemen, if any of you, educated and intelligent men, could compute the accuracy of the quoted monthly payment? If you can not and if my staff member could not, how do we expect the average consumer to be able to do so. H.R. 11601 provides that the United States rule of actuarial method be used to calculate the normal annual rate. It is my contention that in order to ensure that the borrower not be cheated when his payments are calculated, that he be given a copy of this actuarial com- putation at the time his loan is transacted. I can not emphasize how important these calculations are. The majority of complaints handled by our Office of Consumer PrOtection against finance com- panies concern the computation of interest and clearly reveal that almost no consumer could make such calculations himself. Holders in due course A major pvoblem faced by consumers in credit transaction comes because of the lack of legislation regulating holders in due course. A holder in due course is a third party to a transaction who handles nothing but the financing of an installment contract. Let us assume that I, as a consumer, contract for home improvements to m~ house. Mr. Smith, the contractor and I enter into a credit agreement. Unknown to me, Mr. Smith thereupon turns around and discounts this installment con- 83-340----67-pt. 2-19 PAGENO="0290" 872 CONSUMER CREDIT PROTECTION ACT tract to a third party, a licensed financing institution. Mr. Smith gives me a warranty on construction materials and workmanship for three years. A year and a half later, Mr. Smith has gone out of business and I have holes in my roof. Since I can no longer contact Mr. Smith but I am still making payments to the financing institution, I go to them and seek remedy. The man at the financing institution tells me he is very sorry but handles only the financing and if the workmanship and materials have not performed as promised, there is absolutely notl~Ung be can or will do. I still owe $2100 for work under war- ranty which no one will repair fore me. This situation is the most common comPlaint we face in the New Jersey Office of Consumer Protection. It is my strong belief that if a financing institution is going to make a profit-and they do-out of a transaction, then they should also share the responsibility for that transaction. If such a regulation were in force, we would soon find financing institutions making the same requirements for discounting installment contracts as they now do for personal loans and mortgages. Since they now have absolutely no responsibility for the work per- formed by the contractor, they buy paper from anyone who has paper to sell. It is a shameful practice which is common among the most respected, upstanding and ethical financing institutions in our country. I strongly recommend Federal Legislation that will abolish the holder in due course and make the financing institution as responsible as the contractor for the work done. Seven year jnstaflment contracts While I am on the subject of home improvements, let me also suggest that a national ceiling s~Iiould be placed on the number of years in which an installment contract can be fir~anced. It is presently common practice in New Jersey and many other states, for home improvement installment contracts to run as long as 7 years Let's consider for a moment what effect these 7 year contractS have upon the consumer. In the first place, many would never have entered intO the contract in the first place if they had understood bow much money it would cost them over a seven year period. Mr. Smith is approached by Mr. Jones, a home improvement contractor. Mr. Jones suggests that what Mr. Smith really needs is a finished basement in his house, at a cost of $4000. Mr. Smith protests that he can not afford such a construction job. Mr. Jones claims that he can. After all, the pay- ments would only be $70 a month. Using high pressure tactics, Mr. Jones man- ages to convince Mr. Smith that he can afford to make such improvements to his home. Only after a completely binding and legal contract is signed, does Mr. Smith realize that he is indebted for 7 years at 7% per annum-or total interest cost of 49%. It will cost him $1960 to finance this home improvement job worth $4000. If the 7 year contract were not available to him, I am sure Mr. Smith would never have gotten himself so deeply in debt. Let us now take a look at Mr. Smith five years later. He was given a 48 month warranty on all conStruction materials and workmanship. The warranty is now expired and now the finished basement needs more Work. He still has two years to go, or a total of better than $1700 to pay on the original job. But the original job is no longer good enough. I strongly believe that if a man can not afford to pay for work done to his home in 5 years 9r less, then the work should not be done. I urge that Federal legislation be enacted placing a national ceiling of five years on the length of any installment contract or personal loan. Indentures In many cases Linance institutions require dealers to obtain signatures of con- sumers to second mortgages on their homes as security for a loan or Installment contract. The title of this piece of paper which they sign is "Indenture." Few consumers know the significance of this document and most are not apprised of the fact that it is actually a second mortgage on their home. I strongly suggest that legislation be enacted to require all mortgages be entitled "mortgage." Madam Chairman, I want to thank you for the opportunity of submitting testi- mony expreSsing my views on I~[.R. 11601 and future needs. I am sure that Con- gress will pass this Bill and will soon recognize the need for the other legislation recommendations which I have made. The citizens of New Jersey are extremely gratified with th~ efforts of you and your committee to enact long overdue re- forms in the field of consumer credit. Thank you ver~ much. PAGENO="0291" CONSUMER CREDIT PROTECTION ACT 873 STATEMENT OF THE AMERICAN INDUSTRIAL BANKERS ASSOCIATION The American Industrial Bankers Association is a national trade organization of sales finance companieS, Industrial loan companies and small loan companies. We have approximately 425 member companies with some 8,500 offices. Some of our members only have one office, some have several hundreds. The sales finance companies primarily buy documents involving credit trans- actions (paper) from dealers. The industrial loan and Morris Plan companies make direct loans in larger amounts to the consumer; they also (where per- mitted by state law) issue certificates of investment or indebtedness to those wishing to invest in their operations. The small loan companies make direct loans to the consumer, but usually on a smaller scale than do the industrials. The total dollar outstandings of the companies and individuals who are mem- bers of AIBA currently average about 20 billion dollars a year. In other words, the members of our association are engaged in the consumer credit business and any legislation dealing with consumer credit will have a direct effect on the busi- ness of our member companies. In presenting this written statement with regard to H.R. 11601 and other re- lated bills, we want to make it clear from the outset that the American Indus- trial Bankers Association strongly favors the full disclosure of the terms of all consumer credit transactions. Moreover, we feel that such full disclosflre should be in language that consumers can easily understand. Finally, full disclosure should be made in a manner that is not at variance with the normal practices with respect to the particular kind of transaction involved. In our Senate testimony on 5.5, `we have already expressed our views with rbspect to the preferability of State action, rather than Federal, on the subject of consumer credit. In view of the role of the States in this field,' we do not think Federal legislation is necessary. Most states today, have laws that regulate and control the type of credit trans- actions handled by various companies that are members of this association. We do not believe that the superimposing of Federal regulation on top of existing state regulation will help. Neither do we feel that Federal legislation requiring the merchant, the dealer, the finance company, or the bank, to state the charges involved in a credit transaction, on an annual percentage rate, will help the con- sumer make more intelligent decisions about the use of credit. We fail to see how the passage of a Federal law of any kind is going to cause the consumer to use any different common sense than he has been using all along. Good judgment and education cannot be legislated! In addition, as this subcommittee is fully aware, there has been in progress for several years a detailed study by the Commissioners on Uniform State Laws to determine if a Uniform Consumer Credit Code should be established through- out the fifty states. Particularly in view of the pendency of this project, we feel that the passage of any Federal legislation at this time is unwarranted. We be- lieve it would be for the best interests of all concerned for Congress to wait and see the results of this study-which will become available, in final form, in the near future. As this subcommittee is no doubt aware, this Association opposed 5.5 in the form it was originally introduced. We testified before the Senate Subcommittee on Financial Institutions setting forth our reasons for this opposition. We watched with a great deal of interest the progress this bill made as it moved from subcommittee to full committee to the floor of the Senate. We had naturally hoped the bill would not pass as we still feel such legislation is not necessary. However, in fairness to all concerned, we must state that S. 5, as finally passed by the Senate, is a much better bill than it was when first introduced. We would also be less than candid if we did not add to this statement that we feel there are one or two provisions of HR. 11601 that we feel would improve S. 5. We agree with Mrs. Sullivan and those who have been advocating this type of legislation for many years that if a Federal Act is passed it should cover every segment of the consumer credit industry. Therefore, we feel that provisions for open-end credit, along the lines provided in H.R. 11601, should be added to 5. 5. We also feel that mortgage credit, whether first or second, should be added to S.5. Having said this. however, we must keep the record straight by expressing our opposition to some of the other provisions of H.R. 11601 that differ from S. 5; namely: A Federal usury statute-a statute imposing a ceiling on rates to PAGENO="0292" 874 C~NSUMER CREDIT PROTECTION ACT be charged; a Federal statute pertaining to garnishment and confessions of judgment; and the provision giving the Executive Branch new authority of the Regulation W type. It is our firm belief that these matters do not belong in a bill pertaining to full disclosure. In addition, we can see no reason for the establishment of a National Commis- sion on Consumer Affairs, If S. 5 or a similar bill should pass both Houses, we feel the Federal Reserve Board can sufficiently administer such an Act without creating an additional agency. It has been suggested by some that we in the finance industry are not concerned about the consumer, that all we really are interested in is making a profit. Anyone who makes such a statement just doesn't understand the business world. No one is more interested in the consumer than are members of the American Industrial Bankers Association. Our livelihood depends on the consumer being satisfied, on his being treated right, on his being fully informed. If the consumer is unhappy, dissatisfied or doesn't understand what he's doing, he is going to stop dealing with our companies. When this happens, there just won't be any finance business, any finance business profits, or any tax revenues based on such profits. Everyone is a consumer-without exception-and the consumer is capable of speaking for lilmseif. He does this daily as he goes about buying merchandise and services that he wants. The American consumer is capable of speaking for himself and he does In any many ways. Nowhere on earth do consumers have access to the quantity, quality, and variety of consumer goods, services and credit as is available to the American consumer-and at pJ~ices he can afford. This has come about because the con- sumer is satisfied. 1~Vhen millions of consumers are buying billions of dollars worth of merchandi~e and services on time, somebody, someplace, is not t~o unhappy. Once more we repeat, we remain opposed to Federal regulation of consumer credit. We are convinced that any problems that may exist in this field can most appropriately be solved at the state level. However, if such legislation is passed by ~iongress we strongly urge that it be kept as simple as possible and as workable as possible. We firmly b~lieve that S. ~, with the few changes we have outlined above, would be such a bill. STATEMENT O~ THE NATIONAL AUTOMOBILE DEALERS AssOCIATION The National Aut~moblle Dealers Association appreciates the opportunity to present Its views on HR. 11601, the "Consumer Credit Protection Act", and the related bills being cOnsidered by this Subcommittee, including S. 5 as approved by the Senate on Julj* 11, 1967. NADA is a nation~tl trade organization whose membership comprises approxi- mately 22,000 franchised new car and truck dealers engaged in the retail sale and service of all makes of new cars and trucks, both domestic and foreign, including farm implement dealers. Dealers in every State and Congressional District in the United States are included in our membership which is com- posed of 69 percent of the franchised dealers in this country. As such, we are vitally interested in the various legislative proposals presently before this Sub- committee which, if enacted, will directly and significantly affect the daily busi- ness operations of ou~ members. At the outset, we should like to point out that NADA has in the past opposed enactment of so-called "Truth-in-Lending" bills and continues to feel that the proposed legislation Is unnecessary for reasons spelled out in detail in its state- ment of May 12, 1967, on 5. 5 to the Subcommittee on Financial Institutions of the Senate Banking and Currency Committee. However, lest our position be misunderstood, it should be emphasized that this Association has always favored a truthful and complete disclosure to a purchaser of all pertinent details of the transaction, including finance charges and a detailed itemization of all other costs and charges. But we have advocated that the full disclosure of the ele- ments making up the total cost should be expressed in the medium which is most comprehensible to the purchaser-in terms of dollars and cents, rather than as a percentage rate. We believe that S. 5 as passed by the Senate is a more workable measure than the bill as originally introduced. S. 5 could be further improved by amend- ments which we will Øutline later in this statement. PAGENO="0293" CONSUMER CREDIT PROTECTION ACT 875 It is also our belief that certain concepts contained in HR. 11601 would go far to strengthen S. 5. In this regard, we `especially commend Mrs. Sullivan and. her cosponsors for incorporating the principle of "Truth4n-Credit Advertising'~ in H.R. 11601 and for the elimination of the exemptions provided in S. 5 for open-end and revolving credit, and first mortgage credit~ Our recommendations for improvement of S. 5 are set forth below. 1. Exemption for Open-End Credit Plans and First Mortgages. One of the basic contentions of proponents of the legislation has been that it would give consumers a uniform yardstick to compare consumer credit costs. Yet, as passed by the Senate, S. 5 exempts most open-end credit plans from the requirement that finance charges be disclosed in terms of an annual per- centage rate. Under S. 5, creditors offering "open-end" credit need disclose an annual per- centage rate, basically, only in connection with plans (1) involving a security interest or (2) in which less than 60 percent of the unpaid balance at any time outstanding is repayable within twelve months. This exemption gives a pre- ferred position to a substantial portion of loan credit and the very largest part of the credit extended by the large national merchandising chains, thus placing automobile dealers and other small merchants at a severe competitive disad- vantage. To cite but one example, dealers compete directly with many large chain stores in the sale of tires, batteries and accessories, as' well as automobile service. In this area of competition, the preferential position given such stores in quoting monthly percentage rates for finance charges would present ob~rions and potentially disastrous consequences to dealers required to state such charges~ in terms of an annual percentage rate. There is no justification for this "special favor" treatment for the fastest growing segment of the credit industry. The exemption in S. 5 of revolving credit plans of large retailers represents outright legislative discrimination against small businessmen such as auto dealers who must compete against giant chains which can afford the complex computer systems, credit departments and the like required for efficient and economical open-end systems-a luxury far be- yOnd the limited means of the small merchant. HR. 11601 recognizes this inequity and restores comparabilit~~ of credit costs by rejecting the Senate bill's exemption for open-end credit. We fully subscribe to the following remarks of J~. L. Robertson, Vice Chair- man of the Board of Governors of the Federal Reserve System, on this matter in his statement before this Subcommittee on August 7: "In eliminating the revolving credit exemption, the sponsors of H.R. J~1601 have recognized the importance of providing consumers with a standardized method of comparing' credit costs, and have avoided giving one type of creditor an unfair competitive advantage over another." ror similar reasons, we believe that first mortgage credits should not be ex- empted from the bill, as is done by S. 5, but should be covered, as provided in H.R. 11601. 2. Treatment of Insurance Premiums. Under both S. 5 and H.R. 11601, all insurance charges must be fully dis~ closed. Section 3(d) of S. 5 expressly exemptS from the definition of "finance charge" amounts collected by a creditor or included in the credit for filing fees, taxes and insurance if they are itemized and disclosed to the obligor. Section 202(d) (1) of HR. 11601 apparently includes in the definition of the finance charge: "(C) charges or premiums for insurance against loss of or damage to property related to a credit transaction or against liability arising out of the ownership or use of such property; and (D) charges or premiums for credit life and accident and health insurance." (Sec. 3(d) (2) (e) and (d) of S.5) The consequences of such inclusion are most serious. The definition of "finance charge" in S. 5 was designed to conform closely to state law concepts because the draftsmen of S. 5 recognized that expansion of the concept of "finance charge" would only confuse consumers. Differences between applicable state law and the concepts of the bill magnify the issue of Federal preemption and prevent the reconcilation of state and Federal disclosure laws now contemplated by Sections 203(g) and 205(a) of EE.R. 11601. There was no suggestion in the hearings on S. 5 that charges for insurance against loss of or damage to collateral or against liability arising out of its PAGENO="0294" 876 CONSUMER CREDIT PROTECTION ACT ownership or use should be treated as a part of the finance charge. Property insurance, such as automobile physical damage insurance, is a normal incident of the ownership of a motor vehicle. No existing principle of law requires that charges for such instirance be characterized as finance charges. Credit life and accident and health insurance present somewhat different problems. Each print of S. 5 treated credit life and accident and health insurance differently. The view of J. L. Robertson, Vice Chairman of the Federal Reserve floard, was finally adopted. In his testimony b~fore this Subcommittee on August 7, Governor Robertson, repeating his statement before the Senate Subcommittee on Financial Institu- tions, said in pertinetit part: "One of the issues that has proved troublesome during consideration of dis- closure legislation has been the question of how to treat insurance premiums on policies taken out by borrowers as a condition of, and covering the amount of, the credit contract. * * * "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 regarded as part of the finance charge, and should be specifl~ally excluded, as provided In S. 5. We do believe, however, that the dollar amount of any such preniiums included in the credit extended should be Itemized, again as provided In ~. 5." FQr the reasons set out above, the previously quoted exemption for insurance contained in subsection (C) and (D) of Section 3(d) (2) of S. 5 should be added to Section 20~(d) (1) of H.R. 11601. H.R. 11601 contains the same civil and criminal penalty provisions found in S. ~S. As applied t~ automobile dealers who handle one of the highest priced products covered by the proposed legislation, the civil penalties are inordinately excessive and call for modification. If this legislation were easily understood and complied with, some valid argument for severe penalties might be niade. But this is not the case. Install- ment sales made by automobile dealers are for long periods, ranging from twenty-four months to forty-two months. The penalty of two times the finance charge could, considering the complexity of the proposed legislation, result in bankruptcy for many automobile dealers. The sale of a new car with an unpaid principal balance of $3,000 at a $6 add-on rate for a term of three years pro- duces a finance chay~e of $540. Twice the finance charge is $1,080. Thus, the penalty of twice the finance charge--even applying the S. 5 ceiling of $1,000- results not only in loss to the dealer of any compensation for the credit extended but also a loss of principal. The civil penalties now provided in S. 5 and KR. 11601 fully protect con- su~ners without the penalty of twice the finance charge. Under both bills, a consumer recovering a penalty is also entitled to reasonable attorneys' fees and court costs. If a consumer shows any violation whatsoever, he is entitled to a minimum penalty of $100. It is unjustifiably harsh to impose, in addition, a penalty of twice the finance charge. Sale of an automobile on an installment plan is a complex transaction. A dealer is required to calculate, in addition to any finance charge, insurance premiums, taxes, certificate of title, and license and filing fees. The possibility of error, or of a misunderstanding leading to an al- legation of error, is great and is appreciably widened if the "Truth-in-Credit Ad- vertising" provisions of II.R. 11601 are adopted. We strongly urge that the penalty be limited to loss of finance charge. If so limited, the consumer will lose nothing, except the possibility of a windfall. The provisions for attorneys' fees and the minimum penalty of $100 are suf- ficient to encourage civil actions to enforce the purposes of S. 5. We therefore suggest that Section 206(a) (1) of KR. 11601 be revised to read: "Any creditor who, in connection with any credit transaction, knowingly fails, in violation of this Act of any regulation issued hereunder, to disclose any in- formation to any per~on to whom such information is required to be given shall have no right to collect in connection with such transaction any unpaid finance ~harge and shall pay to such person or credit to his account the finance charge paid by such person to the creditor in connection with the transaction, except that the penalty shall not exceed $1,000 on any credit transaction. If the fore- going penalty is less than $100, the credit shall in any event be liable to such person in the amount of $100." PAGENO="0295" CONSUMER CREDIT PROTECTION ACT 877 To forestall a multiplicity of nuisance suits against creditors, we would also urge that a provision be inserted in the bill which would hold an unsuccessful plaintiff liable for the defendant's reasonable attorneys' fees and court costs. Thus, both parties would be placed on the same fooUng and the litigious-minded would be forced to give pause before instftuting a ~rlvolous suit in the hope of a quick settlement. This could be done by deleting the sentence beginning at line 8 of page 23 of HR. 11601 and substituting the following: "In any such action to recover a penalty as prescribed in paragraph (1), the losing party shall be liable for the reasonable attorneys' fees of the prevailing party and court costs as determined by the court." Finally, as regards the civil penalities section, we would recommend the delection of the Words "and prior to the institution of an action hereunder or the receipt of written notice of the error" in lines 23 through 25 on page 22 of H.R. lltElGl. The present civil penalties section provides an adequate remedy to all debtors without making a game out of the discovery of errors. Every creditor should be given the opportunity to correct his error as soon as it is dis- covered, no matter who discovers it. 4. Inclusion of Agricultural Transactions. In the Executive Session of the Senate Subcommittee on Financial Institu- tions, agricultural transactions were specifically brought within the scope of S. 5 and adopted by the Senate. They are also included in H.R. 11601. The inclusion of agricultural transactions raises many problems for our dealers. The income of most farmers is seasonal and highly variable. Repayment schedules must be adapted to income patterns. Agricultural transactions prob- ably involve the most complex and difficult computations of any installment credits. The bill should protect farmers as consumers, and exempt farmers as~ businessmen. The specific addition of credits extended for agricultural purposes, whether or not for personal, family, or household purposes, would have the effect of giving businessmen who are farmers protections which they have not requested. These protections will only serve to increase the cost of credit to farmers and make it more difficult for them to obtain credit. This Subcom- mittee is urged to exclude from the scope of H.R. 11&fl business transactions entered into by businessmen whose business is agriculture. 5. The "Truth-in-Credit Advertising" Provisions of H.R. 11601. As mentioned at the outset, NADA is pleased to see H.R. 11601 include require- ments with respect to the advertisement of credit. While we recognize that this bill will not cure all the ills of advertising, it nevertheless offers a good begin- ning, at least as regards the advertisement of credit to which it is specifically directed. By the way of background, NADA has been engaged in the battle against false, misleading and deceptive automobile advertising since 1954. It has pio- neered in this field and is today without peer in its programs and efforts. The initial "Recommended Standards of Practice for Advertising and Selling Automobiles" were compiled jointly by NADA and the Association of Better Business Bureaus twelve years ago with the aid of a grant of $25,000 by NADA's Board of Directors for this purpose. The Standards are reviewed periodically by the NADA Advertising Standards and Practices Committee with the Automobile Advertising Committee of the ABBB in order to keep them current with changing business conditions and new concepts in advertising. As an example, provisions of the code were ex- tended two years ago to include the advertising of rental and leasing of auto- mobiles, phases of the business which have grown considerably in recent years. During this period, NADA has spent, by a conservative estimate, well In excess of a half million dollars promoting the adoption of its advertising stand- ards by members, automobile dealers generally, the manufacturers, advertising agencies and the media. We have sponsored extensive advertising campaigns in the media trade press urging their adoption of these standards, or acceptable adaptations; we have provided speakers for a variety of meetings of advertising representatives of the media, explaining our objectives and seeking their coop- eration; we have distributed thousands upon thousands of copies of the stand- ards and have provided additional thousands to Better Business Bureaus throughout the country for supplemental distribution on their part. Copies of these standards have also been made available to the public, schools and colleges, research libraries, Individual consumers and others. PAGENO="0296" 878 CONSUMER CRE~IT PROTECTION ACT Our programs, aims and objectives have been made known to the Federal Trade Commission, and other government agencies, from time to time. We have had discussions with FTC officials seeking their advice and cooperation. Our most successful operations have been conducted with the cooperation and assistance of the Better Business Bureaus in some metropolitan areas and substantial amounts of dealers' money. Probably the most successful program has been sponsored in Chicago by the Better Business Bureau of Metropolitan Chicago and the ~Jhicago Automobile Trade Association with the full support of the local media. Chicago dealers contribute $35,000 annually to the Bureau to underwrite the cost of "refereeing" automobile advertising in that market, using the NADA Standards as the guide for judging. A constant and keen eye Is maintained by the Bureau in the Chicago market and when, in its opinion, a dealer's advertising is false, misleading or deceptive, it issues a "not-in-the-public-inter- est" (NIH) objection and the media immediately withdraws the advertising deemed unsatisfactory and refuses to accept additional advertising from the offender until a corrected ad and apology is published and the Bureau lifts its "indictment." Similar arrangements exist In several other cities, Boston probably being the next most successfnl example. In all its advertising and public relations support of this program, NADA has stressed that its efforts are in the public interest, and that it is reasonable to expect similar interest on the part of the media for their readers, listeners and viewers. Some members of `the media ha've adopted or adapted our standards and have reported their action to us. Others have indicated very frankly that they are interested in advertising solely as a source of revenue and have no intention of judging the content unless ft be so obviously false, misleading and deceptive, or otherwise objectionable, that it would be certain to cause embarrassment or legal complications to them. The media can, and on occasion does, contribute to the deception with full knowledge. Therefore, granting the media exemption from any responsibility for the acceptance and publication of false, misleading and deceptive advertising would substantially curtail the inten~1ed objectives of the advertising provisions of this bill. We would urge this Committee to give serious consideration to limiting the exemption granted the media by imj~osing a responsibility to all' in the public Interest in rejecting for publicatioli false, ulisleading and deceptive credit advertising. Having indicated our long-term efforts and progress in the field of auto- mobile advertising, generally, we now come to the specific provisions of FIR. 11601 as they affect the advertisement of credit and we recommend the follow- ing constructive and clarifying amendn~éiits. Sections 203 (j) and 203 (k) of I~LR. 11601 require all cOnsumer credit ad- vertising containing "spe~lfic terms" to set forth clearly and conspicuously vir- tually the same Information required to be disclosed to consumers before any credit is extended. S. 5 now protects a consumer after he has decided to seek credit. Regulation of advertising will supplement this basic protection by insuring that consumers have accurate information before deciding to seek credit. All reputable creditors should support extension of the full disclosu~é prin- ciple to advertising. However, the advertising provisions of FE.R. 11601 raise a nun~ber of technical and practical problems, including (1) improper definitions, (2) the amount of informatjon required to be disclosed, and (3) the severity of penalties. H.R. 11601 defines an "advertisement in interstate commerce or affecting interstafe commerce . . ." (Section 202 (1)). However, the definition is merely jurisdictional; it peither defines an advertisement nor specific credit terms. In the interest of clarity, the term advertisement should be amended to read: "`Advertisement' means any publication, display, broadcast, solicitation or representation in connection with ar~y credit or consumer credit sale." The suggested definition omits any reference to interstate commerce because the declaration of purpose in Sectioli 201 (a) (page 3. lines 4 through S~ ex- pressly invokes the powers of Congress to establish a currency and regulate its value, thus mkaing it unnecessary to limit the scope of the act to advertisements PAGENO="0297" CONSUMER CREDIT PROTECTION ACT 879 in interstate commerce. The definition, therefore, covers all forms of consumer credit advertising. A definition of specific credit terms should be added to Section 202 (1) "An advertisement contains specific credit terms if it states any of the follow- ing: (A) a rate or rates of any finance charge; (B) the amount of any finance charge; or (0) the amount of any installment or installments." The definition is important because under the vague language of HR. 11601 any advertisement containing any specific information must apparently dis- close all of the detail required by Sections 203 (j) and 203 (k). Creditors should not be required to add a mass of detail to all advertisiug. Advertisements stating only "loans to $2,500" or "terms up to 24 months" are unlikely to mislead consumers and provide valuable information about the serv- ices offered by credjtors. The detailed requirements of Section 203 (j) and 203 (k) would lead creditors to limit advertising to "tombstone" notices. Consum- ers would, as a result, receive even less information about credit terms than they now do. The advertising provisions of H.R. 11601 should be designed to prevent mis- leading credit advertising instead of requiring disclosure of detailed and often meaningless information. The suggested definition of specific credit terms accom- plishes the purpose by enumerating the kinds of information which have some- times been stated in a misleading or confusing fashion. Section 203(j) and subsection (1) of that section require a creditor advertis- ing "specific" credit terms to disclose in the advertisement, clearly and con- spiculously: (a) the cash price, (b) the number, amount and period of each in- stallment payment, (c) the down payment, (d) the time sale price, and (e) the finance charge expressed in an annual percentage rate. It would be difficult for creditors to comply with Section 203 (j). In automobile sales, for example, the cash sale price frequently depends upon competitive factors, the time of the year, the dealer's inventory, and the like. The cash sale price also reflects the options selected by the purchaser. It would, therefore, be difficult to state a true cash sale price in an advertisement. The number and amount of payments depend on the needs of the customer, his credit standing and other factors. The amount of the down payment is similarly variable. The time sale price and the finance charge reflects the down payment and the number of installments. The annual percentage rate depends not only on all these factors but on additional variables such as the date of the first install- inent payment. Section 203(j), therefore, should be amended to shift its emphasis from dis- closure of detailed and often meaningless information to prevention of mislead- ing credit advertising. The interpretation to 203(j) and subsection (1) of that section should be revised to read: "No creditor in any advertisement containing specific credit terms and designed to promote or induce, directly or indirectly, any credit or consumer credit sale shall state: (1) a rate or rates of finance charge, unless the annual percentage rate is also stated (2) the amount of any finance charge or Installment payment, unless the annual percentage rate and the number, interval and amount of installment payments are also stated." The suggested amendment will not deprive consumers of any substantial pro- tections. The detailed information required by Section 203(j) (1) must be dis- closed by a creditor "before the credit is extended." E.g., Section 203(b). On the other hand, there is likely to be more advertising of helpful information if cred- itors are relieved from the overly detailed requirements now contained in See- tion203(j) (1). Failure of a creditor to comply with Sections 203(j) or 203(k) is, apparently, a violation of Section 206. Under Section 206, any creditor who, in violation of Section 203, f ails to disclose, to any person to whom Information is required to be given, is liable to such person for $1QO or twice the finance charge required by the creditor in connection with the transaction, whichever is greater, plus attor- neys' fees. The civil penalty section, thus, raises the possibility that anyone who reads a newspaper or watches a television program containing an advertisement which does not comply with the requirements of Section 203 would have a right to a penalty of $100 and attorneys' fees. In addition, any obligor able to show that PAGENO="0298" 880 CONSUMER CREDIT PROTECTION ACT a credit transaction was preceded by an advertisement Which violated the law, apparently, could recover the civil penalty even though the creditor disclosed to him before the credit was extended all the information required by Section 203 and had thereby, cured any defects in the advertisement. The advertising provisions of H.R. 11601 were copied from Senator Magnu- son's proposed "Fair Credit Advertising Act" Senator Magnuson's proposal con- tains no civil penalties. It would, therefore, seem that application of civil penalties to advertising violations Was inadvertent. H.R. 11601, like Senator Magnuson's Act, should rely exclusively on criminal penalties for enforcement of its advertising requirements. The introduction to Section 206(a) (1) should, therefore, be amended to read: "Any creditor who, in connection with a credit transaction, knowingly fails in violation of Section 203 (ea,cept subsections 203 (5) and (k)), or any regulation thereunder.. . ." (New matter italicized.) We believe that the net result of legislative action along the lines suggested in this statement will be a measure which would deal with the realities of the situation to which both S. 5 and 11.11. 11601 are addressed. We strongly recom- mend, however, that such legislation should not include sections of H.R. 11601, not found in 5. 5, providing for a statutory interest rate ceiling, prohibiting the garnishment of wages or confession of judgment, and authorizing the imposition of selective controls on consumer credit. Nor do we see any clear need for a National Commission on Consumer Affairs. Finally, the effective date of the legis- lation should be that prescribed by 5. 5 rather than H.R. 11601. We have attempted in this statement to treat what we regard as the more important provisions of S. 5 and HR. 11601 as they affect our members. By way of summation, we remain unconvinced that the anticipated benefits to the consumer from enactment of legislation in this field will be realized. And we continue to believe that the burdens imposed on small independent business- men who sell automobiles, trucks and farm implements will far outweigh the supposed benefits accruing to consumers. Nevertheless, if there is to be legislation, we would hope that the final version would include amendments to S. 5 proposed above along with the incorporation in S. 5 of those previsions of H.It. 11~01 which we have presented and supported in this statement. STATEMENT OF AMERICAN AssoCIATION OF UNIvERsITY WOMEN, WASHINGTON, D.C. Madam Chairman and members of the committee, the AAUW welcomes the op- portunity to support enactment of a Truth-in-Lending or Consumer Credit Protec- tion Act. The rise in consumer debt over the past quarter of a century in its relation to either the Federal debt or to the disposable income of this country's wage earners has been astonishing. The rise in the cost to the consumer of such debt is in many instances equally gmazing. Even the otherwise sophisticated fall prey to hidden charges, to misleading advertising a~d to small print in contracts. Many seem- ingly astute home buyers believe they are paying 6% interest a year, when in fact, they are paying 12%. Many otherwise "educated" purchasers of commodities fail to translate 21/2% a month in finance charges into something that can be costing 30% a year. While credit, used wisely and properly extended, can be useful both the the con- sumer and producer, we in AAUW, believe many current consumer credit prac- tices are insupportable and harmful both to the stability of the economy and to the welfare of the public. We believe the buyer has a right, when making a purchase on credit under contract, to information in writing oi~ the total dollar amount of the credit charge, and to this dollar charge expressed as a true annual percentage rate on the out- standing or unpaid balance. In other words, we believe the consumer has a right to know, indeed, that the seller has an obligation to reveal the difference between the cost of an article sold for cash amid the final cost of one sold on credit when paid for within a stipulated time. We believe that any incidental charges, such as charges for servicing the loan or for life insurance should be disclosed in writ- ing to the borroWer. We also belleve that the disclosure requirement should be extended to cover the advertising of credit in order that consumers be in a posi- tion to make a comparison of the cc~sts of different kinds of credit. PAGENO="0299" CONSUMER CREDIT PROTECTION ACT 881 * We have referred to those "who should know better" as victims o bait adver- tising and "easy credit" but the plight of the underemployed, the poorly paid and the undereducated is desperate since they rarely have money for cash purchases and resort to credit buying for almost every commodity which they purchase except food. These are the consumers who cannot afford to shop for their credit, who cannot understand the technical language even when able to read a contract, and who fall most frequently into the trap of fraudulent or grossly misleading information, and overselling, and who accept as inevitable exorbitant interest rates. These are the people that suffer most from the garnishee process. We believe regulation of collection practices such as tying up the debtors wages in garnish- ment or threatening disclosure of debt to an employer or to the welfare agency as a collection device (a threat which to the debtor becomes a threat of loss of his job or being taken off welfare rolls) would reduce to a measurable degree the practices of overextension of credit to the poor and the subsequent repos- session (and frequently resale) of partially paid for merchandise. While we recognize the difficulties of stating accurately on an annual basis the interest charges on fluctuating "revolving" charge accounts we believe those consumers whose charge accounts are rarely paid in full should be made aware of the yearly cost of the credit they use-or in other and simpler words, of the money they rent. We also see as a possibility that more and more businesses might resort to revolving accounts as a loophole by which to avoid full disclosure unless these revolving accounts are covered in the legislation under consideration. For this reason we prefer the language of the Administration Bill and H.R. 11601, Mrs. Sullivan's bill, to that of the Senate passed bill. We have noted that the Senate passed bill exempts transactions of $10 or less. We believe, like the "re- volving" charge account, the small loan transaction should not be exempted as in the latter case regrettable and usurious practices are frequently reported~ We also are at a loss to understand why S.5 excludes first mortgages and loans to businesses from its disclosure provisions. We are gratified that the legislation before this Committee calls for the drafting of detailed regulations by the Federal Reserve Board to put Truth-in-Lending into effect and that the Board is to be given powers of administrative enforce- ment to secure compliance. We thank you for the privilege of having this statement included in the record of the hearings of this subcommittee. CoNsUMER CREDIT INSURANCE AssocIATION, Chicago, Ill., August 22, 1967. Hon. LEONOR K. SIJLLIvAN, Cli airma~i, Subcommittee Ofl Consumer Affairs, House Banking and Currency Committee, Rayburn House Office Building, Washington, D.C. (Attention: Mr. Charles Holstein). DEAR REPRESENTATIVE SULLIVAN: Enclosed is a statement of the Consumer Credit Insurance Association with respect to H.R. 11601 and related bills which bills have been the subject of Hearings before your Subcommittee. We appreciate yot~r giving this statement consideration and making it a part of the Hearing record. Very truly yours, WALTER P. RUNKLR, General Counsel. STATEMENT OF CONSUMER CREDIT INSURANCE AssocIATION WITH R~SPECT TO HR. 11601 AND RELATED BILLS This statement is filed on behalf of the Consumer Credit Insurance Association (COlA), a national trade association composed of 94 insurance companies which write insurance in connection with credit transactions of all types. The COlA was organized in 1951 specifically as a trade association of insurance companies engaged in the business of underwriting Insurance in connection with loans and credit transactions and has confined its activities to these areas up to the present time. We recognize H.R. 11601 is principally a proposal with respect to finance or loan practices but we feel it is desirable to express our views with regard to PAGENO="0300" 882 CONSUMER CREDIT PROTECTION ACT the treatment of credit insurance that might be affected by HR. 11601 and the related bills being considered by your Committee. Our Association does not believe that any responsible spokesman for the insur- ance industry woiild oppose separate disclosure of the facts of an insurance transaction consumated in connection with a credit transaction, as now required by S. 5, also under consideration by your Subcommittee. This disclosure, we believe, should be basic prerequisite to the transaction itself. This is the con- cept expressed in the so-called Model Bill to Provide for the Regulation of Credit Life and Credit Accident and Health Insurance developed by the National Asso- ciation of Insurance Commissioners in 1957 and subsequently enacted in a majority of the states. Serious problems could be created by enforcement of H.R. 11601 if insurance is included in the definition of "finance charge." The basic concept of "disclosure" as presently set forth in H.R. 11601 would be contrary to the principles of the NAIC Model Bill and other state insurance and finance laws and regulations. HR. 11601 would require the cost of credit life insurance, credit accident and health insurance abd property insurance in connection with a credit transaction to be included in the computation of the "annual percentage rate." We do not believe this should be required. The primary benefits from insurance provided in connection with ~t credit transaction flow to the debtor. If the debtor dies With- out credit insurance his estate is responsible to discharge the indebtedness. [f the borrower is sick or injured and does not have credit accident and health insurance he remains fully responsible for the payments. With credit insurance the underlying obligation is reduced or discharged in accordance with the terms of the insurance policy. Although it is recognized the creditor's collections may be facilitated from the insurance obtained by its borrowers, nevertheless, the primary benefits do inure to the protection of the debtor or his estate. J. L. Robertson, Vice Chairman of the Board of Governors of the Federal Reserve System in his statement on S. 5 discussed the subject of insurance and concluded "to require that the finance charge include insurance premiums would overstate the actual charge for credit. Therefore, we think that the cost of any kind of insurance Is not properly regarded as part of the finance charge, and should be specifically excluded in S. 5," Subsequently, the Senate adopted Mr. Robertson's recommendations, as evidenced by the final version of S. 5 as passed by that body. More recently Mr. Robertson, in his statement on H.R. 11601 and related bills, again discussed insurance emphasizing 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" and concluded "that such premiums are not properly regarded as a part of the finance charge, and should be specifically excluded, a~ provided in S. 5." (emphasis supplied) We strongly endorse this recommendation. We believe the Inclusion of insurance costs in determining the annual percentage rate would distort the true expression the sponsors of the bill seem to be seeking. Meaningful comparisons of percentage rates with insurance included become extremely difficult when it is recognized that similar types of lending institutions charge different rates for similar insurance and offer different plans nf insurance with a wide range ef premium ~harges. In credit accident and health insurance, for example, there are numerous variations in benefits with consequent variations of rates being charged. When property insurance is added as a further considera- tion, the problems are significantly multiplied. Attempting to include insurance costs in the calculation of percentage rates without regard to benefits being pro- vided would only compound confusion where comparison is to be made by debtors, creditors or regulators. In keeping with the recommendations of the NATC we believe a more beneficial concept of complete disclosure is accomplished by breaking down, in dollar amounts, insurance costs, if any, so that the purchaser or borrower can see what he is paying for each type of insurance, In this manner and only in this manner can the customer e~aluate his insurance costs and coverages. If lumped in gen- erally with "finance~charges" the lack of separate identification of insurance costs tends to defeat the real concept of disclosure in that the customer may never be aware that he has i~svrance muqh less know what it costs. Insurance, particularly where written in connection with credit transactions, must stand on its oWn merits in the eyes of the debtor who pays for the coverage and in the eyes of the creditors and regulators. Insurance must be separately PAGENO="0301" CONSTJMER CREDIT PROTECTION ACT 883 disclosed and separately evaluated, as now provided in S. ~. Any regulation which would tend to treat insurance as an integral part of a credit transaction would make it very difficult, if not impossible, to maintain adequate policing of rates charged in relation to benefits provided. Consistent with Mr. Robertson of the Federal Reserve Board we urge you to amend ~R. 11601 to exclude insurance as a component of "finance charge." NATIONAL FOUNDATION FOR CON5UMEB CREDIT, Washington, D.C., August 3, 1967. Hon. LEONOR K. SULLIVAN, House of' Representatives, Washington, D.C. DEAR MRs. SULLIVAN: I acknowledge your request for our appearance before the Consumer Affairs Subcommittee, Tuesday, August 8, 1967. The National Foundation for Consumer Credit is composed of manufacturing, retailing, banking and other financial concerns dedicated to the purpose of making the consumer credit transaction better understood and more intelligently handled. With our membership so widely diversified and with each industrial, trade and financial group in our membership being represented specifically by the trade association or associations in its own field, we do not undertake to come to any common agreement on policy with respect to the intracacies of any legislation. Our principal concern is with two major projects: (1) education, through the schools and colleges, in the area of consumer credit, to prepare the oncoming gen~ eration for its intelligent use; and (2) sponsorship of a nationwide network of non-profit Consumer Credit Counseling Services to help people who find them- selves in credit and financial difficulty. In more than 2,800 cities, the public schools have accepted our unit, using our credit intelligently for classroom teaching. Many parochial and other private secondary schools have done the same. Among those who edited It were fifty-five teachers, principals and superintendents who volunteered their time to help us make the study as impartial as possible. This resulted, by the way, in 28 separate manuscripts before so many points of view could be meshed to the satisfaction of all. In the Counseling area there are now more than seventy Services in operation with possibly 27,000 families under our wing at the moment. Private enterprise is investing close to two million dollars a year in this project alone, setting up the local Services. We believe before long there will be several hundred of these in operation. I am taking the liberty ofsending you a copy of both using our credit intelli- gently and the plans and working suggestions pertaining to the Counseling Serv- ice program. These projects and the work involved in explaining them to all sorts of civic groups and to the teachers, to say nothing of persuading enterprise to support thIs effort take about all the time and money the Foundation has been able to generate. So we respectfully suggest that we are really unable to contribute to the hear- ings on HR. 11601 constructively; have not been instructed by our membership or officers as to their attitudes. These I expect could be varied and hardly within our province to seek to coordinate. I appreciate your thoughtfulness in suggesting that we testify. I should like very much in the course of events to find that you may be inter- ested personally in the work we are doing; should enjoy the opportunity to dis- cuss it with you at your leisure. Incidently we are not a large organization and do not assume to represent any cross-section of business and banking opinion in the manner that the large trade associations can. Cordially yours, W. J. OHEYNEY, Ea'ec. Vice President. P.S.-I thank you for the copy of the H.R. 114301 and the accompanying July 20 release. PAGENO="0302" 884 CONSUMER CREDIT PROTECTION ACT NATIONAL ASSOcIATION OF HousE TO Housa INSTALLMENT Cos., INc., New York, N.Y., Augnst 4,1967. Hon. LEONOR K. SUL*VAN, Chairman, Bubcomii~ttee on Consumer Af/~airs, Henre Banking and Currency Committee, Hon8e Office Bnildi~ng, Washington, D.C. DEAR CONGI~ESSMAN SULLIVAN: I am writing to you on behalf of the more than 370 direct selling credit companies that are members of the National Association of House to House Installment Companies, all of whom have a Vital interest in the "Truth-In-Lending" Bill. I think it is a basic concept that Federal legislation should not discriminatO against one group as opposed to another. It should be basic, therefore, that all retail creditors should be treated equally and kept on equal footing. Any dis- closure legislation should not, in the way terms are to be stated, discriminate against retailers using any particular method of extending credit and should not favor other retailers such as department stores using other methods of giving credit. For example, the "Truth-In-Lending" Bill now allows typical department store revolving credit to g~ive service charge as monthly rate only but requires revolv- ing accounts with title-retention and conventional installment accounts to give annual percentage rates, such as 18 per cent if monthly rate is 11/2 per cent. This puts independent retailers who are in competition with department stores on big ticket items at a tremendous disadvantage. In our type of continuot4~S credit relationship with a customer, there are weekly payments plus add-on sales so that it is both a practical and a mathematical im- possibility to establish the so-called "true" annual rate of interest. What our customers are interested in is the dollar cost of the credit that they obtain. The purpose of the "Truth-In-Lending" Bill is to protect the consumer. Its purpose is not to protect one class of retailers against another and discriminatory protection of this t~pe does nothing to enhance the protection given to the con~ sumer in any way. Sincerely yours, EDWARD L. SARI), J3J~reoutive Director. NATIONAL LEAGUE OF INSURED SAVINGS ASSOCIATIONS, Washington, D.C., Avgust 8,1967. Hon. LEONOR 1~. SULLIVAN, Clsairman, subcommittee on Consumer Affairs, Committee on Banking and Cur- rency, Hoitse of Representatives, Washington, D.C. DEAR CHAIRMAN $ULLIVAN The National League of Insured Savings Associa- tions is a nationwide trade association serving the savings and loan industry. Its 1967 Legislative Conference in Washington, D.C. on February 14 voted to sup- port the principle o~ Federal Truth-in~Lending legislation. This action was consistent with the National League's past support of the prin- ciple of such legislation introduced in earlier Congresses. As you know, it has been the hi~torlcal practice of the savings and loan indus- try to quote costs of interest on loans secured by mortgage of real property in terms of a simple annual rate of interest. Nearly all other financing costs of real estate loans are payable in cash at the time of closing the loan transaction. While certain of these payments at closing may at times be destined for the lending institution, most such payments are for the benefit of third parties other than the lender or the borrower. In cases where the loan is to aid in purchase of real estate as distinguished from other uses of the loan proceeds, there are likely to be several cash payments to be made at the closing. Again, it is a fairly common practice among our members to give the borrower- mortgagor a statement in writing at the closing setting forth the sales price, the principal sum of the mortgage, the schedule of mortgage payments, the Interest rate, and amounts to be paid by the borrower at the closing. While payments at closing form an essential part of the loan transaction, they do not themselves constitute a credit transaction, because they are handled on a cash basis. It would appear, therefore, that in a real estate mortgage transaction, truth- in-lending is accomplished as long as the potential borrower is furnished infor- mation as to the basic cost to him of the loan he agrees to repay. He should, of PAGENO="0303" CONSUMER CREDIT PROTECTION `ACT 885 course, also be fully informed of any non-loan portions of the transaction, that will require payment of funds by him at closing or earlier. These purposes are accomplished when the borrower is furnished written statements of the type noted above. Our members will continue to follow their present disclosure practices as a matter of policy. We understand that the Board of Governors of the Federal Reserve System and the Under Secretary of the Treasury have recommended that loans se- cured by a first mortgage on real estate be excluded from the provisions of truth-in-lending legislation because adequate disclosure is already made to the borrower in this type of transaction. The National League confirms this rea- soning as to its member savings and loan associations, all of which have savings accounts insured by the Federal Savings and Loan Insurance Corporation and are therefore regulated by the Federal Home Loan Bank Board, an independent agency of the Federal government. The present main concern of National League members is that the differences between a real estate mortgage transaction and a retail credit transaction be accommodated in any statute enacted in this field. Retail credit transactions do not normally involve the type of payments at closing that have come to be customary in real estate mortgage transactions. Some other distinctions between the two types of transactions follow. Some real estate mortgages contain provisions relating to penalties that may be op- tionally charged by the mortgagee or its assignee for late payments not made timely pursuant to the payment schedule. Some real estate mortgages contain provisions permitting the mortgagee or its assignee to charge a premium if the mortgagor exercises his privilege of prepaying a substantial portion of the out- standing balance due on the mortgage. While often referred to as a "penalty", this payment in reality helps reimburse the lender for the expense of finding and making use of a suitable reinvestment medium for funds in connection with which it had already incurred placement expenses when advanced as a loan to the mortgagor. This is also a charge left within the discretion of the mort~ gage holder if the borrower triggers the occasion for its use. The premium pro- vision is usually not invoked if the borrower is using his own funds to exercise his privilege of prepayment rather than merely using funds borrowed elsewhere at a cost lower than the interest rate on the mortgage being prepaid. When such late charge or prepayment premium options do exist, they are fully set forth in the mortgage document itself, so the information concerning them is available to the borrower. In addition initiation of the circumstances making such charges applicable rests not with the mortgagee or its assignee, but rather with the borrower. Since the cause for invoking the charges may never occur, it would not seem appropriate to require any more than a caution to the borrower that he or his advisers should carefully read the mortgage instruments involved. It is urged that suitable exclusions be made from those provisions of the bill dealing primarily with retail credit transactions, in order to recognize the dif- fering situation prevailing in real estate mortgage loan transactions. It is further requested that if mortgage loans are included in the legislation, the Committee report on the bill encourage the Board of Governors of the Fed- eral Reserve System to make liberal use of the authority section 205(b) of the Federal Reserve Act as proposed to be added by H.R. 11601 and section 6(b) of H.R. 11602 would confer upon it to exempt from the requirements of the Act any credit transactions or class of transactions it determines to be effec- tively regulated under State laws. In fact we would encourage the Subcommittee to insert the words "or business practice substantially similar to the require- ments under that section" after the word "enforcement" in proposed section 205(b) of H.R. 11601 in line 20 on page 21. The comparable amendment in HR. 11602 would occur in line 2 on page 18. Such an amendment would permit the Federal Reserve Board to take cognizance of the fact that the disclosure prac- tices already followed by savings and loan associations in making mortgage loans on real estate make available to the borrower the information it is the purpose of this legislation to supply to him. We stand ready to respond to any invitation from you to work with you and members of your Subcommittee or its staff to discuss further ways to imple- ment the ideas set forth in this letter. PAGENO="0304" 886 CONSUMER CREDIT PROTECTION ACT It will be appreciated if these views are included in the printed record of the hearing on this proposed legislation. Sincerely, REx 4. BAKER, J~., President, OAL~TORNIA FARMER-CONSUMER INFORMATION COMMITTEE, Santa Clara, Calif., August 8, 1967. Hon. LEONOR K. SULLIVAN, Chairman, Ho'use Consumer Affairs Subcommittee, House OffIce Building, WashinØon, D.C. DEAR CONGRESSWOMAN SULLIVAN AND MEMBERS OF THE SUBCOMMITTEE: In behalf of our half a million members of affiliated groups, organizations, coop- eratives and iudivh~uals, we place our wholehearted support for passage of H.R. 11601 relating to consumer credit `and truth-in-lending, legislation. We have followed the history of the truth-in-lending bill, first introduced by former Senator Pau' Douglas some seven years ago, and continue to marvel at the audacity of the powerful and well-financed lobbies who oppose such legisla- tion which would benefit the public at large. The time was not too distant when reputable banks loaned money to reputable customers at reasonable rates in complete trust. Gradually this procedure changed as more and more money lenders discovered that the Interest paid on consumer credit is BIG, BIG BUSINESS. The poor and uneducated are easy victjms of unscrupulous operators. How- ever, they are not alone. The educated too, are victims of unethical bankers and misleading and fraudulent advertising covering retail credit, new or used car loans or any type of modern merchandise. Continued abuses in consumer credit practices produce a grave demoralizing effect on the public at large, particularly if such deceptive practices are condoned from the top. We urge an immediate "Do Pass" for H.R. 11601, so that It may reach the House for a vote in this session of the 90th, Congress. Very truly yours, B0RGHILD HAUGEN, Consumer Consultant. DEPARTMENT OF BANKING AND INSURANCE, DIVISION OF BANKING, Mo'utpelier, Vt., August 10, 1967. Representative LEONQR K. SULLIVAN, House of Representatives, Washington, D.C. DEAR Mas. SULLIVAN: I have been ~ollo'wing the progress of truth-in-lending with great interest both because of my position here in the State of Vermont and for more personal reasons. As Commissioner of Insurance, I have spoken out several times against the pernicious practices existing in the sale of credit life Insurance and credit health insurance. Most recently, I was the lead-off witness at a hearing convened by Senator Hart, the Chairman of the Senate Antitrust and Monopoly Subcommit- tee. I enclose a copy of my statement `presented `there. (See p. 914.) Naturally, I have been especially Interested in the disposition of the credit life charge as it relates to interest disclosure. Governor Robertson argues that the insurance premiums provide a benefit to the borrower over and above the use of credit and inclusion of the premium In the finance charge would overstate the actual charge for the credit itself. Obviously, there is something to this. However, if the creditor is arranging for the insurance at, say, $1 per $100 borrowed repayable in one year-a common rate in many areas-he may well be receiving as much as 60% of that charge as a commission, dividend or in other more complicated ways. Clearly, this "kick- back" is hardly a benefit to the borrower. As the bill was progressing through the Senate, it occurred to me that a useful compromise between the pros and cons for inclusion of the insurance premium in the finance charge would be to require that anything in excess of 50~ per $100 PAGENO="0305" CONSUMER CREDIT PROTECTION ACT 887 borrowed repayable in twelve months, or its equivalent for longer or shorter durations, be included as part of the finance charge. Another way of expressing this would be to include the total insurance premium in the finance charge and then to allow a deduction of `/2% for the credit life insurance. It seems to me that such a measure would be. very easy administratively and would do justice to Governor Robertson's point. It might also have a beneficial effect on excessive rates charged for this kind of life insurance in many of our states. The rate of 50~ mentioned is the maximum rate permitted for credit life in- surance in the small loan acts of at least two states-Massachusetts and Con- necticut. Most creditors can obtain the insurance for their customers at less than this rate. If there is any room for compromise at all on this matter it should lie along these lines. If you ~ee1 that there is any merit to the suggestion, I would certainly be glad to discuss it further with you. Sincerely, JAMES H. HUNT, Commissioner. AMERICAN BooK PUBLISHERS COtJNOIL, INC., AND AMERICAN TEXTBOOK PUBLISHERS INsTITUTE, Washington, D.C., Aug'ust 17, 1967. Hon. LEONOR K. SULLIVAN, House of Representatives, Rayburn Ho'use Office Building, Washington, D.C. DEAR MRS. SULLIVAN: At the request of the Reference Book Section of the American Textbook Publishers Institute, I am writing you concerning Section 205 of HR. 11601, the truth-in-lending act. We believe that Section 205 of the bill should be modified to discourage the states from enacting their own versions of truth-in-lending laws. subsection 205 (a) now provides that the Federal act shall not be construed to annul or exempt any creditor from complying with any state law relating to disclosures in connection with credit transactions, ex- cept where such laws are inconsistent with the provisions of the Federal act. Subsection 205 (b) allows the Federal Reserve Board by regulation to exempt from the act any credit transactions which it determines are effectively regulated by state laws. By implication, these two subsections seem to encourage the several states to enact their own credit disclosure requirements. Most publishing firms do business in many other states other than the one in which they are principally housed. We seriously doubt that Congress would want to incur a multiplicity of requirements that would constitute a restraint of trade in interstate commerce. We would stro~igly recommend, therefore, that Section 205 be amended to discourage the states from enacting 50 different credit disclosure requirements. It should be made clear that compliance with the Federal act concerning credit disclosure would preempt the states in this area. We agree with Mr. Robertson, Vice Chairman of the Board of Governors of the Federal Reserve System, that the Federal implementing agency should not be called upon to judge how effectively state laws in this field are enforced. But we also feel strongly that Congress should not be encourging the states to enact 50 different requirements for industry to satisfy. Simple reason, we think, should dictate that a properly worded Federal act resulting in a more effective disclosure of credit costs to consumers should be sumcient to satisfy the needs of all consumers, irrespective of the state in which the consumer lives; and we believe that the states should be preempted from further regulations. Placed in a national perspective, firms shipping goods across state lines ought not to have 50 contractual barriers to satisfy if they want to do business on a national level. Sincerely, CLIFFORD P. GRECK, Director, Washington 0/flee. 83-340-67-pt. 2-20 PAGENO="0306" 888 CONSUMER CREDIT PROTECTION ACT Nnicui~ORHOOD LEOAL SnavIcEs CENTERS, Detroit, Mich., August 23, 1967. Hon. LEONOR K. SULLIVAN, Chairman, Subeom'm4ttee on Consumer Affairs, House (Jom'mittee on Banking and Currency, House Office Building, Washington, D.C. Dear Mns. SULLIVAN: I write you as the Research Director of the Neighbor- hood Legal Services Program of the City of Detroit, a part of the Administra- tion's War on Poverty. Our office has been functioning in assisting the people of our community for somewhat less than a year. Even in that brief span of time, it has become very clear to us that among the very basic problems faced by the poor are those of consumer credit sales and financing. The poor are untutored in the wise use of credit and are prey to that segment of the comercial community which takes advantage of this lack of knowledge to deliberately induce credit buying beyond their means. I was most plea~ed to read that your credit protection bill contains a prohibition on the garnishment of w~tges to settle debts. I have reluctantly come to the conclusion that this somewhat drastic remedy is absolutely neces- sary for the protection of the people of our community. I do not mean to belittle "truth in lending", or the other protections of the bill, but my experience here convinces me and convinces my fellow attorneys from the program, that mere disclosure is not adequate protection, and that there is the evil of garnishment which makes the oppression of the poor possible. By and large, the poor of our community have not the same freedom of choice in purchasing as many other segments of our commitnity. They lack the knowledge of the competitive sources, they lack transportation facilities, they are lured by Ipromises of bargain rates, they consistently pay more for merchandise of lower quality, both in food and In household furniture and goods, then other st~gments of our community, and are deliberately lured into extending themselves beyond their own credit capabilities. We can see from our bankruptcy practice in Detroit, that the results of these problems and the cycle generally goes as foliows: A family will buy furniture beyond which It can afford on credit, usually for a higher price than the goods are worth, and for unreasonable credit rates; then having over-extended themselves, will, because of layoffs or family illness, be unable to meet the payments. They then borrow from the small loan finance companies where the interest rates are even greater and it is garnishment which then boxes them further into this trap from which there is no proper escape. Even bankruptcy Is not an adequate remedy. In the first place, it Is not fair to the sellers, in th~ second place, it I~ available only once each six years, and in the third place and most serious difficulty, sellers and lenders In our area habitually sue the bankrupt after the ~ompletlon of the bankruptcy proceedings, for fraud in obtaining the credit Initially, and are usually successful. Thus, the buyer finds himself helplessly mesbed in this trap, owing the credit merchant and the finance company and unable to meet his obligations as they come due and is threatened with garnishment which will cost him his job with no possible way out. I would like very much to have appeared before your committee and testified as to the problems existing In our community, but It seems that there was not sufficient available time before your committee. I hope you will consider this letter as my testimony and distribute It to the membors of your committee. Perhaps even stronger testimony than mine could be, was the response of the citizens of our community to the dIspair which this sort of trap has led them into. CertainiEv, one of the large factors In causing the recent riots in our community was precisely this problem. It Is significant to note as you travel down the ravaged streets of our community, that the three major types of stores which were looted and burned, freQuently standing next to untouched business places, were grocery stores (where the prices were high and nuality low), credjt furniture stores and pawn shops. Several of the stores which were burned cau~tht fire from the credit records being burned by desperate people in an imuroper attempt to avoid a despairing trap. Something must be done to rive these people, most of whom are really trying hard. a better alternative than burning the credit records of our stores. And I feel that the garnishment provision of your bill Is the greatest step possible in that direction. PAGENO="0307" CONSUMER CREDIT PROTECTION ACT 889 Just two additional brief comments: It has been our experience here in Michigan that maximum rates allowed in legislation quickly become the standard minimum rates, as has been indicated both by our small loan act and our consumer credit act. Secondly, the warning of amount as stated in your bill will probably be effective for a large mass of intelli- gent consumers but again, will not be effective for the uneducated, impoverished consumer who really has no alternative anyway. However, best wishes for your success with what in my judgment is one of the most important pieces of legislation ever to be presented to Congress, and one of the most needed in our country to prevent a repetition of the recent anger of our urban centers. Very truly yours, JOXIN HOUSTON. CouNcn~ OF MUTUAL SAVINGS INSTITUTIONS, New York, N.Y., August 25, 1967. Hon. LEONOR K. SULLIVAN, If ouse of Representatives, Washington, D.C. DEAR CONGRESSwOMAN SULLIVAN: This Council has consistently supported the so-called truth-in-lending bills as a matter of principle, and continues to do so. In light of the fact that our members are savings, building or homestead associa- tions, we do have some questions of interpretation with respect to this bill, as follows: 1. Paragraphs (1) and (2) of subsection (d) of Section 202 exclude from the definition of "finance charge," the items which, in first mortgage lending, are commonly termed "disbursement." To an increasing degree, however, institu- tions such as comprise our membership have portions of these operations per- formed by salaried personnel. Instances are salaried appraisers and an internal legal staff. Might not some provision be made for such cases? 2. It would also seem that some provision should be made for overhead in processing, which is not conducted for profit. To illustrate: The allowable charges permitted by the Veterans Administration in the case of a mortgage loan under the terms of the Servicemen's Readjustment Act is described as "1% plus disbursements." The Veterans Administration further allows an ad- ditional 2% for overhead in processing construction loans. I believe the Federal Housing Administration did or does employ a similar scale. In the State of New York, which has a 0% usury law, the courts have recently held that 2% was a reasonable charge for overhead and did not come within the purview of the usury statute. 3. This is not a question. I wish to make It clear that these questions do not relate to discounts, frequently called "points," which we recognize as being an added finance charge and, hence, clearly subject to the provisions of subsection (c) of Section 203. 4. We do have a question with respect to subsection (g) of Section 203, which waives disclosure of Items substantially similar to those required by this bill. Might this not be extended to cover Federal requirements? For instance, Sec- tion 545.6-10 of the Rules and Regulations for the Federal Savings and Loan System provides that "Upon the closing of the loan, the association shall furnish the borrower a loan settlement statement showing in detail the charges or fees the borrower has paid or obligated himself to pay to the association or to any other person in connection with such loan; and a copy of such loan settlement statement shall be retained in the records of the association." I am informed that a similar requirement is imposed by some of the state supervisory authori- ties. A related question Is as to who is to make the determination that such a requirement, however it may be phrased, is "substantially similar ?" 5. Might it not prove feasible, either to revise subsection (g) or to provide in a separate subsection, an exception for supervised financial institutions which are required, upon the making of a first mortgage loan, to furnish the borrower with a complete settlement statement in a form similar to that described in the regulation quoted above? In that connection, I am reminded (although I do not have its regulations at hand) that the Veterans Administration imposes a sim- ilar requirement with respect to every first mortgage GIL loan. Please understand that this Council supports the principle of full disclosure and that, in posing these questions, we are not seeking a favored position, but PAGENO="0308" CONSUMER CREDIT PROTECTION ACT 890 that we understan~ab1Y wish to avoid a duplicatiQn of existing requirements and added paper work, where the substance is covered by another route. Cordially yours, GEoRGE L. BLIss, President. Airnusr 24, 1967. Hon. LE0N0R K. SULLIVAN, Chairman Subcomm,ittec on Consumer Affairs, House Committee on Banking and Currency, Rayburn House Office Building, Washington, D.C. DEAR CoNGREsSWOMAN SULLIVAN: We are writing to you on behalf of the American Life ConVention and the Life Insurance Association of America, two associations with a joint membership of 349 companies accounting for ap- proximately 92% of the life insurance in force in the United States. We did not request an opportunity to appear before your Subcommittee during the current bearings on the proposed Consumer Credit Protection Act (HR. 11601, H.R. 11602, 5.5). However, we wish to go on record with respect to the proposed legislation as it would apply to real estate mortgage loans. We find merit in the recommendation made to your Subcommittee by Federal Reserve Board Governor, J. L. Rabertsou, that an exemption should be provided for first mortgage loans on real estate. We concur in the finding of the Senate Comn3ittee on Banking and Currency that adequate disclosure is already being made in this area of credit. (Senate Report 392). Accordingly, we urge that first mortage real estate loans be exempted from any bill which your Subç~ommittee may favorably recommend. It will be appreciated if this letter could be made a part of the hearing record. Sincerely, AMERICAN LIFE CONVENTION, ARTHUR S. FEFFERMAN, Director of Economic Analysis. LIFE INSURANCE AssocrwrfoN o~ AMERICA, RALPH J. MONAIR, Vice President. HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON CONSUMER AFFAIRS OF THE COMMITBE ON BANKING AND CURRENCY, Wa~1vington, D.C., August 25, 1967. Mn. ARTHUR S. FEFrERMAN, Director of Economic AnctZy$is, American Life Cons~ention, Mn. RALPH J. MCNAIR, Viec Presiclent, Life Insurance AssOciation of America. Washington, D.C. DEAR MR. FEFVERMAN AND Mn. MONAIR: The letter you have submitted to rae for inclusion in the record of the hearings on H.R. 11601 and related bills merely expresses the opposition of your two organizations to the inclusion of first mort- gage credit under the legislation. Since you are familiar with the statement made by the witness from the Federal Reserve Board of Governors, Mr. James L, Robertson, which you mentioned in your letter, I am wondering if you are~ also familiar with the extensive testimony we received on the other side of this issue from Under S~cretary of the Treasury Barr, Miss Betty Furness, the Secre- tary of Commerce, the Administrator of the Small Business Administration and other witnesses. It is true that mpst first mortgage loans are issued by legitimate financial in- stitutions which make full disclosure as to the terms and the rate of interest, but we are deeply concerned over the transactions which also occur in the first mortgage field by unscrupulous operators who, under the terms of S. S as it passed the Senate, would not have to make any disclosure whatsoever of any charges they make as long as the instrument used in the transaction could be defined as a "first mortgage." My purpose in writing this letter is to ask if there is any reason why you would exempt from the disclosure requirements the kind of first mortgage frequently obtained by what some of our witnesses referred to as "the suede shoe boys" PAGENO="0309" CONSUMER CREDIT PROTECTION ACT 891 who sell an elderly couple or widow an expensive furnace or siding or roofing job at unconscionable finance terms and have a piece of paper which can be filed as a first mortgage. I am sure any first mortgages entered into by correspondents for life insurance companies are not guilty of such practices; thus, I cannot see why the industry would object to coverage under the legislation, particularly if such coverage were to make possible the prevention of the abuses which now occur in mortgages offered by the unscrupulous operators. Sincerely yours, LEONOR K. SULLIVAN, Chairman. SEPTEMBER 1, 1967. Hon. LE0N0R K. SULLIVAN, Chairman, f~ubcommittee on Consumer Affairs, House Committee on Banking and Currency, Rayburn House Office Building, Washington, D.C. DEAR CONGRESSWOMAN SULLIVAN: Thank you for your letter of August 2~ in regard to the treatment of first mortgage credit under H.R. 11601. In our letter to your of August 24 urging that first mortgage real estate loans be exempted from any bill which your Subcommittee may favorably recommend, we had in mind first mortgages arising in connection with the unpaid purchase price of real estate. Since, as is generally agreed, adequate disclosure is already being made with regard to these mortgages, we believe that it would not be desirable to subject them to mandatory disclosure under the pending iegislation. We have no objection to requiring disclosure of information for mortgages result- ing from home repairs and purchases of appliances, if this has been found to be an area of abuse. However, we would hope that any legislation designed for this purpose could be drafted to apply only to the abuse areas and not to first mort- gages generally. To apply the mandatory disclosure provisions to all first mort- gages would detract from the effectiveness of the legislation by applying the requirements to areas where they are not needed and would not accomplish any useful purpose. We are grateful to you for your letter and very much appreciate this chance to enlarge upon our views to you on this important subject. Sincerely, AMERICAN LIFE CONVENTION, ARTHUR S. FEFFERMAN, Director of Economic Analysis. LIFE INSURANCE ASSOCIATION OF AMERICA, RALPH J. MONAIs, Vice President. THE COMMONWEALTH OF MASSACHUSETTS, DEPARTMENT OF THE ATTORNEY GENEBAL, Boston, Sfeptember 14, 1967. Hon. LEoNoii SulLIvAN, Chairman, ~S'ubcoinmittee on Consumer Affairs, (ionimiitce on Banking and Currency, House of Represetatives, Washington, D.C. DEAR REPRESENTATIVE SULLIVAN: At the time of my appearance on August 11 before your committee in support of H.R. 11601, Representative Lawrence G. Williams asked me to make a comparison between Massachusetts truth in credit laws and the proposed Federal Consumer Credit Protection Act (HR. 11601). The basic objective of both Massachusetts law~ and HR. 11601 is safeguarding the consumer with reference to credit transactions by requiring full disclosure of finance charges. I believe both laws achieve this objective. There are, however, some areas of difference between the Massachusetts Retail Installment Act (G.L. Chapter 255D) and Truth in Lending Act (G.L. Chapter 140A) and H.II. 11601. They are as follows: 1. Finance Formula Under Massachusetts General Laws, Chapter 25~D Section 1, the annual finance charge formula is based on a constant ratio approach while under H.R. 11601 an actuarial method is provided for. PAGENO="0310" 892 CONSUMER CREDIT PROTECTION ACT 2. Motor Vehicles Under Massachusetts General Laws, Chapter 255D Section 1, the term "goods" includes all things movable purchased primarily for personal, family or house. hold purposes other than motor vehicles, which are covered by a separate law in Massachusetts. HR. 11601 Section 202c does not appear *to exclude motor vehicles from its scope of operation. 3. Cancellation of Agreement Massachusetts General Laws, Chapter 255D Section 14 nflows the consumer to cancel his retail installment agreement other than for a breach by the seller, where the `seller h~ts failed to send a written copy of the agreement signed by the seller to the consumer or where there has been no substantial performance on the seller's part. Notice of cancellation must be given by certified mail by five o'clock post meridian on the next business day following execution of the' agreement. 4. security Interests Massachusetts General Laws, Chapter 255D Section 15 provides' that the retail agreement shall create no security interest in the property of the purchaser other than on the goods sold under the agreement. 5. Protection for Buyer Massachusetts General Laws, Chapter 255D Section 10 provides that no seller, sales finance company or holder shall at any time take or receive any retail in- stallment sale agreement from a buyer which contains (1) Blank spaces for terms required by this chapter or for terms upon which the parties at the consummation of the sale have agreed to the extent of the then a~eailable informatior~ except that items 10 and 11 of subsection C of section 9 must always be disclosed; (3) Any schedule of payments under which any one installment, except the down payment, is not equal or substantially equal to all other install- ments, excluding the down payment, or under which the intervals between any consecutive installments except the down payment differ substantially, unless (a) the buyer is given an absolute right upon default in any such excess or irregular installments, including that in default, revised to con- form in both amounts and intervals to the average of all preceding install- ments and intervals, or (b) unlesis the time and amounts of the buyer and a statement appears in the contract to that effect. 9. Regulation of Credit for Commodity Future Trade: Our Truth in Ctedit laws do not cover the amount of credit that may be ex- tended under commodity future contracts as provided for H.R. 11601 Section 207. 10. Emergency Control of Consumer Credit: Our credit law is in no way tied in with the economic condition of the state of Massachusetts or the county as provided in HR. 11601, Section 208. 11. Interest Rate on Loans: H.R. 11601 applies to all extensions of credit. In Massachusetts we have one regulation covering retail installment agreement and another which regulates the loan businesses of Massachusetts. Our Truth in Lending Laws, Massachusetts General Laws Chapter 140A, however, does not establish `the rates for loans, but merely regulates the procedure under which loans are to be made. The rate setting power is in the hands of a state regulatory board. * I hope this repOrt will be of help to you in evaluating whether H.R. 11601 provides sufficient jn-otection for the consumer. Very truly pours, ROBERP L. MEADE, Chief, Consumer Protection Division. PAGENO="0311" APPENDIX A (The following agency reports on H.IR. 11601 were received for inclusion in the record:) SECUIUTIE5 AND ExCHANGE CoMMIssIoN, Washington, DXI., July 27, 1967. Re: H.R. 11601, 90th Congress. Hon. WRIGHT PATMAN, Chairman, Committee on Banking and Currency, House of Representatives, Washington, D.C. DEAR MR. CHAIRMAN: This is in response to your letter of July 22, 1967 re- questing the Commission's comments on the above bill. From our analysis of the bill it appears that under Section 203(n) (2) "trans- actions in securities or commodities in accounts by a broker-dealer registered with the Securities and Exchange Commission" would be exempt from the regu- latory provisions of the bill which would apply to other parties who extend consumer credit. Since this exempted area is the only one in which the Com- mission has any direct or substantial concern with the extension of credit and since the bill would apparently not have any impact on any other aspects of the laws which the Commission administers, we do not care to comment on it. Time has not permitted formal submission of our position on this bill to the Bureau of the Budget but we have been in touch with the Bureau by telephone and are advised informally that the Bureau has no objection to our position. Notwithstanding our decision not to comment on this bill, we do appreciate your affording us the opportunity to consider it. Sincerely yours, HUGH F. OwENs, Commissioner. THE GENERAL CouNs1~i~ OF THE TREASURY, Washington, D.C., July 31, 1967. Hon. WEIGHT PATMAN, Chairmaa, Committee on Banking and Currency, House of Representatives, Washington, D.C. DEAR Mn. CHAIRMAN: Reference is made to your request for the views of this Department on H.R. 11601, the proposed Consumer Credit Protection Act. Title I of the proposed legislation is essentially a revised version of S. 5 which has passed the Senate and is now pending before your Committee. This title would add a new title II to the Federal Reserve Act. Most of the provisions in sections 201-206 of the proposed title II relating to disclosure of the cost of ci~edit are simi- lar to the provisions of the Senate-passed version of S. 5, with the following notable exceptions: (1) Section 203(d) of the proposed title would require dis- closure of an annual percentage rate of a finance charge rather than a percentage rate per period with regard to open-end credit plans or revolving credit. (2) The exemptions which S. 5 would provide for transactions involving less than $10 in credit charges and first mortgages in real estate transactions are omitted from H.R. 11601. (3) Subsections (j) and (k) of section 203 would extend certain dis- closure provisions, including the requirement to set forth the finance charge, expressed as an annual percentage rate, to any advertisement of consumer credit. (4) The provisions of the proposed title would take effect on July 1, 1968 rather than on July 1, 1969. 893 PAGENO="0312" 894 CONSUMER CREDIT PROTECTION ACT The remainder of title I of the bill would make substantive changes unrelated to the disclosure of finance charges, which is the subject matter of S. 5. Section 203(1) would prohibit any finance charge for credit to natural persons which exceeds 18 percent. Section 203(m) would prohibit notes authorizing the con- fession of judgment against a debtor. Section 207 of the proposed title II would direct the Board of Governors of the Federal Reserve System to prescribe regu- lations governing the aniount of credit that may be extended or maintained on conimodity futures contracts. Section 208 would provide the Board with standby authority to restrict or control the use of consumer credit whenever the President determines that a national emergency exists. Section 209 would give the Board certain powers of adniinistrative enforcement with regard to violations of the title. Title II of the bill would prohibit the attachment or garnishment of wages or salary due to an employee. Title III of the bill would establish a bi-partisan National Commission on Consumer Finance. The Commission would be composed of nine members: three members of the Senate appointed by the President of the Senate, three members of the House of Representatives appointed by the Speaker, and three persons appointed by the President. The Comtriission would study and appraise the func- tioning and structure of the consumer finance industry, and would be required to report to the President and the Congress, by December 31, 1969. The report would include treatment of (1) the adequacy of existing arrangements to pro- vide consumer financing at reasonable rates; (2) the adequacy of existing super- visory and regulatory mechanisms to protect the public from~ unfair practices; and (3) the desirability of Federal chartering of consumer finance companies. In his message to the Oongress on February 16, 1967, on consumer protection, the President said: "I recommend the Truth-in-Lending Act of 1967 to assure that, when the consumer 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 original version of 5. 5 would have required all revolving credit plans to disclose the anmlal percentage rate at the time the account was opened and on the periodic monthly statements. In the report dated April 12, 1967, to the Senate Banking and Currency Committee on S. 5, this Department fully en- dorsed the principle that the total cost of obtaining credit should he clearly dis- closed to a potential user, both in terms of dollars and annual rate. Also, the original 5. 5 would not have provided exemptions for small credit transactions and first mortgages. 5. 5 as passed by the Senate would allow such exemptions and would allow the interest rate on most revolving accounts to be stated on a monthly rather than annual basis. Thus, for example, in most instances, a creditor could state the rate on purchases charged to a revolving account at 1.5 percent a month rather than 18 percent a year. The Department believes that all types of creditors and all types of credit transactions should be treated equally and impartially to the greatest extent possible. According'y, the Department supports the proposed provisions of H,R. 11601 which would require disclosure of an annual percentage rate by all credi- tors without exceptions or special treatment for revolving credit, transactions involving less than $10 in credit charges, and first mortgages. We also support the provisions which would extend the disclosure of credit costs to advertising. We believe that these provisions would more fully implement the recommendations of the President with regard to disclosure of finance charges. In addition, the Department would have no objection to a comprehensive study of the consumer finance industry. However, it would appear that such a study could best be accomplished by an existing agency of the Federal Government or by the Congress. We believe that those other provisions of H.R. 11601 whIch are not related to the disclosure of the cost of credit should receive extensive study and that their consideration by your Committee at this time should not be permitted to delay action on effective truth-in-lending legislation. Those pro- visions, however, wOuld appear to be proper topics for study. PAGENO="0313" CONSUMER CREDIT PROTECTION ACT 895 The Department has been advised by the Bureau of the Budget that there is no objection to the submission of this report to your Committee and that enact- ment of legislation to provide full disclosure of credit charges would be in accord with the program of the President. Sincerely yours', FRED B. SMITH, Generai Counsel. BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM, Washington, July, 31, 1967. Hon. WRIGHT PATMAN, Chairman, Committee on Banking and Currency, House of ]?epresOntatiives, Washington, D.C. DEAR MR. CHAIRMAN: This is In response to your request for the Board's com- ments on HR. 11601, the "Consumer Credit Protection Act." Most of title I of the bill is designed to provide consumers with meaningful information concerning the costs and terms of credit. The Board believes that legislation of this kind is needed, and that important social and economic bene- fits may be expected to flow from its enactment. With one exception, however, we believe that the disclosure provisions of S. 5 are preferable to those `of H.R. 11601. The Board believes that the provisions of HR. 11601 as to open end credit plans are preferable to those in S. 5 as passed by the Senate. The need for a common standard to facilitate comparison shopping for credit, as well as the desirability of treating all creditors alike, argue against the Senate bill's provi- sions exempting certain forms of open end credit from the general rule requiring disclosure of equivalent annual rates. In addition to disclosure provisions similar to S. 5, H.R. 11601 provides for regulation of credit advertising affecting interstate commerce, ceilings on finance charges, controls on commodity futures trading, and prohibitions against parti- cular methods of debt collection. Presumably because of the broad scope of these provisions, section 209 of the bill incorporates authority for their enforcement through administrative proceedings leading to cease and desist orders. The Board has Urged that its responsibility as' to legislation requiring disclosure of credit terms be limited to prescribing implementing regulations, and that respon- sibility for enforcement and investigation of complaints be lodged in another agency with a trained investigative staff. The Senate concurred in our recommendation as to the B'oard's role in igiple- menting S. 5. As to enforcement, it was decided not to establish "investigative or enforcement machinery at the Federal level, largely on the assumption that the civil penalty section will secure substantial compliance with the Act (S. Report 392, p. t~) ." We hope that civil sanctions, supplemented, as they are, by criminal sanctions, will prove to be adequate to asstire compliance with disclosure requirements. If experience under the legislation should indicate that compliance is not being achieved, the Board would so indicate in `the annual reports provided for in the bill. If, however, the Congress now determines that adequate protection for consumers warrants imposition of the broader Controls embodied in HR. 11601 in addition to' the disclosure requirements of S. 5, responsibility for their administration and enforcement should be vested elsewhere than in the Federal Reserve System. The question of whether certain of the controls added to S. `5 by HR. 11601 are desirable is' now under study by the Government agencies directly concerned. We understand that the Department of Agriculture is' now reconsidering its earlier request for standby authority to prescribe margin requirements for trad- ing in the commodity futures markets, pending analysis of additional informa- tion w'hich it has recently received. And the President has directed the Attorney General, in consultation with the Secretary of Labor and the Director of the Office of Economic Opportunity, to make a comprehensive study of the problems of wage garnishment. The Board believes that decisions on these questions should be deferred until the results of these studies are available. A Federal limitation on finance charge's, as provided in HR. 11601, could operate to deny credit to those who need it under certain circumstances, and to raise credit costs in other instances. A single, national statutory ceiling cannot adequately reflect the varying elements-such as risk, costs, and size of transac- tion-that enter into th'e determination of finance charges for various kinds of PAGENO="0314" 896 CONSUMER CREDIT PROTECTION ACT credit arrangements. In some small transactions, finance charges that are low in dollar amount but exceed 18 per cent when converted to an annual percentage rate may be justified to compensate the creditor for relatively high out-of-pocket handling costs. Under those circumstances, an 18 per cent ceiling could cut off extensions of credit. For other kinds of credit needs that can be met at lower rates, an 18 per cent ceiling might tend to become a floor as well as a ceiling, resulting in higher costs to the borrower. We agree with the principle expressed in the Senate Banking and Currency Committee's report on S. 5, that "full dis- closure of credit cihárges (should) be made so that the consumer can decide for himself whether the charge is reasonable (S. Report 392, p. 1)." Another provision of H.R. 11601 would grant to the Board authority to impose broad controls over the use of consumer credit upon a determination by the President that a national emergency exists which necessitates such action. The Board believes that standby authority of this kind could prove useful under certain conditions, although it clearly is not needed at present. We do not regard this authority. However, as a method of protecting consumers. Rather, it is a means of curbing consumer demands at times of unusual stress when the economy could not satisfy those demands and at the same time meet higher-priority needs such as the defense of the nation. As was demonstrated only last year, authority for consumer credit controls is also a controversial matter. We hope, therefore, that your Committee will act favorably on disclosure legislation without jeopard- izing its enactment by inclusion of this additional authority. Sincerely yofirs, WM. McC. MARTIN, Jr. DErARTMENT OF AGRICULTURE, Washington, D.C., August 3, 1967. Hon. WRIGHT PATMAN, Chairman, Committee on Banking and Currency, House of Representatives, Washington, D.C. DEAn Mn. CHAIEMAN: This is in reply to your request of July 22, 1967, for a report on H.R. 11601, the "Consumer Credit Protection Act." This Department endorses the provisions of this bill requiring disclosure of the cost of credit. The bill provides for full disclosure of, and maximum rates for, finance cbarg~ to consumers, authorizes regulations of credit for conimodity futures trading, provides machinery for controlling credit during national emergencies, prohibits garnishment of wages, and creates a commission t~ study the need for further regulation of the cOnsumer finance industry. Farmers, as well as others, are entitled to know the actual annual percentage rate for the cost of credit incurred In the purchases of goods and services. We believe the proposed legislation can combat ignorance and exploitation in the field of credit and save farmers many millions of dollars annually. This Department defers to the Department of Treasury for comment on the details of procedures for disclosure of the cost of credit. Section 201(b) and Section 207 of H.R. 11601 are concerned with the regula- tion of speculation and the use of credit in trading on commodity futures con- tracts. In the past this Department has advocated regulation of margin require- ments on commodity futures transactions when excessive speculation is causing undue price fluctuations~ In line with our concern we have recently commissioned a study related to this question. Pending a careful analysis of this study we are not in a position to make a judgment with respect to these provisions of the bill. We suggest that these provisions, and others not related to the disclosure of credit charges, be considered separately following a thorough study of the prob- lems they pose. The Bureau of the Budget advises that there is no objection to the presentation of this report from the standpoint of the Administration's program, and that enactment of legislation to provide for full disclosure of credit charges would be in accord with the President's program. Sincerely yours, ORvILLE L. FREEMAN. PAGENO="0315" CONSUMER CREDIT PROTECTION ACT 897 SMALL BUSINESS ADMINISTEATION, Washington, D.C., August 4, 1967. Hon. WRIGHT PATMAN, Chairman, Committee on Banking and Currency, House of Representatives, Washington, D.C. DEAR Mn. CHAIRMAN: This is in reply to your letter of July 22, requesting the comments of this Agency on H.R. 11601, the "Consumer Credit Protection Act." Congressman Leonor Sullivan, in her introductory remarks on the floor of the House on July 20, noted that many sections of this bill are controversial, but stated that it was being introduced with its multiplicity of titles "for the purpose of c~utlining and dramatizing the scope of this (consumer credit) issue, and as a vehicle for hearings." The principal title of HR. 11601 is its Title I, on "Credit Transactions"; and the principal provision therein, in our estimation, is that regarding credit dis- closure. This Agency has gone on record as having strongly favored S. 5, the Senate-passed "truth in lending" measure. We therefore take this occasion to reiterate our support for the type of consumer protection which mandatory dis- closure of finance charges will afford. Mrs. Sullivan has likewise suggested that the additional and admIttedly con- troversial features of her bill "will not be permitted to stymie effective `Truth- In-Lending' legislation," now that that measure has already been passed by the Senate. The Small Business Administration would favor just such a balance of priorities, and would hope that-whatever the fate of the bill's other parts-a credit disclosure measure will be enacted. The bill would also prohibit the garnishment of wages in any situation. Mrs. Sullivan's press release on the bill state the following rationale: ". . . the garnishment of wages is frequently an element in the predatory ex- tension of credit and. . . such garnishment frequently results in the disruption of employment, production, and consumption, constituting a substantial burden on interstate commerce." Garnishment is very often the only legitimate means in the employ of a businessman-creditor for final satisfaction of business debts due him,. With re- gard to this section of the bill, then, as well as that proposing a National Commis- sion on Consumer Finance, we would recommend very careful consideration before any action is taken thereon. The Bureau of the Budget has advised that there is no objection to the sub- mission of this report, and that enactment of legislation to provide full dis- closure of credit charges would be in accord with the President's program. Sincerely yo~urs, RonnaT C. MooT, Administrator. Thu WHITE Housu, WashSngton, August 4, 1967. Hon. WRIGHT PATMAN, Chairman, Committee on Banking and Currency, House of Representatives, Washington, D.C. DEAR MIL CHAIRMAN: This report is in reply to your request for the comments of this office on HR. 11601, a bill to safeguard the consumer in connection with the use of credit under prescribed conditions of disclosure and for other purposes. The bill is to be known as the "Consumer Credit Protection Act." The bill would amend the Federal Reserve Act by adding a Title II providing for full disclosure in consumer credit transactions including advertising, a na- tional usury law and other particulars, including the provisions of S. 5, 00th Congress', as passed by the United States' Senate, but going beyond the scope of the latter bill. Among other things, H.R. 11601 also' provides for the pro- hibition of the garnishment of wages and the establishment of a national com- mission on consumer finance to examine and evaluate the consumer finance industry. Section 201 recite's the need for full disclosure of consumer credit terms, a requirement to regulate the speculation and excessive use of credit in com- modity futures contracts and the advisability of establishing a stand-by author- ity for the emergency control of consumer credit. PAGENO="0316" 898 CONSUMER CREDIT PROTECTION ACT The definitions of Section. 202 follow generally the definitions of S. 5, 90th Congress, dated July 12, 1967, except for the following additional beneficial changes' for the consumer. The definition of "finance charge" (Sec. 202(d)) includes, among other im- portant items, the cost of any guarantee or insurance p~otecting the obligor's default or other credit loss. Current news reports, testimony in the Congress, as well as hearings held in several of the States, report excessive premiums charged oonsume~s for credit insurance and illustrate the opportunity to in- crease the yield to the creditor at the expense of the debtor by `saddling him with such high cost additions. Credit insurance amounts frequently to' a sub- stantial additional cost to the debtor when. obtaining credit. Therefore, to provide true comparability as between creditors' rates, credit insurance should be an itemized and inelhded as a line item cost facto'r in determining the total finance charge. E.R. 11601 provides an adequate standard of full disclosure that will be of material assistance to the prospective debtor in his quest for the most desirable or economical source of credit. The definition section o'f HR. 11601 has also strengthened the full disclosure principle by permitting no exceptions to stating finance charges on annual per~ cordage rate basis on the grounds that some credit aè~ounts are `installment open-end plans" as now permitted in the Senate bill. We think it important to prohibit such exceptions. While revolving credit now represents a relatively small proportion of the total consumer debt, it is growing and with such a loophole, it may burgeon even more rapidly by . businesses seeing the advantage of avoiding full disclosure by converting to this form of credit plan. Treasury Department officials and others, including Massachusetts bussinessrnen, have shown that revolting charge accounts can be accommodated to the system. SectiQn 203 requires the disclosure of finance citarges as defined in Section 202 and parallels the excellent disclosure provisions of S. 5, 90th Congress, dated July 12, 1967, but with some added improvements. First, credit charges under $10 are not excluded from the coverage of the bill. We think It important to have no exceptions by degree of the amount involved, for it is in this area that the poor and disadvantaged are subject to abuse. Their small purchases can, in the aggregate, be burdened with excessive credit charges. They are citizens to whom the cost of $5 worth of credit is just as Important, if not more so, than a $50 credit charge' to a more affluent member of society. If sales taxes can be readily computed on small amounts, so can the annual percentage rate. Of great significance to consumers is the language of subsections 202(i), 203 (j), ahd ~03(k), which provide that creditors advertising and consumer credit sale in interstate commerce, extenglon of credit or open-end credit plan, must clearly set out the details of the offer to include the cost of the finance charge expressed as an annual rate. This requirement of H.R. 11601 allows the consumer to begin his shopping for credit at home rather than at the store. Full disclosure of terms when the family is discussing the advisability of using credit in the privacy of the home is surely more conducive to the wise use and selection of credit sources~ Full disclosure in advertising should increase competition with resulting benefits to both the creditor and the borrower. Hopefully, with respect to the latter, the credit charges of the high ratelenders will tend to lower. Section 204 provides guidelines for the issuance of regulations b~ the Board and includes provisions for coordination with other Federal agencies. and the establishment of an Advisory Committee. We think these features of the bill will aid in providing Improvements in the administration of the Act in the years ahead. Section 205 preserves the laws of the States to the extent they are not incon- sistent with the bill and appears to take cognizance, among o'ther things, of the concern of some to preserve the time~price doctrine. In paragrap'h (3) of Section 206(a) on page 23 at line 7, the time for bringing a court action is limited to' one year. It is recommended that the statute of limi- tations be extended to four years since the laws of several States run to four years. Moreover, a long limitation period is advisable In the interests of the consumer. Section 200 prOvides for administrative enforcement of Title' II. The' agency responsible for enforcement of this bill should have appropriate powers in order to curb the acts of the unscrupulous few. Otherwise, the benefit of this bill might well be illusory to the consumer. The drafters of HR. 11601 are to be especially commended for making it possible for the administering agency to bring an action on behalf of the consumer by serving a complaint, stating its PAGENO="0317" CONSUMER CREDIT PROTECTION ACT 899 charges, and then calling a hearing. Often today, the consumer Is unable, does not know how, or cannot afford the cost of pursuing a claim against the creditor. This Committee believes that several portlon~ of H.R. 11601 are worthy of study although they do not specifically relate to the full disclosure provisions of that bill. This office recommends that the subjects advanced in subsection 203(1), calling for a national usury law; in subsection 203 (m), which would outlaw the cognovit note; and Title II, which would prohibit the garnishment o~ wages, all be deferred for further study. Their individual significance for American con- sumers certainly merits full attention and complete analysis. The cognovit note, or confession of judgment against the debtor is a creditor's remedy which is now prohibited in some States. This practice has often been used by creditors to the detriment of the legal position of consumera The President's Committee strongly urges that it be the subject of further study so that its full implications can be completely evaluated. Title II of the bill would prohibit the garnishment of wages. This office be- lieves that at present garnishment as it affects debtors, employers, and creditors should also be the subject of intensive investigation. Therefore, we welcome the study now being conducted by the Attorney General, the Secretary of Labor, and the Director of the Office of Economic Opportunity. It is our hope and expec- tation that the study will point the way to a proper and equitable solution to this problem which particularly affects low-income groups. While this office believes that the objectives of Title III to study the con- sumer finance industry are laudable, we also believe that such a study should be separated from H.R. 11601. It could provide valuable data and suggestions for action in such areas as deficiency judgments, unconscionable contracts, licensing requirements and debtors' remedies. However, we should first determine if the study can be better and more economically performed by an existing agency. Therefore, since it is our desire to advance the full disclosure portions of H.R. 11601, we wish to strongly support all such provisions of the bill. The legislative philosophy of Hit. 11601, which recognizes that the consumer, to effectively fulfill his role in the marketplace, must be an informed consumer, Is in full accord with the viewpoint of the President's Committee on Consumer Interests. The Committee has been advised by the Bureau of the Budget that there is no objection to the submission of this report to your Committee and that enact- ment of legislation to provide full disclosure of credit charges would be in accord with the program of the President. Sincerely, HOWARD FRAZIER, (For Betty Furness, Special Assistant to the President for Consumer Affairs). DEPARTMENT OF HEALTH, EDI~CATION, AND WELFARE, August 4, 1967. Hon. WRIGHT PATMAN, Chairman, Committee on Banking and Currency, House of Representatives, Washington, D.C. DEAR MR. CHAIRMAN: This letter is in response to your request of July 22, 1967, for a report 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 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 author- izing the Board of Governors of the Federal Reserve System to issue regulations dealing with the excessive use Qf credit for the purpose of trading in commodity futures cocntracts 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 creat- ing the National Commission on Consumer Finance to study and make recom- mendations on the need for further regulation of the consumer finance industry; and for other purposes." The bill, which is considerably more comprehensive than bill 5. 5, would pro- vide for the full disclosure of the terms and conditions of credit in connection with consumer credit transactions by requiring each creditor to furni~b to each borrower information in accordance with regulations pvescribed by the Board of Governors. In the case of consumer credit sales arLd extension of credit the PAGENO="0318" 900 OONSTJMER CREDIT PROTECTION ACT creditor would be required to furnish the details of the transaction including the total amount to be financed, the amount of the finance charge expressed as an ann~a1 pegceptage rate, the number, amount and due dates or periods of pay- ments scheduled to repay the indebtedness and the default, delinquency or similar charges payable in the event of default. With respect to open-end credit plans, the creditor shal' disclose to the person to whom credit is extended information concerning the conditions under which a finance charge may be imposed, the method of deternlining the balance upon which a finance charge will be imposed, the method of determining the amount of the finance charge. the annual percent- age rate `of the finance charge and in the case o'f an installment open-end credit plan, the equivalent annual percentage rate and the conditions under which any other charges may be imposed. ILR. 11601 also provides that no creditor may state or otherwise represent in any advertisement in or affecting Interstate commerce that specific terms are available `with the purchase of goods or services or the obtaining o'f a loan or the extension of credit under an open-end credit plan unless the advertisement clearly and conspicuously sets forth details including the finance charge expressed as an annual percentage rate or in the case of open-end credit plans the percentage rate per period and the annual percentage rate of the finance charge to be imposed. The bill provides that no creditor may de'mand or accept any finance charge in connection with any extension of credit which exceeds the maximum rate under applicable State law or 18% per annum, whichever is less, and that no creditor may demand or accept in connection with any extension of credit any note or other d'ocument authorizing the confession of judgment against the debtor. Regulation of credit for éommo'dity futures trading by the Bo'ard of Governors is authorized by this bill and the Board is further authorized to issue reguli~tions to control the extension of consumer credit whenever the President determines that a national emergency exists which necessitates such action. Title II of the bill would outlaw the garnishment of wage's by providing that no person attach, or garnish wages or salary due an employee or pursue in any court any similar legal or equitable remedy which has' the' effect `of stopping or diverting the payment of wages or salary due an employee. Title III provi~Ees for the establishment of a National Commission on Consumer Finance, which shall study and appraise the functioning and structure of the consumer finance industry and make recommendations' to the Congress. In regard to the Department's Federal Credit Union Program the requirements of the bill for dthclosure of finance charges' as' an annual percentage rate would not impose a burden upon Federal credit unions. From the beginning the Federal Credit Union Act has limited interest charges to a rate not exceeding 1 percent per month inclusive of all charges incident to making the loan. The conversion to an annual percentage rate would pose no' problems'. The requirements concerning the advertising would likewise present no' difficulty for Federal credit unions. While some Federal credit uni'ons in some States utilize cognovit notes' the prohibition of their use as prescribed in this bill would not be a hardship. Neither would the prohibition of the use of garnishments or wage attachments seriously adversely affect the o'peration of Federal credit unions. In summary, we endorse the provisions of the bill which will provide the con- sumer with a full disclosure of the terms and conditions of finance charges and permit him to make an informed judgment concerning the use of credit. We have no comment on 1~he o'ther administrative and procedural aspects of 11.11. 11601. We are advised by the Bureau of the Budget that there is no `objection to the presentation of this report from the standpoint of the Administration's program. Sincerely, WILLIAM J. COHEN, Thuler $eeretary. ExuctrIvE Ornren OF THE PREsIDENT, Orricu or EMERGENCY PLANNING, Washingto~a, D.C., August 10, 1967. lion. WRIGHT PATMAN, Chairman, Coin~m~ttee on Banking and Currency, House of Representatives, Washington, D.C. DEAR MR. CHAIRMAN: This is in reply to your request for an expression of the viewa of this Agency concerning ER. 11601 of the 90th Congress', entitled "Consumer Credit Protection Act." PAGENO="0319" CONSUMER CREDIT PROTECTION ACT 901 The primary responsibility of this Agency with respect to the s'tabilization of credit and similar measures involves the development of preparedness plans designed to be effectuated h~ the event of any extraordinary national emergency situation. However, most of the provisions of HR. 11601 deal with safeguarding consumers in the use of credit as a general proposition and this proposed legis- lation is commonly referred to as the "Truth-In-Lending Bill." In view of the foregoing, we are restricting our comments concerning this bill to Section 208 which would provide express authority for the imposition of consumer credit controls in emergency situations. Shortly before the U.S. entered World War II, President Roosevelt issued Executive Order No. 8843 which directed the Federal Reserve Board to impose controls on consumer installment credit. That Order was issued pursuant to Section 5(b) of the Trading with the Enemy Act. Pursuant to that authority the Board issued Rule W. The First War Powers Act i~pproved and ratified actions taken pursuant to the Trading with the Enemy Act and broadened the scope of Section 5(b). Section 5(b) of the Trading with the Enemy Act is now operative as a result of the National Emergency declared by the President in Proclamation No. 2914 of December 16, 1950. Consequently, it appears that adequate general standby emergency authority for the control of consumer credit now exists. Accordingly, we do not feel that more specific standby authority, such as Section 208, is needed at this time. If, however, the Congress decides to enact more specific standby consumer credit control legislation, we strongly recommend that no restriction, such as the restriction contained in the last sentence of Section 2Q8 with respect to controlling real estate credit be included in such legislation. The Bureau of the Budget advises that it has no objection to the submission of this report, and that enactment of legislation to provide full disclosure of credit charges would be in accord with the President's program. Sincerely, FA1UUS BRYANT, Director. U.S. DEPARTMENT or LABOR, OFFICE OF THE SECRETARY, Washington, August 11, 1967. Hon. LEONOR K. SULLIVAN, Chairman, subcommittee on Consumer Affairs, Committee on Banking and Cur- rency, House of Representatives, Washington, D.C. Dis~n MADAM CHAIRMAN: This is in reply to your request for our comments' on H.R. 11601, the proposed "Consumer Credit Protection Act." The Department of Labor has long supported legislation requiring full dis- closure of consumer credit financing charges, the terms and conditionS of credit purchases and the annual percentage rate of the finance charge, as is proposed in Title II of this bill. I regard disclosure of the terms and conditions of consumer credit as a first step in protecting consumers against excessive charges which many of them now pay because they do not understand the complex charges' and calculations~ in- volved in these transactions. A clear itemization of all of the charges', including a statement of the annual percentage rate, would enable buyers more readily to compare terms and costs offered by various lenders and to seek the most ad- vantageous terms. It would also provide a. basis for more effective consumer edu- cation to' avoid overuse of consumer credit. HR. 11601 differs in a number of important res'pects from S. 5 as' it passed the Senate. This' Department prefers the stronger provisions of HR. 11601 which require the statement of an annual percentage rate rather than a periodic (i.e., monthly) rate on revolving credit accounts and which would not exempt credit charges of less than $10 or first mortgages on real estate from the requirement to disclo's~ the annual percentage rate charged. This Department also believe that "come-on" advertising which lures unwary customers' by failing to diselose the true cost of credit has been an important factor in overe~tensio'n of consumer credit, and should be curbed by appropriate measureS. The Department reeo'~n1zes that disclosure of credit costs and terms is only a first step in consumer protection against abuses. It would welcome a compre- hensive study of the problems of consumer financing but believes that the study PAGENO="0320" 902 CONSUMER CREDIT PROTECTION ACT could be made more effectively by an appropriate agency of the Executive Branch or Committees of the Congress. The Department ~s especially interested in two other provisions of this pro- posed Act which would affect wage earners directly-the prohibition of the garnishment of wages in Title II, and the prohibition of notes authorizing the confession oct judgment against the debtor (cognovit notes) in Title I, Sec. 203 (m). Your Comxnit1~ee is to be commended for recognizing the gravity of this situation and bringizLg it to public attention by including it in HR. 11601. The loss of wages through garnishment has worked great hardship on wage earners and the growing number of personal bankruptcies has become a serious problem. As the President said in his mesSage to Congress on the War on Poverty, delivered March 14, 1967, "Hundreds of workers among the poor lose their jobs or most of their wages each year as a result of garnishment proceedings." He stated that he was "directing the Attorney General, in consultation with the Secretary of Labor and the Director of the Office of Economic Opportunity, to make a comprehensi~e study of the problems of wage garnishment and to recom- mend the steps that should be taken to protect the hard-earned wages and jobs of those who need the income most." This study is now in progress and, although no final conclusions have been reached, I appreciate the opportunity you have given me to discuss t~is general problem before the Committee. In summary, the Department of Labor strongly supports "truth4n-lendlng" legislation. It is our hope that final action can be taken in the present session on the provisions for the full disclosure of consumer credit charges which we have all sought for so long. The Bureau of the Budget advises that it has no objection to the submission of this report from the standpoint of the Administration's program. Sincerely, W. WILLARD Winrz, ~ of Labor. OFFICE OF THE DEPUTY ATTORNEY GENERAL, Washington, D.C., August 18, 1967. Hon. WRIGHT PATMAN, Chairman, Committee on Banking and Currency, House of Representatives, Washington, D.C. DEAR MR. CHAIRMAN: This is in response to your request for the views of the Department of Justice on H.R. 11601, a bill entitled "Consumer Credit Protection Act." The bill consists of four titles. Title I would require the disclosure in a simple form of actual finance charges or interest rates on credit extended to consumers. Title II would prohi~rit the attachment or garnishment of the salary of any em- ployee. Title III would create a Commission on Consumer Finance to study and report to the Congress and the President on the functioning and structure of the consumer finance industry. Title IV contains a severability provision. The Department of Justice favors the enactment of the provisions of Title I of the bill which are consistent with the "Truth-in-Lending" recommendations contained in the Pre~ident's message "American Consumer Protection." (El. Doe. No, 57, 90th Congres~) Inasmuch as Titles II and III are not directly related to the purposes of this legislation, we recommend that they be separated from the bill in order that they not delay consideration of consumer credit disclosure legislation by your Com- mittee. The Department believes that the penalty provisions of the bill could be strengthened in two respects. Section 206(b) provides that any person who "know- ingly and willfully" fails to make required disclosures shall be subject to criminal penalties. This requirement of specific proof of willfulness substantially increases the difficulty of establishing criminal violations of the Act. Where the nature of the acts prohibited is clearly defined in the statute, criminal intent may be pre- sumed from the fact that the prohibited acts were committed. It is not a require- ment of fairness or constitutionality that the Government prove specific intent to commit the acts prohibited by this bill in order to impose criminal penalties. Special proof of willfulness is not required in other welfare regulations enforced by criminal sanctions. See, e.g., the Federal Food Drug and Cosmetic Act, 21 U.S.C. 333(a). PAGENO="0321" CONSuMER CREDIT PROTECTION ACT 903 Section 206 (a) requires a plaintiff seeking recovery of a civil penalty to show that an offending creditor "knowingly" failed to disclose required information. The requirement of proof of specific knowledge, which the Department does not believe is required in a criminal proceeding, is certainly not required by fairness in a civil proceeding. The burden of proving specific knowledge by an offending creditor might frustrate prospective plaintiffs, and thereby weaken the enforce- ment provisions of the act. The Bureau of the Budget has advised that enactment of legislation to pro- vide full disclosure of credit charges would be in accord with the Program of the President. Sincerely, WARREN CHRISTOPHER, Deputy Attorney General. FEDER4L HOME LOAN BANK BOARD, Washington, D.C., &~ptember 1, 1967. HON. WRIGHT PATMAN, Chairman, Committee on Bank~ng and Currency, House of Representatives. DEAR MR. CHAIRMAN: In response to your request, the Federal Home Loan Bank Board submits this report on HR. 11601 of the present Congress, which if enacted would become the Consumer Credit Protection Act. This report is presented from the point of view of the functions now vested in the Board under Federal statute. The Board supervises the Federal Home Loan Banks, twelve in number, which provide reserve credit for their member institu- tions. All Federal savings and loan associations, which are chartered and super- vised by the Board, are required to be members, and membership is extended on an optional basis to State-chartered associations and to savings banks and insur- ance companies engaged in making long-term home mortgage loans. The Board also administers the Federal Savings, and Loan Insurance Corporation, which insures up to a statutory limit of $15,000 savings in all Federal savings and loan associations and in such State-chartered associations as apply and are admitted to insurance. (1) Disclosure of Finance Charges. The bill would add to the Federal Reserve Act a new title II requiring disclosure of finance charges where credit is granted by a creditor to a person other than an organization and the debt is contracted by the obligor primarily for personal, family, household, or agricultural pur- poses. The Board strongly urges the enactment of legislation along the lines of these provisions. It is desirable that there be clarity as to the effect of those provisions on loans by the institutions which are supervised by the Federal Home Loan Bank Board to individuals where the amount or rate of the finance charge may be uncertain. Although the incidence of these examples is small in relation to the total number of transactions affected by this legislation, an example of a loan having an uncer- tain amount or rate of finance charge would be construction loans which are to be disbursed in progress payments that can vary in timing with weather conditions and other factors, or loans which have an interest-rate adjustment or escalation clause. We are not entirely certain that the provisions of subsection (c) of the proposed new section 204 of the Federal Reserve Act are fully adequate for this purpose. We therefore suggest that at page 20, line 2, immediately before the period, language such as the following be added: ", or in the judgment of the Board are necessary or appropriate to accom- modate the requirements of section 203 to the characteristics of the class of transactions dealt with". We note that H.R. 11601 does not contain a provision analogous to subdivision (4) of section 8 of the Senate bill (S. 5) as passed by the Senate, which provides that tb~e provisions of the act shall not apply to "transactions involving exten- sions of credit secured by first mortgages on real estate", the term "first mort- gage" being defined in subdivision (i) of section 3 of that bill as meaning "such classes of first liens as are commonly given to secure advances on, or the unpaid purchase price of, real estate under the laws of the State in which the real estate is located". While the Board sees no impelling need for the inclusion of such mort- gages in the disclosure provisions, it recognizes that such coverage is not unrea- sonable. 83-340 0-67-pt. 2--21 PAGENO="0322" 904 CONSUMER CREDIT PROTECTION ACT With respect to the disclosure compliance provision for extensions of credit other than consumer credit sales or transactions under an open-end credit plan, we suggest that at page 11, line 10, the language `in the note or other evidence of indebtdness to be signed by the obligor" be changed to read "in the contract or other evidence of indebtedness, or in the mortgage or other security instrument, to be signed by the obligor". We make this suggestion because it might be inad- visable, for reasons relating to negotiability, for such material to be included in the note or other evidence of indebtedness, as distinguished from the mortgage or other security instrument, which is to be signed by the obligor. (2) Advertiseme~it of Credit Terms. Subsection (j) of the proposed new section 203 of the Federal Reserve Act would prohibit any creditor (which term is de- fined in subdivision, (e) of the proposed new section 202) from advertisement in or affecting interstate commerce that specific credit terms are available unless they are set forth as provided in the bill. Subsection (k) of said section 203 con tains similar provisions as to open-end credit plans. The Board would favor such provisions. (3) Usury. SubsOction (1) of the proposed new section 203 would provide that no creditor may demand or accept any finance charge in connection with any ex- tension of credit tO a natural person which exceeds (1) the maximum irate or amount permitted under applicable State law or (2) 18% per annum, whichever is less. The base to which the 18% rate is to be applied (original amount, declin- ing balance, or otherwise) is not clear, and no account is taken of minimum charges which might be perfectly legal under applicable State law but might produce a rate higher than the 18% rate. In the light of the foregoing, and with- out undertaking to consider the arguments which might be made for or against usury laws as a general matter, the Board recommends against enactment of this provision. (4) Confession of Judgment. Subsection (m) of the proposed new section 203 provides that no creditor may demand or accept in connection with any extension of credit aiiy note or other document authorizing the confession of juugment against the debtor. A ban on provisions for confession of judgment could cause difficulties in mortgage foreclosure in some jurisdictions. The Board recommends that this provision not be enacted. (5) Control of Consumer Credit. The proposed new section 208 which the bill would add to the Federal Reserve Act would authorize the Board of Governors of the Federal Reserve System, whenever the President determines that a na- tional emergency exists which necessitates such action, to issue regulations to control, to such extent as the Board of Governors deems appropriate, (1) the ex- tension of consumer credit is specified respects, including among others the amounts, purposes, and maximum maturity, and such other elements "as may, in his [sic] judgment, require regulation in order to carry out the purposes of this title", (2) the extension of credit to finance directly or indirectly the extension of consumer credit, which controls "may be related to the borrower's financial history, or to the lender's other loans and investments, or to such other factors as the Board may deem appropriate", and (3) in the case of any lender engaged both in the extension of consumer credit and in other types of financing, the pro- portion of such lender's assets which may be devoted to the extension of any type of consumer credit. The Federal Home Loan Bank Board expresses no view as to the need for or advisability of the enactment of this section. (6) Garnishment of Wages. Title II of the bill would provide that no person may attach or garnish wages or salary due an employee, or pursue in any court any similar legal or equitable remedy which has the effect of stopping or divert- iiig the payment of wages or salary due to an employee, and would provide crimi- nal penalties for violation. The Board recommends against the enactment of any garnishment provision until the inter-agency study of garnishment is completed and recommendations are developed. The Bureau of the Budget has advised that there is no objection to the sub- mission of this report, and that enactment of legislation to provide full dis- closure of credit charges is in accord with the program of the President. With kindest regards, I am Sincerely, JoHN E. HORNE, Chairman. PAGENO="0323" CONSUMER CREDIT PROTECTION ACT 905 (Mr. Joseph W. Barr, Under Secretary, Department of the Treas- ury, submitted the following material for inclusion in the record:) EXAMPLES ILLUSTRATING THE APPLICABILITY OF THE DEPARTMENT OF DEFENSE RATE TABLE TO H.R. 11601 No. 1-Equal payments, no deferment.1 NOTE-Examples [-9 are taken from the Treasury Department's "Annual Rate Tables." No. 2-Odd final payment, no deferment. No. 3-Equal payments plus deferment. No. 4-Odd final payment plus deferment. No. 5-Single payment (short term). No. 6-Balloon payment. No. 7-Skipped payments with odd payment. No. 7a-Skipped payments with odd payments. No. 8-Irregular single payments. No. 0-Add-on purchase. No. 10-Multiple disbursement case. No. 11-Single payment loan (30 months). Example 1-Equal payments, no deferment The amount financed in the purchase of an automobile is $2000. The finance charge is $419.02. The monthly payments are $67.22 each for 36 months. What is the annual rate of finance charge? Form No. I For level payments which are irregular only because of deferment or odd final payment (provided the odd final payment is not more than twice as great as a regular payment). Use in connection with Defense Department Rate Table. Step 1-Move decimal 2 places to the left in the amount to be financed and divide it into the finance charge. This gives the finance charge per $100 of amount to be financed. (=$21.00) Step 2-(a-) Double the initial payment period, round it to the nearest whole month, and subtract 2. (b) Add (a) to the total number of payments. (=36) Step 3-Read down left hand column of the Defense Department Rate Table to number of payments found in Step 2(b). Read across to locate finance charge per $100 (Step 1) and read up to find rate. (=13%) Note: This form incorporates the assumption of Section 202(f) (1) (B) of H.R. 11601 regarding an odd payment. It has been suggested that Section 202 (f) (1) (0) could easily be revised to embody the Step 2 correction for deferment of the first payment. Example 2-Odd f(nal payment, no deferment A TV is purchased for $305 plus a finance charge of $39.50. Tt is to be financed by 17 payments of $24 each plus a final payment of $26.50. What is the annual rate? Form No. I For level payments which are irregular only because of deferment or odd final payment (provided the odd final payment is not more than twice as great as a regular payment). Use in connection with Defense Department Rate Table. Step 1-Move decimal 2 places to the left in the amount to be financed and divide it into the finance charge. This gives the finance charge per $100 of amount to be financed. (=$10.00) Step Z-(a) Double the initial payment period, round it to the nearest whole month, and subtract 2. (b) Add (a) to the total number of payments. (=18) Step 3-Read down left band column of the Defense Department Rate Table to number of payments found in Step 2(b). Read across to locate finance charge per $100 (Step 1) and read up to find rate. (=12%) Note: This form incorporates the assumption of Section 202(f) (1) (B) of H.R. 11601 regarding an odd payment It has been suggested that Section 202(f) (1) 1 In the case of monthly payments deferment is the time by which the first payment period exceeds the usual 1 month. (When the time to first payment is less than 1 month, the deferment Is negative.) - PAGENO="0324" 906 CONSUMER CREDIT PROTECTION ACT (C) could easily be revised to embody the Step 2 correction for deferment of the first payment. Ea,a~mple 3-Equal payments plus deferment A personal loan, is arranged for $200. The finance charge is $16.00. There are to be 12 payments of $18.00 each. The first payment is due in 3 months 24 days. What is the annwU rate? Form No. I For level payments which are irregular only because of deferment or odd final payment (provided the odd final payment is not mo,re than twice as great as a regular payment). Use in connection with Defense Department Rate Table. Step 1-Move decimal 2 places to the left in the amount to be financed and divide it into the finance charge. This gives the finance charge per $100 of amount to be financed. (==$8.00) Step 2-(a) Double the initial payment period, round it to the nearest whole month, and subtract 2. (=6) (b) Add (a) to the total number of payments. (=18) Step 3-Read clown left hand column of the Defense Department Rate Table to number of paythents found in Step 2(b). Read across to loc.ate finance charge per $100 (Step 1) and read up to find rate. (=10%) Note: This form incorporates the assumption of Section 202(f) (1) (B) of H.R. 11601 regarding an odd payment. It has been suggested that Section 202 (f) (1) (C) could easily be revised to embody the Step 2 correction for deferment of the first payment. Erample 4-Odd final payment plus deferment A $195.50 appliance is financed with 10 payments of $20.00 each and a final payment of $7.80. The finance charge is $12.30. The first payment is due in 21 days. What is the annual rate? Form No. I For level payments which are irregular only because of deferment or odd final payment (provided the odd final payment is not more than twice as great as a regular payment). Use in connection with Defense Department Rate Table. Step 1-Move decimal 2 places to the left in the amount to be financed and divide it into the finance charge. This gives the finance charge per $100 of amount to be financed. (=$6.29) Step 2-(a) Double the initial payment period, round it to the nearest whole month, and subtract 2. (==-1) (b) Add (a) to the total number of payments. (=10) Step 3-Read down left hand column of the Defense Department Rate Table to number of payments found in Step 2 (b). Read across to locate finance charge per $100 (Step 1) and read up to find rate. (=131/2%) Note: This form incorporates the assumption of Section 202(f) (1) (B) of H.R. 11601 regarding an odd payment. It has been suggested that Section 202(g) (1) (C) could easily be revised to embody the Step 2 correction for dei~erment of the first payment. E4rampZe 5-Single payment The purchase of $250 of merchandise is to be financed by a single payment of $257.50 in 3 months 21 days. Find the annual rate. Form No. I For level payments which are irregular only because of deferment or odd final payment (provided the odd final payment is not more than twice as great as a regular payment). Use in connection with Defense Department Rate Table. Step 1-Move decimal 2 places to the left in the amount to be financed and divide it into the finance charge. This gives the finance charge per $100 of amount to be financed. (=$3.00) Step 2-(a) Double the initial payment period, round it to the nearest whole month, and subtract 2. (=5) (b) Add (a) to the total number of payments. (=6) Step 3-Read down left hand column of the Defense Department Rate Table to number of payments found in Step 2 (b). Read across to locate finance charge per $100 (Step 1) and read up to find rate. (=10%) PAGENO="0325" CONSUMER CREDIT PROTECTION ACT 907 Note: This form incorporates the assumption of Section 202(f) (1) (B) of HR. 11601 regarding an odd payment. It has been suggested that Section 202 (f) (1) (0) could easily be revised to embody the Step 2 correction for deferment of the first payment. Example 6-Balloon Payment An item priced at $610 is paid for as follows, each series beginning at the indicated time from contract date. 10 pmts. of $50 each, beginning at 1 mo. 28 days. Total, $500. 1 pmt. of $150, at 11 mos. 28 days. Total, $150. The total finance charge is $40. Find the annual rate. Form No.11 For all irregular cases not covered by Form No. I. Use in connection with Defense Department Rate Table. Step 1-Move decimal 2 places to the left in the amount to be financed and divide it into the finance charge. This gives the finance charge per $100 of amount to be financed. (=$6.543) Step 2-For each sub-schedule within the main schedule fill in the following: (A) (B) (C) (0) (E) (F) Initial period doubled, to nearest month Number of payments Amount of each payment Total amount of payments (BXC) Eqt;iv~'lent payments (A+B-2) (DXE) 4 24 10 1 $50 150 $500 150 12 23 $6,000 3,450 Total 650 9,450 Divide total of column F by total of column D and round to the nearest integer. This is the equivalent number of payments. (=15) Step 3-Read down left hand column of the I)efense Department Rate Table to number of payments found in Step 2. Read across to locate finance charge per $100 (Step 1) and read up to find rate. (=10%) Example 7-skipped payments with odd final payment An item priced at $346 is paid for by the following groups of payments, each series beginning at the indicated time from contract date. 3 pmts. of $20 each, beginning at 1 mo. 5 days. Total, $60. 8 pmts. of $20 each, beginning at 7 mos. 5 days. Total, $160.' 7 pmts. of $20 each~ beginning at 18 mos. 5 days. Total, $140. 1 pmt. of $30, due at 19 months 5 days. Total, $30. The total finance charge is $44.00. Find the annual rate. Form No. II For all irregular cases not covered by Form No. I. Use in connection with Defense Department Rate Table. Step 1-Move decimal 2 places to the left in the amount to be financed and divide it into the finance charge. This gives the finance charge per $100 of amount to be financed. (=$12.72) Step 2-For each sub-schedule within the main schedule fill in the following: (A) (B) (C) (D) (E) (F) Initial period doubled, to nearest month Number of payments Amount of each payment Total amount of payments (BXC) Equivalent payments (A+B-2) (DXE) 2 14 36 38 3 8 7 1 $20 20 20 30 $60 160 140 30 3 20 41 37 $180 3,200 5,740 1,110 Total 390 10,230 PAGENO="0326" 908 CONSUMER CREDIT PROTECTION ACT Divide total of column F by total of column P and round to the nearest integer. This is the equivalent number of payments. (=26) Step 3-Read down left hand column of the Defense Department Rate Table to number of payments found in Step 2. Read across to locate finance charge per $100 (step 1) and read up to find rate. (=11%) Ecoample ia-Skipped payments with odd payments. A farmer and his wife (who is a schoolteacher) in purchasing an automobile borrow $2786 for which the finance charge is $444.21, and the payment schedule is as follows: Contract date-7/12/O7 9 monthly payments of $50 each starting 10/3/67 1 monthly payment of $50 on 10/3/68 1 monthly payment of $550 on 11/3/68 7 monthly paymer~ts of $50 each starting 12/3/68 1 monthly payment of $50 on 10/3/69 1 monthly payment of $550 on 11/3/69 7 monthly payments of $50 each starting 12/3/69 1 monthly payment of $880.21 on 7/3/70 Form No. II For all irregular cases not covered by Form No. I. Use in connection with Defense Department Rate Table. Step 1-Move decimal 2 places to the left in the amount to be financed and divide it into the finance charge. This gives the finance charge per $100 of amount to be financed. (=$15.94) Step 2-Fpr each sub-schedule within the main schedule fill in the following: (A) (B) (C) (D) (E) (F) Initial period doubled, Number of Amount of Total amount Equivalent to nearest month payments each payment of payments payments (DXE) (BXC) (A+B-2) 5 29 31 33 53 55 57 71 9 1 1 7 1 1 7 1 $50 50 550 50 50 550 50 880 $450 50 550 350 50 550 350 880 12 28 30 38 52 54 62 70 $5,400 1,400 16,500 13,300 2,600 29,700 21,700 61,600 200 Total $3, 230 152, Divide total of column F by total of column D and round to. the nearest integer. This is the equivalent number of payments. (=47) Step 3-Read down left `band column of the Defense Department Rate Table to number of payments found in Step 2. Read across to locate finance charge per $100 (Step 1) and read upto find rate. (=7'/2%) Ecoample 8-Irregular single payments An item priced at $400 is paid for by the following single payments, each pay- ment due at the indicated time from contract date. 1 payment of $100.00 at 1 month 9 days. 1 payment of $100.00 at 2 months 1 day. 1 payment of $75.00 at 4 months 10 days. 1 payment of $65.00 at 5 months 9 days. 1 payment of $25.00 at 8 months 6 days. 1 payment of $51.83 at 10 months 8 days. The total finance charge is $16.83. Find the annual rate. Form No. II For all irregular cases not covered by Form No. I. Use in connection with De- fense Department Rate Table. PAGENO="0327" CONSUMER CREDIT PROTECTION ACT 909 Step 1-Move decimal 2 places to the left in the amount to be financed and divide it into the finance charge. This gives the finance charge per $100 of amount to be financed. (=$4.21) Step 2-For each sub-schedule within the main schedule fill in the following: (A) (B) (C) (D) (E) (F) Initial period doubled, to nearest month Number of payments Amount of each payment Total amount of payments (BXC) Equivalent payments (A+B-2) (DXE) 3 4 1 1 $100 100 $100 100 2 3 $200 300 9 1 75 75 8 600 11 1 65 65 10 650 16 1 25 25 15 375 21 1 52 52 20 1,040 Total 417 - 3,165 Divide total of column F by total of column D and round to the nearest integer. This is the equivalent number of payments. (=8) Step 3-Read down left hand column of the Defense Department Rate Table to number of payments found in Step 2. Read across to locate finance charge per $100 (Step 1) and read up to find rate. (=11%) Example 9-Add-on purchase An item priced at $142 was added to an existing contract. In order to set a uniform total payment for the account over the next 12 months, the payments for this item were to be made as follows, each series beginning at the indicated time from contract date. 10 pmts. of $10.50 each, beginning at 1 month. Total, $105. 2 pmts. of $24.50 each, beginning at 11 months. Total, $49. The finance charge is $12.00. Find the annual rate. Form No. II For all irregular cases not covered by Form No. I. Use in connection with Defense Department Rate Table. Step 1--Move decimal 2 places to the left in the amount to be financed and divide it into the finance charge. This gives the finance charge per $100 of amount to be financed. (=$8.45) Step 2-For each sub-schedule within the main schedule fill in the following: (A) (B) (C) (D) (E) (F) Initial period doubled, to nearest month Number of payments Amount of each payment Total amount of payments (BXC) Equivalent payments (A+B-2) (DXE) 2 10 2 $10.50 24.50 $105 49 10 22 $1,050 1,078 Total 154 2,128 Divide total of column F by total of column P and round to the nearest integer. This is the equivalent number of payments'. (=14) Step 3-Read down left hand cOlumn of the Defense Department Rate Table to number of payments found in Step 2. Read across to locate finance charge per $i~00 (Step 1) and read up to find rate. (=13%) Example 10-Multiple Disbursement Case Disbursements: $100 on 5/1/67 $300 on 6/1/67 $600 on 9/1/67 Repayments: 12 of $90.02 each beginning 10/1/67. PAGENO="0328" 910 CONSUMER CREDIT PROTECTION ACT Form No. I For level payments which are irregular only because of deferment or odd final payment (provided the odd final payment is not more than twice as great as a regular payment). tise in connection with Defense Department Rate Table. Step 1-Move decimal 2 places to the left in the amount to be financed and divide it into the finance charge. This gives the finance charge per $100 of amount to be financed. (=$8.02) Step 2~-(a) Double the initial payment period, round it to the nearest whole month, and subtract 2. (3*) (b) Add (a) to the total number of payments. (=15) Step 3-Read down left hand column of the Defense Department Rate Table to number of payments found in Step 2(b). Read across to locate finance charge per $100 (Step 1) and read up to find rate. (=12%) Note: This form incorporates the assumption of Section 202(f) (1) (B) of H.R. 11601 regarding an odd payment. It has been suggested that Section 202 (f) (1) (C) could easily be revised to embody the Step 2 correction for defer- ment of the first payment. Evample 11-~9ingle Payment Loans (30 months) Loan: $100. Repayment: 1 payment of $209.76 at end of 30 months. Form No, I For level payments which are irregular only because of deferment or odd final payment (provided the odd final payment is not more than twice as great as a regular payment). Use in connection with Defense Department Rate Table. Step 1-Move decimal 2 places to the left in. the amount to be financed and divide it into the finance charge. This gives the finance charge per $100 of amount to be financed. (=$100.76) Step 2~-(a) Double the initial payment period, round it to the nearest whole month, `and subtract 2. (=58) (b) Add (a) to the total number of payments. (=59) Step 3-Read down left hand column of the Defense Department Rate Table to number of payments found in Step 2(b). Read across to locate finance charge per $100 (Step 1) and read up to find rate. (=36%) (34.74% by interpolation) Note: This form incorporates the assumption of Section 202 (f) (1) (B) of H.R. 11601 regarding an odd payment. It has been suggested that Section 202 (f) (1) (C) could easily be revised to' embody the Step 2 correction fo'r deferment of the first payment. DEFINITIONS OF TERMS USED IN UNISER SECRETARY BARE'S STATEMENT ON HR. 11601 ADD-ON Dollar add-on is synonymous with the finance charge. That is, it is the amount ad'ded to the initial unpaid balance to cover the cost of credit. The important point about dollar add-on is that it is often expressed as a percentage (or dollar per `hundred) of the initial unpaid balance. For example, in a 6 percent add-on loan for $1000 for 12 months, the add-on is $60, resulting in an annual percent- age rate of 10.9 percent. (See statement on H.R. 11601 by J. L. Robertson, Vice Chairman, Board of Governors of the Federal Reserve System.) *Months from 5/1 to 10/1=5X $IOO= 500 Months from 6/1 to 1O/1=4X 300=1200 Months from 9/1 to 1O/1=1X 600= 600 $1000 2800 2300 Average time until first payment=~-00 =2.3 months. Double 2.3 to get 4.6. Round to 5 months and subtract 2. *The true rate in this example is 30%. Obviously the level payment table is not well suited for longer term single payments, A matching "single payment" table (of same size and form as the existing table) is necessary and can easily be prepared. PAGENO="0329" 924 CONSUMER CREDIT PROTECTION ACT Taking credit life and credit health together, we arrive at the following esti- mates for 1967: 1. Premiums Earned $750, 000,000 2. Losses including expenses of adjusting losses 400, 000, 000 3. Expenses of Insurer other than Commissions, Profit and Divi- dends to Oreditor (Note A) 70,000,000 4. Commissions (3%) 22, 500,000 5. Profit to Insurer (3%) (Note B) 22,500, 000 6. Compensation to Creditor 60, 000,000 7. Balance 175, 000, 000 NOTE A.-Some of the larger companies have aggregate commission ratios on Group Life as follows: Aetna, 2%; Allstate, 0%; Metropolitan, 1% ; New York Life, 2%; Occidental of California, 2%; Prudential, 1/2 %; Travelers, 2%. Thus, 3% has been taken as an approximation to the average true selling expense. While the smaller companies would necessarily have higher ratios, they would not exert much effect on the average-thus 3% seems reasonable. NOTE B-Similarly for profit, here are a few margins for larger companies: Aetna, 0%; Allstate, 1 1/2 %; Continental Assurance, 2%; Occidental of California, 1 1/2 %; Old Repub- lic, 0% Travelers, 2%. A source of important additional profit to the insurer is investment income which explains why a company can operate on a 0% profit margin. Again 3% does not seem unreasonable. If, somehow, creditors were prevented from profiting excessively on the insur- ance, annual savings of perhaps $175 million would be possible. My estimate of $100,000,000 of a year ago was timid. Actually, the analysis above may even understate the facts because: a.) At least one company, Old Republic, reports to Spectator on a premium basis net of dividends'. Their annual financial statement reveals they p'aid dividends of $5,856,000 which do not show up in Spectator; rather their premiums have been reduced by that amount. b.) The analysis assumes' the companies not reporting to Spectator-about 15% of the business-have a loss ratio of about 50%. Most likely it is close to 25%. c.) The analysis omits credit property insurance. THE DILEMMA OF THE RESPONSIBLE INSURER As evidenced by the New York Life incident related earlier, where that com- pany lost a case because they refused to raise their premium to "meet the com- petition", companies which pride themselves on low cost service to the public are on the horns of a dilemma-either they play the game, or they lose the business. Many such companies are reluctant to be a party to gouging the public and are not aggressively seeking business. Some of our largest group life companies- very efficient operators due to the economies of large scale-are only modest participants in credit insurance. Of itself, this iS a serious indictment of the credit insurance industry for it tends to breed a myriad of inefficient companies whose administrative and other expenses would choke them if they had to compete on a price basis. CONCLUSION These central facts seem to emerge from a review of the credit insurance industry: (1) Fantastic profits are being made from the incidental sale of insurance in connection with loans and other credit transactions. (2) In large measure, these profits are being captured by the finance in- dustry, directly and indirectly, not the insurance industry, although many insurers are doing right well. (3) They are made possible because competition works against the debtor to raise his cost. (4) Someone must protect the debtor, who is in an inferior position to the creditor. (5) This protection must come from government but state governments have been slow to act. This is not necessarily the fault of the insurance com- missioner because he may be unable to secure legislation due to pressure ex- erted by creditors. Maryland and Iowa were unable to pass the model credit life bill this year for this reason, I understand. (6) The citizens of many of our states need help. PAGENO="0330" CONSUMER CREDIT PROTECTION ACT 923 on the basis advocated has been collected and studied. They also advocate that the experience for each state be collected separately. This means that in many instances the experience will be so fragmented that it will take several years at least to obtain meaningful data. The obvious purpose is to delay any reduction of the charges to the public and therefore any reduction of the creditors and in- surers profits for as long as possible. Such reductions could and should be accom- plished promptly by using the data produced by the NAIC's 1964 Study of credit life insurance experience to establish prima fade maximum rate standards, cou- pled with deviation procedures for cases with poor experience, which would pro- duce loss ratios of at least 50% when the maximum rates are charged. This is sub- stantially what the NAIC recommended a year ago, but no state has since acted upon that recommendation.10 HOW MUCH ARE CONSUMERS BEING ovERCHARGED FOR CREDIT INSURANCE? We have discussed bow competitive forces tend to keep premium rates high in credit insurance. What would the savings be if normal competition prevailed? By normal competition we mean the kind of competition found in regular group life insurance of the employer-employee variety where state laws require that the employer pay a portion of the net cost of the insurance and, therefore, he seeks out the insurer with the lowest bid. A year ago I made the following statement: "One thing is clear, if normal competition, rather than reverse competition, could exist there would be a tremendous reduction in cost of credit insurance passed on to borrowers. I would estimate that, based on current premium income, savings would exceed $100,000,000 nationwide annually." This statement has been criticized as grossly exaggerated and harmful to the credit insurance industry. Therefore, perhaps a new estimate with a few details is in order. Statistics on credit insurance are hard to come by and one task the Subcom- mittee should set for itself is to search out all companies writing this business and develop meaningful data. The best, and latest, source of reasonably complete information is the October 1966 issue of Spectator magazine, which contains an article entitled "The Rebirth of Credit Life Insurance". Therein are included statistical tables for both credit life and credit health insurance. The author estimates that the data covers about 85% of the premiums written in the year shown, 1965. The aggregate figures for items 1, 2 and 3 below come from that magazine and have been divided by .85 as an estimate of the total business in 1965 and then increased by 15% as an approximation to the business being written as of mid- 1967. This assumes a growth rate of 10% per annum, a conservative projection as the business has grown faster than that in recent years. As discussed earlier, con~issions and insurer's profit (net gain from opera- tions), items 4 and 5 below, in the case of most companies included in Spec- tator's statistical table, grossly overstate the amounts necessary to conduct the business of credit insurance since the creditor achieves his profit through these sources, as well as from dividends. Therefore, the estimates given are intended to approximate what the commissions and profits would be if the creditor were looking for the lowest premium to pass on to his debtor. Item 6, compensation to creditor, is arbitrarily set at approximately 10% of the estimated reduced premium volume currently if excess compensation were elim- inated. I am confident 10% exceeds the creditor's marginal cost of administering the insurance. Thus, it would not eliminate his profit. 1° June, 1966. meeting in Richmond. Virginia, the NAIC passed a resolution recom- mending among other things enactment of the Model Bill in those states where it has not been enacted and implementation of the requirement that benefits be reasonable in relation to premiums through the promulgation of maximum rate standards by the Commissioners of those states which had not done so. PAGENO="0331" 922 CONSUMER CREDIT PROTECTION ACT York limited charges to 64ç~ per $100 for the smallest creditors reducing to 440 per $100 for the largest cases (over $5,000,000). New Jersey adopted the same scale and, currently, Vermont and California are considering similar regulations. Five other states setting maximum rates have ado~pted the 50% loss ratio test recommended by the National Association of Insurance Commissioners in 1959 as a guideline to state insurance commissioners. By loss ratio we mean the ratio of benefits incurred to gross premiums earned. The resolution adopted says: "The Committee in executive session recommends to all insurance supervisors that a rate for Credit Life or Credit Accident and Health producing a loss ratio of under 50% should be considered to be excessive." As the underlying mortality cost in Credit Life averages about 30ç~, this im- plies a maximum rate of about 60~, although three of the five states mentioned above use 640. (Michigan and Pennsylvania are at 600; Connecticut, Maine and New Hampshire premit 640.) The other states which have promulgated maximum rates adopted 750 which should produce a loss ratio of just in excess of 40%, thereby excessive according `to the NAIC recommendation. Thirty-four states, of course, have no rate standards. Undoubtedly investiga- tion would show that a tremendous volume of credit insurance is being written at loss ratios under 40%. WHAT IS A FAIR LOSS RATIO? Virtually the whole credit insurance industry has embraced the 50% mini- mum loss ratio principle; at least that is their public position. Two questions are pertinent: first, is this a fair return and, second, is it being achieved? To a life insurance actuary, familiar with the efficiency of group life insur- ance, the suggestion that 50% is an appropriate loss ratio is upsetting. I know perfectly well that loss ratios can run as high as 80%, perhaps 85%,8 in credit insurance and still allow the creditor to receive a modest dividend and the insurer to make a profit. There are a number of companies who achieve such loss ratios-Aetna Life, to name one. Further, the credit insurance business in Vermont is written at premium levels producing a loss ratio in total averaging 65% to 70%. Thus, I am unable to conclude that 50% of the premium is reasonable. It seems to me that a `rate producing a minimum return to the consumer of some- thing like 650 of each $1 is more appropriate. This ties in with the loss ratios expected in auto insurance where policies are distributed one-by-one without any of the group insurance efficiencies. A minimum 65% loss ratio still leaves plenty for the creditor. For these reasons Vermont will adopt the New York/New Jersey concept which produces an average loss ratio of something like 65% for those creditors charging the maximums. Even assuming the 50% principle is a good one, and it sure is better than any- thing lower than 50%, a tremendous volume of business is being written at rates producing loss ratios of 40%, 30%, 25% and probably lower. In other words, the 50% principle is not being achieved except in a handful of states cited earlier.' There is a running tug of war in the industry between those who feel the con- sumer needs protection and favor the adopting of a set of maximum rates-rates which, at the minimum, will achieve the 50% loss ratio test meaning a rate of about 000-and, lead by the Consumer Credit Insurance Ass'n.,° those who are fighting to preserve the status quo, meaning no maximum rate standards or a 750 rate. Those who resist meaningful rate standards tend to suggest that the 50% mini- mum loss ratio test should be applied on a company by company, policy form, class of business, class of creditor, or a case by case basis and that no prima fade maximum rates should be promulgated by the Commissioner until experience 8 ~ Is Interesting to consider that when the Internal Revenue Service requested the life insurance industry to provide the Service with a schedule of rates for group life insurance In order to establish the economic value for tax purposes of this coverage when provided free of charge by an employer for his employees, an 85% loss ratio was assumed. ° That Is not their public position for this trade association has endorsed the 50% loss ratio principle. However, a reading of their counsel's testimony in Wisconsin In 1966 leads me to conclude that they are primarily devoted to resisting attempts to establish maximum rate standards. PAGENO="0332" CONSUMER CREDIT PROTECTION ACT 921 significant. For example, a $3000 car financed over three years at $7 per $100 would call for average $450 refund, approximately, if death occurred in the first year. The foregoihg is not an academic matter. Even in Vermont, I found one of our largest banks pocketing the difference between the amount of insurance and the net amount necessary to prepay the debt even though the debtor bad paid the full insurance premium. As a result, Vermont's finance laws have been amended to make it crystal clear refunds on prepayment by life insurance proceeds are required. HISTORY or STATE REGULATION OF CREDIT INSURANCE - The first point to make is that life and health insurance pricing traditionally has been subject to no review by state authorities, in contrast to fire and casualty insurance where rates have to be just, reasonable, adequate and non- discriminatory. Therefore, state authorities are powerless to deal with excessive premiums for credit insurance absent specific legislation. In the late 40's and early 50's some of the abuses cited earlier began to gain attention and, in 1954, this Subcommittee conducted an investigation In Kansas into the tie-in sale of credit insurance in connection with small loans and other financial transactions and issued a report threatening federal intervention if corrective action were not taken. Spurred on by this development and other studies, the National Association of Insurance Commissioners assisted representatives of the industry, worked out a model credit insurance bill which effectively deals with problems such as lack of disclosure, pyramiding of coverage, failure to make refunds of unearned insur- ance charges and the more flagrant sales of excessive amounts of insurance. The bill also contains a provision allowing the Commissioner to disapprove any policy form in which benefits are not reasonable in relation to premiums. The model bill is a good one6 but, like much legislation, requires implementa- tion and enforcement to be effective. While about 30 states have enacted the model bill, only 16 states, as far as I can determine, have established maximum premium rates.7 Even among these states, there is a wide variation in rate standards promulgated ranging from a low of 44~ per $100 initial indebtedness repayable in 12 equal monthly installments for larger cases in New York and New Jersey to a high of 90~ for so-called individual policies in Texas. In those states which do not regulate credit insurance pricing, $1 per $100 is not unusual-in fact, it is frequently the standard rate. Sometimes the rate even runs higher than $1. These are extraordinary rates when contrasted with the General Motors Acceptance Corporation (GMAC) rate in my state of 37l/~çt per $100 for essentially the same insurance. And you can be sure GMAC receives a modest refund even at this low rate. Lest it be said that GMAC achieves such a low rate because it is so large, there are *several modest-sized banks in Vermont charging about 40ç~ per $100. The prevalent rate of $1 per $100 in many parts of the country ~s shocking-more than twice the amount necessary for those creditors with a respectable volume. The matter of what constitutes a reasonable relationship between premiums and benefits has been a hot topic in the credit insurance field. The battle got off to a good start when New York promulgated a scale of maximum rates varying by the creditor's volume of insurance. Recognizing that the administrative costs of i group case decline on a per unit basis as the size of the case increases, New ~ Except Indirectly through New York's Sections 213 and 213a limiting certain expenses of a life insurance company doing business in New York. 6 One deficiency of the model bill is that It is limited in scope to credit transactions of 5 years or less. The finançfing of mobile homes, in particular, as well as other costly Items such as garages and home improvement loans, often exceeds 5 years and, even in those states with the model law, the debtor is afforded no protection against excessive charges for the life insurance, as well as some of the other abuses cited. Vermont, at my urging. eliminated the 5 year limitation this year so that our credit insurance law now covers all credit transactions except first real estate mortgages. I would urge other states to make this change for the amounts of insurance and, thereby, the premiums are much larger than In the usual credit transaction. In the discussion that follows, It should be understood that the term "maximum rates" means that higher rates may be charged only upon presentation to the insurance commis- sioner of evidence that a particular creditor's insureds offer a risk significantly higher than normal, presumably due to a higher average age of the group, such that a higher rate is justified. Thus, the rate standards promulgated are "prima fade maximum rates". If a company receives permission to charge a higher rate, that is known as a deviation. PAGENO="0333" 920 CONSUMER CREDIT PROTECTION ACT been no insurance despite the fact that the addition of `the insurance decreases the risk of loss on the credit transaction. (5) Failure to Refund Finance Charges o~i Prepayment of a Debt Due to the Death of an Insured Debtor-As mentioned, state law requires refunds of finance charges to be given if the debtor prepays his debt prior to maturity. Frequently, however, if the debt is prepaid by the proceeds of a credit life insurance policy, the refund is not made to the beneficiary or estate of the deceased debtor. I have a feeling this abuse is more widespread than any of us realize. It is particu- larly deplorable because the debtor pays the entire cost for the insurance, often at an excessive rate, and should be entitled to every penny not legally owed to the creditor. Some detail will be necessary to explain how the creditor, in the absence of specific state laws to the contrary, manages this bit of larceny. In making consumer loans or financing the purchase of goods and/or services, it is virtually the universal practice to add the total finance charges for the en- tire repayment period to the principal of the debt and then to insure the sum of these two items. Thus. at any time prior to maturity, the life insurance is in an amount inclusive of unearned finance ch'arges. On death, the insurance comnany pays to the creditor, as beneficiary, the sum insured and leaves it to the creditor to refund that portion of the insured finance charge which is unearned. That these amounts can he significant is illustrated by the following example derived from a complaint I received in Vermont from a young man who had financed a mobile home over a seven year period and had been required to buy life insurance. His complaint went `to the excessive credit life insurance charges, rather than to `the possibility of his not receiving the full proceeds of the policy on his death. However, since the instrument evidencing his debt had been sold to an out-of-state bank and since the insurance company told me that they merely paid the proceeds to the bank and left it up to the bank to make any refunds of excess `insurance proceeds, I suspect the worst. Here is the breakdown of the charges on the installment sales act agreement signed by the young man: 1. Cash Price $4, 150. 00 2. Less: Down Payment_.~ -300.00 3. Unpaid Balance 3,850. 00 4. Comprehensive and VSI Ins 253. 00 5. Credit Life Insurance 273. 89 6. Principal Balance (3+4+5) 4,378. 89 7. Finance Charge 2, 144. 03 8. Total Time Balance (6+7) 6,520.92 (The other insurance charge-Item 4-is probably reasonable and is not `a matter for consideration here except to say that the $7 per $100 per year finance charge-12.16% true interest-added to this insurance charge represents an additional gain to the credi'tor while the existence of the insurance decreases his risk.) Here is the schedule of the indebtedness, amount of life insurance, amount necessary to prepay the debt and the excess proceeds of the life insurance policy: Beginning of month lndebtedness including unearned Credit life insurance in force Amount necessary to prepay indebtedness Excess amounts of insurance finance charge 1 13 25 37 49 61 73 $6,521 5,589 4,658 3,726 2,795 1,863 932 $6,521 5,589 4,658 3,726 2,795 1,863 932 $4,112 3,820 3,415 2,927 2,349 1,683 884 $2,409 1,769 1,243 799 446 140 48 While credit transactions of lesser amounts and shorter durations do not offer the potential windfalls shown in Column 5, the amounts are nonetheless PAGENO="0334" CONSUMER CREDIT PROTECTION ACT 919 amined the monthly reports from Old Republic, deposited its monthly receipts, and prepared its annual statements to the Indiana Insurance Department with the help of information furnished him by Old Republic and Alinco's consulting actuary. On the average he was able to perform these duties in the space of approximately one day each month. "Despite the simplicity of this operation, Alinco's financial success during the period 1953 through 1959 was striking. Its net gain from operations during that period, before Federal Income taxes but after paying its expenses and share of death benefits, was in excess of $28,500,000." The process by which a credit life company operating in many states in effect stands in place of the creditor's captive reinsurer can be described as a "fronting" arrangement. The primary insurer's cut of the bsuiness is sometimes known as a "fronting fee". Its size depends on the relative strengths of the creditor and the insurer. Earlier we described how competition tends to keep premiums high in credit insurance. The real competition is between the creditor, on behalf of his captive reinsurer, and the insurer as to who gets what share of the action. As time passes, the alert creditor will demand "more and more of the pot", as the expression goes, by threatening to move his insurance to a carrier who will provide the desired arrangement. This squeeze play by the creditor often reduces the insurer's net profit nearly to the vanishing point. For example, one "pot" I am aware of is split 39 parts to the creditor's captive company and one part to the "fronting" insurer. I have heard of deals where the fronting company writes the business for no profit at all save the investment income it can generate from the premium income. Some insurers, I am told, will write the business at no profit for the volume of insurance tends to inflate the annual financial statement, making it much easier to run up the company's stock. Further, without going into detail, there are important tax advantages to having the creditor's share of the pot flow to a subsidiary life company rather than be received directly as commissions or dividends. The advantages, however, are much less significant than they were prior to 1959 when the method of taxing life insurance was changed. The villain of the piece begins to emerge then. The big profits are not going to the life insurance companies who provide the service (except where the insurer is owned by the creditor) but rather to the creditors-small loan companies, finance companies, banks, merchants who sell on time, anyone in the business of extending credit for profit. WHAT ARE SO1~tE OF THE OTHER ABUSES PREVALENT IN CREDIT INSURANCE? The big money in credit insurance is made by the creditor by capturing a large share of an excessive premium, as we have just described. Among other schemes by which the creditor profits at the expense of the debtor are the following: (1) Failure to Refund the Unearned Insurance Premium on Refinancing or Repayment of the Debt-State laws require refund of unearned finance charges on prepayment by the debtor. Since the insurance premium is paid in advance as well, the unearned portion of it should be refunded on prepayment. But many states have no law on this and the creditor often pockets the insurance refund himself. (2) Pyramiding of Policies-Often debts are refinanced or renewed. If so, a new insurance policy is issued and paid for. The proper procedure is to cancel the old policy and make a refund but some lenders leave the old policy in force. Thus the debtor ends up with two or more expensive policies for amounts In excess of his debt. (3) Ea~cessive Coverage Sold at the Inception of the Credit Transaction- Level term policies may be sold to cover a loan repayable in installments rather than decreasing term insurance. The debtor ends up paying too high a price for more coverage than is necessary. (Those states with credit insurance legislation or effective regulations have pretty well put a stop to the three practices above, but, as we will see, many states have no control over the business.) (4) Profit from Finance Charges Added to the Insurance Premium-The nor- mal method for calculating the finance charge is to add the single premium for the insurance to the principal amount borrowed before making the calculation. Thus, the creditor's Interest income is increased over what it would be had there 83-340 0-67-pt. 2-22 PAGENO="0335" 918 CONSUMER CREDIT PROTECTION ACT Note that in a larger case, commissions may well average a fraction on one per cent. Clearly, commission rates of 30%, 40% and more are merely a device to pass on a significant portion of the premium to the creditor. (2) Dividends or Retrospective Rate Credits-A second method, either sup- plementary or in lieu of commissions, is through the payment of dividends or, as they are often called in group insurance, retrospective rate credits. These payments are merely the amount left over after paying all necessary expenses and profits of the insurance company including death and disability claims. While the amount of the dividend depends on the mortality or morbidity experience of the group, in larger cases the dividends are predictable within a narrow range. When I first heard about credit insurance, I naively assumed the dividends were returned to those who paid the insurance premium, the debtors. It came as some surprise to me that the creditor picked them up even though he con- tributed nothing to the cost. (In regular employer-employee group life insurance, the dividends are re- turned to the employer but it is not lawful for him to recoup more than he contributed to the cost of the insurance.) Some states, including Vermont, passed laws requiring that these dividends be used to reduce the cost to borrowers in the following year. Such laws don't work for they merely serve to increase commissions or can be circumvented by either of the methods below. Vermont repealed this requirement shortly after enacting it. (3) Captive Life Insarance Companies-Direct-Obviously, it is possible for a larger creditor to set up his own insurance company as a subsidiary and thereby capture the profits directly. However, it is time consuming to gain admittance to the states in which the creditor does business and the economies of large scale makes this method too expensive for all but the largest creditors. Further, a modest degree of expertise is required. The reinsurance route is generally preferred. (4) Captive Life Insurance Companies-Reinsurance-While the methods above are rather prosaic, the reinsurance deals which criss-cross the country can be intriguing. The Subcommittee is undoubtedly aware that reinsurance is a most useful device in the insurance business to spread the risk-laying off the bets, in the bookmaker's parlance. In this way, a company can take on almost any size risk by limiting its exposure to a predetermined amount and reinsurin.g the bal- ance with one or more reinsurers. In credit insurance, reinsurance has an entirely different function-to pass profits through to the creditor. Because of the small amounts insured, and the fact that the debtors are well dispersed, it is usually unnecessary to spread the risk. The creditor merely forms a life insurance subsidiary which need not apply for admission to do business in any state but its own. The subsidiary enters into a "reinsurance treaty", as it is called, with a company licensed to do busi- ness in at least those states in which the creditor does business, or reinsurance treaties may be negotiated with more than one company. Commissioner Fletcher in the Alinco ease mentioned earlier describes the arrangement better than I can. Old Republic wrote the credit life insurance covering the debtors of Associates Investment Company, the creditor. Alinco was a life insurance company which was wholly owned by Associates. Alinco's only function was to reinsure a portion of Old Republic's direct writings roughly equivalent in amount to the coverage written by Old Republic on Associates debtors. "The Alinco-Old Republic reinsurance arrangement was typical of reinsurance arrangements generally in that Old Republic as the primary carrier handled all administrative details of the insurance including the supervision, investigation, defense against and payment of all claims, and thereafter made its claim against Alinco by way of monthly statements for Alinco's share of the losses. "From birth to liquidation, Alinco's only business consisted of reinsurauce under the Old Republic-Alinco treaty. As might be expected from the fact that Old Republic handled the myriad details incident to the insurance contained in the Alinco Reinsurance Pool, Alinco's operations were quite simple and inex- pensive. Alinco had no office or salaried employees. An accountant employed by another subsidiary of Associates took care of Alinco's books and records, ex- PAGENO="0336" CONSUMER CREDIT PROTECTION ACT 917 lies in the consummation of the primary transaction of loan (or installment sale), he is not likely to go out `shopping' elsewhere for a lower premium rate assuming he is interested in acquiring any credit life insura:nce at all. Thus, it is reasonable to anticipate that, in most instances, a borrower desiring to cover his loan with credit life insurance will consummate the entire trans- action with his creditor in preference to making any independent analysis or corn- iarison of credit life premiums available elsewhere." In other words, the debtors form a captive market for the insurance and have no ability to evaluate the reasonableness of the insurance charge. But it might be askcd, "Does it really matter what the source of the creditor's profit is? What difference is there if he makes it on the insurance, the finance charge, or both?" The answer is that it usually does matter. First, the states all have various laws to protect borrowers and those who buy on time,. These laws-usury laws, small loan acts, installment sales acts, revolving charge account maximums, etc.- are necessary due to the inferior bargaining position of the debtor. It is not at all unusual for small loan companies, finance companies, even banks, to operate at the maximum rates perrnittd by law. Creditors who charge the maxi- mum rate for the extension of credit and profit in addition on the same trans- action from the sale of insurance to their captive debtor are, as a practical matter, circumventing the intent of state's finance laws.4 Having explained how overcharging for credit insurance arises and why it is a serious matter, let us examine the manner in which the creditor captures a large share of the credit insurance dollar. COMMISSIONS, DIVIDENDS, CAPTIVE INSURERS AND EEINSURANCE IN CREDIT INSURANCE There are perhaps four methods by which the creditor gets his "piece of the action". All are quite legal and well-accepted. (1) Comn~i$.sions-The simplest way to pass on a portion of the insurance premium to the creditor is by paying him a commission rate in excess of that which normally would pertain. It is, of course, an easy matter to sell the creditor on the need to cover his debtors with life insurance. It is very valuable to him in his operations and, further, he is able to make a profit from its sale far in excess of the marginal expenses of adding the service. In fact. I would argue that the creditor would be quite willing to offer the insurance without any form of compensation what- soever because it relieves him of the expensive, and sometimes impossible, task of collecting the unpaid balance on death from the debtor's estate. Further, the marginal cost of asking the question about insurance, and of filling in an addi- tional line on the application, is negligible. Often commissions in credit insurance run to 30%, 40% or higher. That this is far in excess of typical commission rates in group insurance can be seen from the following table: REPRESENTATIVE GROUP COMMISSION SCHEDULE 1 [In percentj Portion of premium 1st year 9 renewals lst$1 000 20 5 Next ~4,00O 20 3 Next $5,000 15 l3/~ Next $10,000 123/i 13/~ Do 10 13/i Next $20,000 5 l3/~ Next $50,000 23'~ 1 Do 1 Next $350,000 3i~ 3i~ Next $500 000 Next si,oóo,ooo and over i'm i-i o `Source: Group insurance study notes published by the Education and Examination Committee of the Society of Actuaries. That insurance profits are hardly insignificant Is dramatically Illustrated by a care~u1 review of a recent Credithrift Financial prospectus received in our Securities Division. After taxes and preferred dividends, this finance company earned 3.13 million of which about 1.65 million cathe from writing insurance on their customers. In other words, they made more on the insurance than they did on their basic business. These figures are for the company's fiscal year 1966. PAGENO="0337" 916 CONSUMER CREDIT PROTECTION ACT handling techniques are employed in either case, the two methods differ only in form, not in substance. Thus, we can refer to all credit life insurance as a specialized form of group term life insurance. It is important to point out that, in the vast majority of cases, there is no direct contact between the insurance company and the insured. The creditor controls the sale entirely. Except in specialized coverages, the cost of credit life insurance is the same regardless of the age of the debtor. The reason for this is primarily administra- tive convenience. Further, it makes it much easier to insure older persons who otherwise might resist the substantially higher cost. Credit life insurance is generally single premium term insurance which decreases as the debt is repaid. Sometimes, level term insurance is issued to cover loans repayable in lump sums. In summary, credit insurance is a form of group insurance sold more or less automatically in connection with credit transactions with a minimum of admin- istrative expense to either the creditor or the insurance company. It is a vital adjunct to consumer credit for it protects the creditor against loss through the death or disability of the debtor and protects the debtor's family against claims for debts outstanding at the time of the breadwinner's death or disability. Despite these advantages, credit insurance is subject to widespread abuse, in my opinion, and, with this background information, it is now possible to describe the nature of these abuses and how they arise. COMPETITION IN REVERSE Recently I was discussing credit insurance with the president of New York Life who told me his company had recently lost a large bank's credit life program to another insurer whose price was 60% higher than New York Life had bid. Does this sound like free enterprise gone haywire? Not at all in the credit insurance field. New York Life was simply unwilling to "meet the competition" by raising the price of its product, the cost of which was to be borne entirely by the bank's customers. Of course, it is quickly realized that the creditor accepts the highest bid rather than the lowest because he gets the difference in kickbacks of one form or another which we will go into later. Normal competitive forces, then, tend to raise the price of credit insurance to the consumer and this phenomenon is known as "reverse competition" in the credit insurance field. The process needs to be described in greater detail. Credit insurance is offered in either of two ways: (1) without an identifiable charge, its cost being included as part of the finance charge, or (2) the debtor is assessed a separate extra charge for the insurance. In the first instance, the creditor will wish to minimize his insurance cost so as to maximize his return from the finance charge. If all creditors used this method, we would not be here today for the insurer with the lowest bid com- bined with the best service would c'arry the day. However, most credit insurance is sold as an extra cost item. In this event, the higher the price the greater the return to the creditor. The question arises, "Does not the debtor tend to seek out the lowest cost life insurance?" Commis- sioner Fletcher in his report to the United States Court of Claims in the Alinco3 tax case gives us the answer: "Due to the method by which credit life insurance is sold, a unique situation has been observed by persons knowledgeable in the industry. Since the premium for credit life insurance is generally paid by the borrower, and since the lender's remuneration is generally a percentage thereof, the higher the gross premium, the greater will be the' profit to the lender who procures the policy. Therefore, some lenders (or sellers) in seeking to increase their remuneration for the procedurement of such insurance tend to place `their business with the insurance company that charges the highest gross premium. An experienced lender (or seller) can generally foresee that, since the borrower's (or purchaser's) interest `In U.S. Court of Claims No. 77-63 (l~'iled March 6, 1966)-AlInco Life Insurance Co. V. the U.S-Report of Commissioner to the Court. I would urge the Subcommittee to study this tax case carefully. Although it was decided against the Government, and in favor of a credit life insurer, it nevertheless offers a pene- trating insight into one of the more imaginative ways in which a creditor maximizes his profits from the insurance sale. PAGENO="0338" CONSTJMER CREDIT PROTECTION ACT 915 CREDIT LIFE INSURANCE GROWTH IN THE U.S. Credit life insurance which, to repeat, is sold in connection with loans or other credit transactions in order that the debt may be extinguished at the death of the debtor, was first sold with small loans in 1917. Of course, the requirement of life insurance as additional security for a loan goes back much further than 1917, but its systematic application began then. The growth of credit life was mcdest until after World War II, when it began to grow rapidly. By 1950, credit life insurance in-force had reached only $4 billion. Today, the in-force figure is somewhere around $65 billion.1 Since 1954, when the senate Antitrust and Monopoly Subcommittee held public hearings in Kansas reg~trding abuses in credit life insurance, the business has more than quadrupled to cover an estimated 85% of all consumer installnient debt (excluding charge accounts, credit cards and residential mortgage debt). Thus, there is no question that credit life insurance is pervasive in our economy and any inquiry into consumer credit generally must not omit the "hidden insur- ance, as one writer has labeled credit life. In addition to small loans and installment purchases of autos, appliances, etc., credit life is also sold in connection with other credit transactions such as: 1. Installment loans by banks; 2. Credit card debts; 3. Revolving charge account balances; 4. Front end load, or contractural plan, mutual fund purchases; 5. Debit balances in margin accounts of brokerage firms; 6. Real estate mortgages; 7. Education loahs; 8. Production Credit Association loans to farmers. The ease with which it is sold, the simplicity of administration, and the large profits to the creditor from its sale have combined to make credit life immensely popular. As there are about 70 million 2 policies or certificates outstanding it is e~tiinated that about 50,000,000 people in the U.S. are covered by credit life insur- ance in some form. CREDIT HEALTH INSURANCE GROWTH IN THE UNITED STATES Credit health insurance, which picks up the debtor's monthly payments during his disability, probabl~~ covers only about 10% of consumer installment debt, as opposed to an 85% petietration for credit life. The unit cost is about four times that of credit life which may be a factor in its slower growth. Further, claims administration is considerably more difficult. Also, the disability experience of a group is much less predictable than its mortality experience and insurers have not been as anxious to offer it. Nevertheless, credit health is now growing rapidly in popularity with creditors and its growth rate in the future will probably exceed credit life. (From this point on, it will be less confusing to limit the discussion to credit life insurance. Whatever remarks are made with respect to credit life will gen- erally apply to credit health unless otherwise stated.) CREDIT LIFE INSURANCE-HOW IS IT SOLD? WHAT ARE ITS DISTINGUISHING CHARACTERISTICS? Credit life insurance is offered by life insurance companies to creditors whose job it is to sign up the customer for the insurance as an incidental part of the credit transaction. Often the insurance is required as a condition precedent to the extension of credit, but some states permit the debtor to substitute his own insurance if he requests to do so. As a practical matter, it is not difficult to add the insurance charge for the cost does not appear to be high in relation to the finance charge plus the principal balance. Credit life insurance is written in two ways: (1) under an individual policy issued to the debtor with the creditor named as beneficiary or (2) under a group policy issued to the creditor who is beneficiary as well. Under the latter plan, the debtor is given a certificate evidencing the insurance. Because mass 1 Source: Life Insurance Fact Book 1966 extrapolated. 2 Source: Life Insurance Fact Book 1966 extrapolated. PAGENO="0339" 914 CONSUMER CREDIT PROTECTION ACT (Hon. Jonathan B. Bingham, member of the Consumer Affairs Subcommittee, submitted the following statement of James H. Hunt, commissioner of banking and insurance for the State of Vermont, be- fore the Senate Antitrust and Monopoly Subcommittee, on the subject of credit life and health insurance:) STATEMENT TO THE SENATE ANTITRUST AND MONOPOLY SUBCOMMITTEE REGARDING CREDIT LIFE AND HEALTH INSURANCE BY JAMES H. HUNT, FELLOW, SOCIETY OF ACTUARIES, COMMISSIONER OF BANKING AND INSURANCE, STATE OF VERMONT As the only CommiSsioner of Insurance in the United States who is a life insurance actuary, I am possibly well situated to comment on credit insurance. Equally important, I am also the Banking Commissioner and this responsibiilty includes supervision of sales finance and small loan companies. It is the combina- tion of actuary, insurance commissioner and consumer credit administrator that compels me to appear before this distinguished committee today. My task will be to bring before the Subcommittee certain background informa- tion concerning credit insurance which is necessary to an understanding of the need for effective regulation. In addition, this statement will reveal my own view of credit insurance, which might be summarized at this point by saying that, in most states, the debtor is paying excessive premiums and needs help. Since my remarks will include rather serious allegations about the credit insurance business, I wish at this point to place them in better perspective. First, I have spent my working life in the life insurance business prior to becoming Commissioner and have great respect for the contributions it makes to the economic security of millions of Americans. Moreover, the tremendous capital formation provided by the life insurance industry (but not the credit insurance industry) is a vital factor in our steadily increasing standard of living. Thus, my statement should not be interpreted as a criticism of the life and health insurance business generally but only a specialized segment of it. Secondly, since my comments are mainly directed to excessive premium rates, I wish to make it clear that I am not one who thinks profit is a dirty word. In Vermont, we have had some serious pressures on automobile rates and I have taken a strong position that the auto insurance companies must have adequate rates, rates which give them a reasonable chance to make a profit, in order that they can bring good service to our residents. This strong support of the need for higher auto insurance premiums in my state nearly cost me my job, for the Sen- ate confirmed my appointment by the Governor last February only after much debate and a close vote. My position has been, is, and will continue to be that where plenty of com- petition exists among insurance companies for the premium dollar, the insurance commissioner has little business interfering in the rate-setting process. However, such is not the case in credit insurance and that is why I am here. CREDIT INSURANCE-WHAT IS IT? Credit insurance is that form of insurance sold in connection with loans or other credit transactions generally providing, in the case of credit life insurance, a death benefit at least large enough to prepay the outstanding balance of the loan at the time of death of the debtor and, in the case of health insurance, a periodic benefit (almost always monthly)-equal to the periodic installment payment on the debt-for as long as the debtor is disabled or until the maturity date of the debt. The sale of fire and casualty insurance in connection with credit transactions is known as credit property insurance. As credit property insurance is not sold in Vermont, I will leave discussion of this topic to other witnesses. The insuring of accounts receivable by a merchant against extraordinary losses due to business failure of his customer is also referred to as credit insur- ance. This hearing is not concerned with that specialized field. Throughout this statement. the term "creditor" will he understood to mean a lender, in the case of a loan of money, or the holder of an installment sales agree- merit, in the case of a time sale transaction. The term "debtor" will include the borrower or the buyer as the case may b~'. PAGENO="0340" CONStIMER CREDIT PROTECTION ACT 913 precomputed charges made for the full term loan. The following table shows how this result is achieved; 8/78 (portion of aggregate charge allocated to 5th installment period) 7/78 (portion of aggregate charge allocated to 6th installment period) 6/78 (portion of aggregate charge allocated to 7th installment period) 5/78 (portion of aggregate charge allocated to 8th installment period) 4/78 (portion of aggregate charge allocated to 9th installment period) 3/78 (portion of aggregate charge allocated to 10th installment period) 2/78 (portion of aggregate charge allocated to 11th installment period) 1/78 (portion of aggregate charge allocated to 12th installment period) Total 36/78 (portion of aggregate charge allocated to scheduled installments which have been prepaid) ~8OO Service charge `This expression is more or less synonymous with "finance charge". Finance charge This term is specifically defined in H.R. 11601 as well as in S. 5. In addition, the following definition is given from Neifeld's Guide to Install- ment Purchases: Finance charge: That part of the total price in the retail installment con- tract of sale in excess of the cash price; difference between the commodity's cash and time-sales price. In motor vehicle transactions, the finance charge includes, unless otherwise specified, the insurance premium, if any. Interest The following definition is given by Neifeld: The money charge made by the lender for use by the borrower of a certain sum of money for a specified period of time; in law, compensation allowed or fixed by the parties for the use *or forbearance or detention of money or its equivalent; the rate percent derived from money loaned by another, or from debts remaining unpaid. Time price differentiat Neifeld defines the time price differential as the difference between time pay- ment price and cash price when goods are sold on credit. Sale price V8 cash price Neifeld defines the retail installment sale as a retail installment contract in which the purchase price may be paid in installments over a period of time. The difference between the retail installment sale price and the cash price is the time price differential, defined above. ~° The language most commonly used to express refunds based on the Rule of 78 in small loan laws is set forth in the N.Y. Small Loan Law, N.Y. Banking Law § 352(d)1: [R]efund [shall bel . . an amount which shall be at least as great a proportion of the precomputed interest . . . as the sum of the remaining monthly balances. of principal and interest combined scheduled to follow the installment date nearest the date of prepayment bears to the sOm of all the monthly balances of principal and interest combined originally, scheduled by the contract. It should be noted that the statutory language designates that the fraction to be used in determining the refunçl is equal to the relation of the sum of the amounts of the monthly balance due after the daie nearest the date of prepayment to the sum of the amounts of all schedule~l monthly baladces under the contract. If prepayment in full were made on the fourth installment date on a contract scheduled to be repaid in 12 monthly installments of $10 each, the refund would be calculated as follows: $80+70+6O+50+40+30+20+10 $120 110+ 100+90± 80+70 60+50+40+30+20 1& $360 36 = -- or -- of total charges. $780 78 The result is the same as would be produced under the approach described In the text. That is. as long as. the installments are substantially equal in amount add period, the results are the some whether one uses number of installments or amount of installments in the calculations with the Rule of 78. If installments are unequal in amount, then the method described In the text continues to produce the same result In the example shown, but the language of the statute will produce a larger or smaller fraction depending on whether the larger installments are scheduled to be repaid after the date of prepay~nent. See Ayres, op. cit. supra note 74, at 166-167. PAGENO="0341" 912 CONSUMER CREDIT PROTECTION ACT RULE OF 78 Barbara Curran's "Trends in Consumer Credit Legislation" defines the Rule of 78 as follows: "The Rule of 78 is merely a mathematical formula for determining the amount of the charge to be allocated to each installment period. The amount of the charge to be allocated to any particular installment period bears the same relation to the aggregate charges computed for the entire loan as the number of installments scheduled to be paid on and after the expiration of such installment period bears to the sum of the numbers designating all of the installment payments contracted for. Thus the charge applicable to the third installment period of a 12-installment contract would be 10/78 of the total charge.78 The "10" represents the number of installments scheduled to be paid on and after the date the third installment period terminates, and the "78" represents the sum of the numbers of all the installments contracted for (i.e., 1+2+3+4+5+~l+7+8+9+10+11 +12=78). Under the Rule of 78, 10/78 of the total charge is earned during the third installment period.79 The refund for a loan prepaid in full will equal the aggregate of the charges to be allocated for each installment period following the date of prepayment. In other words, if the borrower prepays the loan in full on the fourth installment due date, he is entitled to 36/78 of the aggregate of "TABLEII.-METHOD REFERRED TO IN NOTE56SUPRA(UNIFORM PAYMENTSOF PRINCIPALAND INTEREST COMBINED BUT NOT ON BASIS OF PRECOMPUTATION) "Balances Interest Principal Total payment $300. 00 $6. 00 $47. 56 $53. 56 252. 44 5. 05 48. 51 53. 56 203. 93 4. 08 49. 48 53. 56 145.45 3.09 50.47 53.56 103.98 2.08 51.48 53.56 52. 50 1. 05 52. 50 53. 55 21.35 300.00 321.35 Id. at 205. "Precomputation: Add the total of the Interest column under either Table I or II above to total of the Principal column and then divide by number of payments in the Total Payment column. For Table I, amount will be- $53.50; for Table II, $53558." rn If charges are computed monthly on the outstanding principal balance and if monthly lnstullment payments of principal are to be equal in amount, then the total amount of each monthly installment payment (which includes the charge for credit) will be less than the amount of the total installment payment for the preceding month. Such is the case because the credit charge is computed on the basis of the outstanding principal which decreases as each mnnthly installment payment is made. Since the act does not require that installments of principal be equal in amount (only that no installment can be substantially greater than the preceding installment), small loan companies are able to devise repayment schedules which provide for installment payments which combine principal and charges but which are equal in amount (except for the last installment payment, which may be somewhat less than preceding installments) and which do not violate the maximum rate provisions of the law. See Ayres, Instalment Mathematics Handbook, `Uniform Payments Under Small Loan Laws" 202-208 (1946). This method is not to be confused with "precomputation" described subsequently in the text. The two are distinguished in note 74 infra following the textual discussion of precomputation. 78 Ayres, op. cit. supra nota 74. at 160-170. ~° It is to be noted that the third installment is due and payable at the end of the third Installment period. That is, the first installment period runs from the date the loan is made to the date of the first scheduled installment payment, the second installment period runs from the date of the first scheduled installment payment to the date of the second scheduled installment period, etc. PAGENO="0342" CONSUMER CREDIT PROTECTION A~JT 911 DISCOUNT Dollar discount is similar to dollar add-on except that the proceeds to the borrower are reduced by the amount of the discount, but the full amount is re- paid. For example, considering a $1000 one year loan again, if the discount is 6% the amount received by the borrower is $1000 less $60. However the amount repaid would be $83.33 per month, or $1000. The annual percentage rate `would be about 11.6%. PRECOMPUTATION Precomputation is a procedure authorized `by many states to facilitate clerical operations. Essentially, the operation `appears to consist of adding the finance charge (however determined) to the amount to be financed and dividing by the number of payments to ~nd the amount of `each payment. Excerpts from Barbara Curran's "Trends in Consumer Oredit Legislation" ~re given below. They explain the device in greater detail. "Charges are precomputed in the following manner: after the lender and the borrower arrange the amount of the loan and determine the schedule for in- stallment payments of prin'cir~al, the lender `computes the charges which would accrue over the term of the loan if the borrower were to repay the principal amount exactly in accordance with the installment schedule `agreed upon; he then adds the charges so computed to the principal and divides by the number of installments schedu'ed to determine the amount of each installment Øayment which now represents charges and principal combined.72 The advantage in using the precom'putation method lies in the fact `that not only will the amounts of all installment payments be substantially equal but the lender will not be put to the trouble of `allocating principal and charges as each Installment payment `l's made.73 72 It is no't suggested here that a lender follows the precise steps indicated in the text for each loan. Not only is there a redundant step in the procedure as described In the text but, as a practical matter, most lenders would have charts for speedy reference by clerks which would give the necessary jnformation about charges for a particular loan. 7~ It would seem most lend'rs would have charts available for use by clerical help which would show the allocation information for loans paid on schedule, and the actual computa- tion would not need to be made each time, even for non-precomputecli loans. However, the dollar allocation of principal and charges would, under the uniform a'ct. have to be entered on the loan records. `~ Precomputation is not to be confused with the method described in note 56 supra. The method described in note 56 is merely a means by which the lender selects a different amount for each monthly installment of principal so that when each such installment of principal is added to the charges computed for the principal outstanding during the preceding month, the sum of principal and charges will be the same for all installments, even though the amount allocated to principat and the amount allocated to charges for all installments is different. The following tables taken from Ayres, lnstalmenl Mathematics Handbook (1946), should illustrate the difference: "TABLE 1.-STANDARD METHOD (UNIFORM PRINCIPAL PAYMENTS WITH INTEREST ON DECLINING BALANCES) "Balances ` Interest Principal Total payment $300 $6 $50 $56 250 5 50 55 200 4 50 54 150 3 50 53 100 2 50 52 50 , 1 50 51 21 - 300 321 - Id. at 202. PAGENO="0343" CONSUMER CREDX2~ PROTECTION ACT In the report of the 1954 Subcommittee, Senator McCarran is quoted in ref- erence to the McCarran Act, Public Law 15, which delegated to the states power to regulate the business of insurance, subject to the ultimate authority of the Federal government. Senator McCarran said in part: `In enacting this law Congress held out an invitation to the States to deal afflrmatrvely and effectively with the activities and practices of the insurance business which might otherwise be the subject of Federal regulation. . . . The Congress, therefore, has the duty to be vigilant of the public interest. . . . We must recognize that silence on the part of Congress depends primarily, not upon the extent or type of regulation imposed by the various states, or by any state, but rather upon the success of such regulation." {Italic supplied.] The Subeommittee concluded with an admonition that they would "not forever accept `attempts' at regulation as a substitute for regulation of the business of insurance by the states. The patience of the Federal government with those who would abuse the good name of insurance may come to an end." It certainly is time for the Subcommittee to take another look at credit insur- ance for there is serious doubt whether the states, as a group, are dealing affirm- tively and effectively with this problem thirteen years after the Subcommittee's warning. Those who must borrow or buy on time are, in a financial sense, "the least among us," hardly in a position to pay exhorbitant credit insurance premiums on top of all their other burdens. They need and deserve your assistance. [From the Washington (D.C.) Wall Street Journal, July 14, 1967] SENATE UNIT STUDYING NEW YORK BANKS' ALLEGEDLY EXCESSIVE LOAN INSURANCE FEES By Stanford N. Sesser, Staff Reporter of The Wall Street Journal NEW YORK.-A Congressional committee is known to be investigating allega- tions that major New York City banks are reaping a windfall from the instal- ment loan business by charging rates for life insurance on these loans that exceed the maximum permitted by the New York State Insurance Department. The investigation is being conducted by the Senate Antitrust subcommittee. The group chaired by Sen. A. Hart (D., Mich.), held hearings in May that ex- posed widespread credit life insurance abuses in the dealings of finance com- panies with insurers. The hearings are scheduled to resume in the fall. While the charges against the New York banks aren't considered as serious as many of the abuses uncovered by the committee in May, they still could have widespread repercussions. An indication that credit life malpractices have spread to some of the nation's largest financial institutions could spur the drive toward Federal regulation of insurance sales. No details of the committee's investigation of the New York banks could be learned, but conversations with banking and insurance executives and New York State regulators indicate that the controversy centers on the pricing of life insurance for secured loans-loans against which something is pledged. The most common type of secured loan is for the purchase of an automobile. New York banks offer auto and other secured loans at the rate of $4.75 a year, deducted in advance, for each $100 borrowed. If the borrower asks for credit life insurance, as almost all do, he's told that the charge for his loan will be $5.25 per $100. This would indicate a charge for life insurance of 50 cents per $100. However, New York State insurance regulations specify a maximum rate of 44 cents for large-volume institutions. Banks place their credit life business with insurance companies, and tech- nically the 44-cent maximum applies only to the rate that the insurer can charge the bank. But the state's banking law specifies that the bank is governed by the same restrictions in its dealings with the borrower. The New York banks don't pay the entire 50 cents to the insurance companies with which they deal; they pay only the rate that the insurer has filed with the state insurance department. These rates sometimes are even lower than the 44-cent maximum; it's believed they range all the way down to 38 cents. PAGENO="0344" CONSUMER CREDIT PROTECTION ACT Thus, it's being alleged that the banks charge the borrower 150 cents per $160 in credit life insurance, pay their insurance companies fro~m 38 cents to 44 cents, and pocket the difference. Borrowers in New York State paid $31 million in credit life premiums in 1965; it's not known what portion of this business was done through NeW York City banks. According to the American Bankers Association the five largest New ~ork banks with instalmeht loan operations are First National City Bank, Manu- facturers Hanover Trust Co., Bankers Trust Co., Chase Manhattan Bank, and Chemical Bank New York Trust Co. The first three place their credit life busi- ness with Prudential Insurance Co. of America; Chase Manhattan deals with Equitable Life Assurance Society of the United States; and Chemical gives its business to New York Life Insurance Co. Executives at the five banks were asked to comment on the alleged ereijit life overcharges. Four of the banks replied that the loans at $4.75 and $5.25 weren't directly comparable, so the assumption that the charge for credit life insurance is 50 cents isn't necesMrily accurate. The banks explained, for example, that an auto loan is made at $4.75 without life insurance. HowthTer, if the borrower wants insurance coverage, he's iii ad given a $5.25 "personal loan." They're different types of loans; they can't be compared," George Beatty, vice president of Bankers Trust, stated. In a personal loan, Mr. Beatty explained, the banks give no breakdowns of the basic loan charge and the charge for credit life insurance. At least one banker, however holds that the difference is largely a legal technicality, rather than a change in provisions. "It's still a secured loan, even if you have credit ~ftfe insurance," said an official of First National City Bank, referring to auto loans. An executive at the fifth bank, who asked not to be identified, conceded that the bank is, in effect, charging 50 cents for its credit life. He said the rate ex- ceeds the 44-cent maximum because the bank incurs extra bookkeeping charges even though the policies are issued by an insurance company. Among the extra charges, he mentioned the "cost of handling the life insurance premiums, passing them on to the insurer, and processing the death claims." The banks that issue $5.25 "personal loans" with credit life don't give a break- down of what part of the charge represents the insurance. "We throw in the life insurance-it's not an identifiable charge to the customer," one executive said. John K. Lundberg, first deputy superintendent of the New York State Bank- ing Department, said he couldn't comment on credit life insurance practices without give the matter study. If the department were to consider the issue, it would undoubtedly have to rule on a key question: Whether the banks' pric- ing practices become legal simply because "they don't include credit life in- surance as an identifiable charge in their $5.25 loan. Section 108 of the New York banking regulations says that the banks may charge borrowers for credit life insurance "at a rate not in excess of the premiums chargeable . . . in accordance with rate schedules then in effect and on file with the Superintendent of Insurance for such insurance by the Insurer." John Kittredge, a Prudential vice president, said the company has had "discus- sions with several of the New York banks." He said that Prudential told the banks that some people have the "impression they were, in fact, charging 50 cents" on their credit life insurance. He emphasized that Prudential was only "bringing this impression to their attention" and not drawing any conclusions. John F. Ryan, senior vice president of New York Life, said he also has bad "conversations" with a bank. He added that New York Life is studying the pricing of credit life insurance, but hasn't yet reached a conclusion. Insurance executives have privately expressed fears that Senator Hart's credit life hearings will prove so damaging to the industry it will provoke widespread demand for Federal regulation. The fact the investigation has been extended to New York is considered significant: New York is widely reputed to have the nation's strictest insurance regulations. The committee's hearings disclosed that in most other states the rate usually charged for credit life insurance is $1 per $100, and often the rates aren't regu- lated by the state insurance department. The committee detailed charges of kick- backs among some finance companies and their allegedly dummy insurance sub- sidiaries on their credit life business. It's understood the committee soon will be investigating the question of whether th~ priictices iittrllrnted to the New York, banks also apply to finance companies operating in New York. PAGENO="0345" CONSUMER CREDIT PROTECTION ACT 927 Although the standard credit life rate outside New York is $1, apparently New York insurance companies and banks are finding business profitable at half that rate. One banker tells of a New York bank that used to pay employees a commis- sion if they'd sell auto loans that included credit life insurance. The banker says he's not sure if the practice still exists. Most New York banks also offer life insurance with "passbook loans"-when the borrower uses the money in his savings account as collateral. Some bankers and insurance executives sharply question the practice of selling life insurance when the loan is fully backed by cash in the bank. In the May Congressional hearings James Hunt, Vermont's commissioner of banking and insurance, estimated that borrowers nationwide are being over- charged $175 million annually for insurance. (Mr. Paul III. Douglas, Chairman, Commission on Urban Problems, submitted the following exhibits for inclusion in the record:) PAGENO="0346" TO LEE'S ANNUAL SIZZUNQ VAWE.SI.. ~ `65 BONNEVILLE $1495 2 DR. HARDTOP J $995 $295 GOOD CREDIT? BAD CREDIT? NO CREDIT? 928 CONSUMER CREDIT PROTECTION ACT I -Si (1) (2) (3) -j TI~ FOLLOWING IU~OBMATION IS LACKING: Specific do~mpaynient ~or each ~-) Arnouxrt o~ each payment aAvertised auto (5) Total finance charge Amount to be financed (6) Annual percentage rate Number o~ payments PAGENO="0347" Hot dog-caskl Satisfy your need for extra money NOW.. . with NO PAYMENTS due for 90 days! That's saying a mouthful, but we'll stick by it whether you want thousands of dollars or only a few hundred, whatever the purpose. Old customer or new, large amount or small. you are important to us. That means you al'~ays get immediate, personal service and low bank rates. For special handling, just call your order! Call 534.1199-ask for DAN WEBSTER COLD RADD ~t~O 24mo 36rno 48mo6Orno $ 200 $ 8.34 $ 5.56 500 20.83 13.89 750 31.25 20.83 1200 50.00 33.33 $25.00 $20.00 2000 55.56 41.66 33.32 3500 97.22 72.91 58.33 5000 138.89 104.17 83.33 Ask for any amount - $100 to $100 000 5lncludes charges for the loan, which are deducted from. these amounts for the term low .IndustriaL,.BsPk Ratea. CONST.JMER CREDIT PROTECTION ACT 929 PICK A ~roper ~aynieflt ~1an INDUSTRIAL BANK 18th & STOUT.- Opposite the Post Office 1toiu$: .9 ~/n. to5:~O p.m-Mon Nights iii! 8 ~ .h,,sni,~f*mme, TKE~ FOLLOWING INNORMATION IS LACKING: (1) Amount of loan (2) Total finance charge (3) Annual percentage rate PAGENO="0348" 930 CONSUMER CREDIT PROTECTION ACT TEE FOLLOWING INFORMATION IS LACKING: Cash price ~or each pictured appliance Number ot payments Total finance charge Annual percentage rate RADIO-4 CHANGER 1 77 ~ IA~ WEEK. ( BUY `~I.rI,ORTABLE TVV BONUS! ~ *TERMS DEPEND ON !NANCED BALANCE, DEPOSITS AEQUIRED ON ~?ENTALS r ~ NO MONEY DOWN .~ _______ ONAPPROVEDCREDIT ~M29O~ (1) (2) (3) (2~) PAGENO="0349" CONSuMER CREDIT PROTECTION ACT 931 418~8111.~ `61 Cad. Com,. _$695 `61 Pont. 4-dr. h.t. $295 `58 Jaguar Rdst. $495 `62 Pont. Cony. $290 ~`6I Ramb. S.W. $95 `6à Dodge 4-Dr. $195 `60 Pont.~4-Dr. $150 `59 Ppnt. 2dr. .$95 S;-CICER 3838.N. wESTERN'. OPEN9tO 9 IR 881 ~`: TEE FOLLOWING INFORMATION IS LACKING: (i) Number of payments (2) Amount of each payment 1IITfiMfiRStF.~ ~VUIE AUTOMOBIttSEOISALE IIITflMflRtfitrnE ~h1r I AIJIOMOBItES FOR SALE $1 DOWN Credit Problems RIDE HOME NOW 200 CARS) IMMEDIATE DELI VERY `65 Pont. G.P. $1,995 `64 Ford Cony. -$1,195 `64 Chev, S.W. $895 `64 Pont, Cony. $1,195 `64 Corvair 4-Dr. $695 .~64 V.W. 2-Dr. $695 `62 Buick 225 $595 Easy Credit Plan £63 PontGP. - $795 `63 Pont. 4-Dr. $795 `63 Triumph Rdst. $495 `63 Corvair 2 Dr. $395. `63 Plym. Cony. *$595 FREE CREDIT cHEcK-~ ASK FOR. MR. BARNES AN-D~'A~ `JOB: YOU DkIVE HOME TODAY WITH EST. CREDIT FREE- CREDIT CHECK~ ~CA1L LU 1-0555 `63 CORVAIR 2-DR.- $695 `62 PONT. CONV~ $895 `62 FORD CAMPER $895 `62 OLDS 4-DR. $795 `62 FORD CONy. $795 `62 BUICK CONV $895 ~ OLDS WAGON $795 `61 MERC. 4-DR. $695 `60 CADDY 4-DR. $895 `60 CADDY CONy. $895 `60, DODGE 4-DR. ~$495~' `59. CHEVY. WAGON $395 `57 CADDY 4-DR. $595 BARGAIN SPECIAI.S `61 MERC. 4-DR. $187 `60 CHEVY 2-DR. $97 `58 FORD WAGON -- $157 CREDIT .~ PROBftMS $25DOWN. AND~AJOB 1U L2733 FREE CREPIT CHECK `64 Corvalr 4-dr. $695 `63 Ford Cony. $695 `63 Chevy 2-dr~ $695. `62 Olds. 4-dr. $595 62 Chevy ht. $595 61 Plym. 4-dr. - $495 61 Corvair- 2-dr. $495 `61 Olds, .4-dr. $495 `61 Buick ht. . $595 .61 For6I wag. - $495 `60 Buick Cony. $595 `60 Caddy 4-dr. $595 `60 Pont. 4-dr. -$595 `60 Chevy. Canv. $495 `59 Buick (-dr. $395 59 Ford 2-dr. $295 ~59 Caddy Cpe. $595 `59 Chevy .C rt, $395 `59 Ford Re ct $395 DAt SPECIALS `59 Ford -dr $99.95 65O~ - SOUTH CICfRO YOU CAN OWN A CAR1 DON'T WORRY ABOUT çREPIT- `64 CORVAIR $50' ON. `63 MONZA $50 ON. `63 TEMPEST- sso DN. `63 DODGE $50 ON. `63 RAMBLER ~- $50 ON. `62 CHEVROLET $50 DN. `62 FORD . $50 ON. `62 AI~BASSADOR $50 DN. `62-MERCURY - $50. ON, CALL MR. KING ME -7~~O3a3 YOU CAN DRIVE TODAY `62 TEMPEST - $50 ON. `62 CHEV. CONy. - $50 ON. `61 OLDSMOBILE - $25 ON. `61 CHEVROLET $25 DN- `61 PONTIAC - . $25 ON. `61 PLYMOUTH $25 DN. `60 BUItK $25 ON. `60 CHEVROLET $25 DN. `59 CADILLAC $25 ON. - - NORTH ~CIC[RO -- (3) Total finance charge (1k) Annual percentage rate PAGENO="0350" 932 CONSUMER CREDIT PROTECTION ACT ~~aiii~L The following information is lacking: (1) Amount to be financed. (2) Number of payments (3) Size of each payment (Lb) Total finance charge (5) Annual percentage rate The following information is lacking: (i) Amount to be financed (2) Amount of each payment (3) Number of paymeotz (~) Total finance charge (5) Annual percentage rate Volkswagen AU Years-All Mod SEDANS-WAGONS SUNROOFS--GHIAS Bank flnandna El tsnn~a HENSEN MOTORS Aulhodaed VW Dealan 1750 N~ HARLEM 625-1323 546-5700 PA-CLOSE OUT - COLOR - 67 MOTOROLA CONSOLE $4PERWK. I - - Gaadyean Sennke Slanea - ,~5j~9~ST. NW. 5013 GA. AVE._NW.1 The following information is lacking: (1) Cash price (2) Downpayment (3) Amount to be financed (1k) Number of payments (5) Total finance charge (6) Annual percentage rate WHOL~SA)~ /fO THE PUBLIC! / $ DOWN / / DELIVERS !~ FORD 4 U O~A$~W R IMPALA $ CONVERTIBLE FORD 95 `59 $99 50 CARS TO OOSE CALL FOR CAPITOL HILL MOTORS BtII\& PENN. AVE., S.E. LI 3-7777 FOR FREE CREDIT CHECK CALL! ~E 7~2222-MR. WHITE The following inf or- mation is lacking: (1) Downpayment rec~uirements (2) Annual pernentage rate PAGENO="0351" CONSUMER CREDIT PROTECTION ACT 933 (i) Do~mpaynient (2) Amount to be financed. (3) Nunther o~ payments (~) Total ±~Lnance charge (5) Annual percentage rate TIIN FOLLOWING I]NFORMATION IS LACKING: PAGENO="0352" 934 CONSUMER CREDIT PROTECTION ACT $314.91 Christmas Cash is waiting for you BORROW BY MAIL in the privacy of your home! No red tape! No waiting! Na co~signers! No payments for 45 days! flea jdt u~ eü ends~ed ftetaeat 44% aftfttcatiae tied mad ~ et I (Subject only to IndiceS liberal credit policy) We will send you our check for $314~91 at once! FIRST PAYMENT NOT DUE `TILL JAN. 1961 INDIAN FINANCE 338 SOUTH WALNUT BLOOMINGTON, INDIANA Phone 332-9351 TEE FOLLOWING lEEOt&iATEOII) ES hACKlE) I: Ci) Size of payments (2) Number of payments Ci) Total Nuance charge ~z) Pummel peroeota%o rate PAGENO="0353" CONSUMER CREDIT PROTECTION ACT 935 (Hon. Frank Annunzio submitted the following article for the record:) (From U.S. Department of Labor, Bureau of Labor Standards, May 1967] AMOUNT OF EARNING EXEMPTED FROM GARNISHMENT UNDEB STATE LAWS * Alabama.-75% of wages or other compensation of State residents, clue or to become clue. (Alabama Code T. 7, sec. 630.) Alas/ca.-$350 income from any source within the preceding 30 clays for a family head, $200 for a single man, if necessary, for his use or the use of his family supported in whole or in part by his labor. Amounts which he has been ordered to pay for child support are also exempt. (Alaska Statutes, secs. 09. 35.080(1) ; 9.35.085.) Arizona.-_50% of earnings for the preceding 30 days if necessary for the use of the debtor's family supported in whole or in part by his labor. (Arizona Revised Statutes Anno., secs. 12-1594; 33-1126.) Arkansas.-100% of wages of a resident laborer or mechanic for 60 clays, provided his wages plus other personal property do not exceed $500 for a married person or family head or $200 for a single person; with an assured minimum exemption for all laborers and mechanics of the first $25 a week of net wages. (Arkansas Constitution, Art. 9, sec. 2; Arkansas Statutes, sec. 30.207.) Calif ornia.-50% of the preceding 30 days' earnings. 100% if necessary for the use of the debtor's family residing in the State and supported wholly or in part by him; 50% if the debts are for necessaries of personal services. (California Code of Civil Procedure, sec. 690.11.) Coloraclo.-70% of earnings `due the head of a family and 35% of earnings due single persons, except for payment of taxes. (Colorado Revised Statutes, sec. 77-2-4; 77-2-5.) Conncctic~t.-Court may set the amount to be paid, taking into consideration the circumstances of the debtor. If he fails to obey the order, amounts over $50 per week plus taxes may be taken as a continuing levy until paid. (Connecticut General Statutes, sec. 52-361.) Delaware,-1O0% in New Castle County, except that 10% may be taken for debts for necessaries or State taxes. 60% of earnings of residents of Kent and Sussex Counties. In all three counties the exemptions do not apply to claims up to $50 for board or lodging. (Delaware Code Anno., T. 10, sec. 4943.) District of Columbia.-9Q% of the first $200 per month; 80% of the next $300; 50% of the balance due or to become due. The attachment is a lien and continuing levy until the judgment is paid. (D. C. Code Anno., sec. 16-572.) Florida.-lOçj% of earnings due the head of a family residing in the State. (Florida Statutes, sec. 222.11.) Georgia.-$3 per day plus 50% of the balance. Garnishment is a lien on present and future wages. (Georgia Code Anno., sec. 46-208.) Hawaii.-95% of the first $100 per month; 90% of the next $100 per month; and 80% of the balance of wages due or to become due. (Hawaii Revised Laws, sec. 237-1.) Idaho.-50% if the debt is for necessaries, otherwise 75% of the preceding 30 days' earnings if necessary for the use of the resident dt~btor's family residing in the State, supported in whole or in part by his labor. Maximum $100 at any one time. (Idaho Code Anno., sec. 11-205.) Illin,ois.-$45 per week or 85% of gross wages, whichever is greater, but not exceeding $200 per week. (Illinois Revised Statutes, Oh. 62, sec. 73.) Incliana-$15 per week and 90% of the balance of income and profits of a resident householder. (Indiana Anno. Statutes, sec. 2-3501.) Iowa.-$35 per week of wages or salary due the head of a family, exclusive of deductions for taxes, plus $3 for each dependent under 18. No creditor may garnish for more than $150, plus costs (Iowa Code, sec. 627.10.) Kangag.-90% of 1 month's earnings of a resident debtor (less court costs up to $4) if necessary for the use of a family supported in whole or in part by his labor. (Kansas General Statutes Anno., sec. 60-2310.) Kentucky._50% of earnings is exempt if the judgment is for debts for neces- saries (food, clothing, medical expenses, rent, or public utilities) otherwise 75% of net earnings in any pay period (earnings due less deductions for govern- *Such references as "earnings for the preceding 30 days" mean earnings for 30 days prior to the service of a writ of garnishment on the employer. Exclusions for such debts as taxes, alimony, or support orders are listed only when they appear in the exemption provision Itself. 83-340 O-67-pt. 2-23' PAGENO="0354" 936 CONSUMER CREDIT PROTECTION ACT mental fees and ta~es, union dues, medical insurance, and retirement programs). Not applicable to garnishments for child support. (Kentucky Revised Statutes, sees. 427.010; 425.210.) Louisiana.-80% of earnings; minimum $100 monthly. (Louisiana Revised Statutes, sec. 13:3881.) Maine.-$40 per week of wages due; minimum $10. (Maine Revised Statutes, T. 14, sec. 2602.) Maryland.-$100 earnings due, except in Caroline, Cecil, Kent, Queen Anne's, and Worcester Counties, where the exemption is 75% of all earnings due. Not applicable to claims for State income taxes. (Maryland Anno., Code, Art. 9, sees. 31,31A, 31B.) Massachusetts-$50 per week of wages due. (Massachusetts General Laws, Ch. 246, sec. 28.) Michigan.-FOr a householder having a family: Percent Minimum Maximum Wages due First garnishment 60 $30 $50 Up to 1 week. 60 90 Morethanlweek. 12 30 Up to 1 week. All other cases For other persons: 1st garnishment All other cases 60 40 30 24 30 20 10 60 60 50 20 lweektol6days. Over 16 days. Source: Michigan Statutes Annotated, 27A.7511. Minnesota.-50% of resident's current unpaid net wages (less amounts re- quired by law to be deducted or withheld). All earnings for the preceding 30 days if necessary for the use of a family supported wholly or partly by his labor. (Minnesota Statutes Anno. sees. 550.37(13) ; 575.05.) Mississippi.-75% of resident's earnings due or to become due. The garnish- ment is a continuing levy until the amount due is accumulated. Does not apply to orders or judgments for alimony, separate maintenance, or child support. (Mis- sissippi Code Anno. sec. 307.) Missouri.-90% of the previous 30 days' wages due a resident head of a family. (Missouri Revised Statutes, sec. 525.030.) Montana.-50% in cases of debts for gasoline or necessaries, otherwise 100% of earnings of a married person or family head for the preceding 45 days if necessary for the tise of the debtor's family supported in whole or in part by his labor. All earnings for the preceding 30 days are exempt in actions for $10 or less. (Montana ReVised Codes, sec. 93-5816.) Nebraska.-90% of wages of the head of a family. (Nebraska Revised Statutes, see. 25-1558.) Neva&t.-50% in cases of debts for necessaries, otherwise 100% of earnings for the preceding 30 days if necessary for the use of the debtor's resident family supported in whole or in part by his labor. 50% of such earnings for debtors without a family residing in the State. (Nevada Revised Statutes, sec. 21.090.) New Hampshire.-$20 per week of wages due, and all wages earned after service of the writ. (New Hampshire Revised Statutes Anne., sec. 512 :21.) New Jersey.-90% of earnings due or to become due; 100% of less than $18 per week. Court may decrease if debtor's income exceeds $2500 per year. The execution is a lien and continuing levy until paid. (New Jersey Revised Statutes, sees. 2A :17-50, 2A :17-56.) New Mevico.-75% of the previous days' earnings of the head of a resident family; 80% of his earnings are $100 or less for the period. (New Mexico Statutes Anno., sec. 26-2-27.) New York.-90% of earnings; 100% if earnings are $30 per week or less. The execution affects earnings due or to become due. (New York Civil Practice Laws and Rules, sec. 5231.) North Uarolina.-100% of earnings for the preceding 60 days if necessary for the use of the debtor's family supported in whole or in part by his labor. (North Carolina General Statutes, sec. 1-362.) North Dakota.-$50 per week plus $5 per week for each dependent (up to $25) of the wages or salary of a resident debtor who is the head of a family. $35 per PAGENO="0355" CONSUMER CREDIT PROTECTION ACT 937 week for residents not the head of a family. (North Dakota Century Code Anno., sec. 32-09-02.) Ohio.-80% of the first $300 and 60% of the balance of the preceding 30 days' earnings of a family head or a widow; minimum $150. $100 of the previous 30 days' earnings of other residents. (Ohio Revised Code Anno., sees. 2329.66, 2329.62.) Oklahomc&-75% of the previous 90 days' earnings. 100% if necessary for the maintenance of a family supported wholly or partly by `the labor of the resident debtor, except for child support orders. (Oklahoma Statutes Anno., T. 31, sees. 1, 1.1, 4.) Oregon.-50% of earnings due after deductions for taxes; minimum $25 and maximum $250 in any 30 day period. (Not applicable to process to collect State income taxes owed by the debtor or to enforce judgments for damages for fraud.) ~Oregon Revised States, sec. ~3.180.) Pennsylvania.-100% of earnings. (Pennsylvania Statutes, T. 42, sec. 886.) Puerto Rico.-75% of a resident's earnings for the preceding 30 days if neces- sary for the use of his resident family, supported wholly or in part by his labor. (Laws of Puerto Rico Anno., T. 32, sec. 1130.) Rhode Island.-$50 of earnings due. (Rhode Island General Laws Anno., sec. 9-26-4.) south Uarolina.-100% of the preceding 60 days' earnings if necessary for the use of a family supported wholly or in part by his labor. However, up to 15% of earnings due may be ordered when the judgment is on food, fuel, or medicine accounts, up to a maximum of $100. (South Carolina Code, see. 10-1731.) For debts contracted in South Carolina prohibits garnishment of resident employee under an out-of-State garnishment unless based on a South Carolina judgment. south Dakota.-100% of the preceding 60 days' earnings if necessary for, the use of the deb'tor's family supported wholly or partly by his labor. (South Dakota Code, sec. 33.2404.) Tenn~e8see.-$17 earnings per week plus $2.50 per week for each dependent child under 16 years, for a resident head of a family. $12 per week for other residents. Exemption does not apply to debts for alimony or support, taxes or fines. (Ten- nessee Code Anno., sees. 26-207-209.) Te~z,as.-100% of current wages. (Texas Constitution, Art. 16, sec. 28; Civil Statutes, Arts. 3832,3935,4099.) Utah.-50% of the preceding 30 days' earnings of a married man or head of a resident family, if necessary for the use of his family supported wholly or in part by his labor. Minimum $50. (Utah Code Anno., sec. 78-23-1.) Vermont.-$30 per week plus 50% of compensation due in excess of $60 per week. (Vermont Statutes Anne., T. 12, sec. 3020.) Virginia.-$100 per month plus 75% of the balance, but not more than $150 of the monthly earnings of the head of a family. 50% of the exemption above for other persons. (Exemption is also enumerated for weekly, bi-'weekly, or semi- monthly pay periods.) (Virginia Code Anno., sec. 34-29.) Washington.-$35 per week plus $5 per dependent (maximum $50 per week) for a debtor with dependents. $25 per week for persons without dependents. (Washington Revised Code, sec. 7.32.280.) West Virgi~nia.-8O% of earnings due or to become due. Minimum $20 per week. The execution is a lien and continuing levy on wages due or to become due within 1 year. (West Virginia Code, sec. 3834.) Wisco'nsin.-$120 income of a debtor with dependents (after deductions for State and Federal taxes) plus $20 per dependent, for each 30 day period prior to service of process, but not more than 75% of net income. 60% of such in- come of a debtor without dependents, but not less than $75 nor more than $100. (May also be computed on a 90-day basis.) (Wisconsin Statutes Anno., sec. 272.18.) Wyoming.-50% of the previous 60 days' earnings when necessary for the use of the debtor's resident family, supported wholly or in part by his labor. (Wyo- ming Statutes Anno., sec. 1-422.) (Rev. Robert J. MeEwen, chairman, Department of Economics, Boston College, Chestnut Hill, Mass., submitted the following publi- cation for inclusion in the record:) PAGENO="0356" PAGENO="0357" Economic Issues in State Regulation of Consumer Credit By ROBERT J. McEWEN, S.J. Reprinted from BOSTON COLLEGE INDUSTRIAL AND COMMERCIAL LAW REVIEW Vol. VIII, No. 3, Spring, 1967 ® Copyright 1967 by Boston College Law School 939 PAGENO="0358" PAGENO="0359" BOSTON COLLEGE INDUSTRIAL AND COMMERCIAL LAW REVIEW VOLUME VIII SPRING 1967 NUMBER 3 ECONOMIC ISSUES IN STATE REGULATION OF CONSUMER CREDiT ROBERT J MCEWEN, S J * I INTRODUCTION Forty years ago, Professor E R A Sehgman opened a session of the annual meeting of the Academy of Political Sciences with a very thoughtful and farsighted paper on "Economic Problems Involved in Installment Selling" With remarkable insight, he concluded his paper with the following warning [I] t must not be forgotten that installment selling, like every institution, is subject to the perils of novelty If this were the time to deal with the subject fully, it could be pointed out that in the course of history credit has assumed manifold forms; and each new form of credit has had to fight its way to recognition after going through three stages that of initial growth, that of the sloughing off of abuses, and that of the final emergence of the soundness of the principle. While [installment selling] has undoubtedly come to stay, all manner of abuses and of perils which it would be shortsighted to deny have crept in. What is needed is a sober and impartial analysis of its true significance As the years roll by, outworn methods will be discarded, new corruptions will appear Is it not the part of wisdom to separate the chaff from the grain, to be on our guard against the more obvious dangers, and to eliminate improper practices ?` Today, state regulation has become an important, but much misunder stood phase of the community's attempt through government action * A B Boston College 1940 MA Fordham University 194~ ST L Weston College 1947 Ph D Boston College 1957 Former Chairman Massachusetts Consumer Council President Council on Consumer Information 1965 1967 Associate Professor and Chairman of Department of Economics Boston College 1 Seligman Economic Problems Involved in Installment Selling 12 Acad Pol Sci Proc 583, 594 (1927) 387 941 PAGENO="0360" 942 CONSUMER CREDIT PROTECTION ACT to insure that the economic processes of borrowing and lending promote the general public welfare. If they are to be sound, arguments for enacting legal control of consumer credit must rely on the best economic and social research and analysis available. Unfortunately for the public interest, in this as in many other areas of policymaking through legislation, pressures from pecuniary self-interest are so great that they lead to enormous con- cealment of fact and distortion of analysis. To uncover the real eco- nomic issues underlying state consumer-credit laws is the primary purpose of this article.2 Three issues are selected for extended dis- cussion, mainly because of their appearance in credit-industry argu- ments presented in the course of debate on consumer-credit legislation. 1. What is the precise definition of consumer credit? Are legal regulations commensurate with the appropriate economic definitions? 2. What must the state do to establish framework conditions on both the demand and the supply side of the consumer-credit market in order to make it function more effectively and more in the public inter- est? On the demand side of the market this refers particularly to state action requiring disclosure of information useful to the customer. On the supply side this refers to state control of operating methods of the companies, with particular reference to selling and collection practices, credit-rating bureaus, and the relationship of financing agencies to sellers of merchandise. 3. Can competition be relied upon to produce fair rates after the state has established the framework conditions surrounding the market? If competition in the market cannot be relied upon, then should the state set rates, or should the state set ceilings far above the prevailing rates and designed merely to ward off instances of gross extortion? II. DEFINITION OF CONSUMER CREDIT A definition of consumer credit is necessary in order to identify and classify the realities of that to which regulation might be directed. 2 ~ should be emphasized that this article is by no means a complete treatment of the importance or significance of consumer credit in the functioning of the national economy. The questions raised by this issue include the following: (1) Does consumer credit constitute a destabilizing force in the economy? Does it really stimulate consumer saving? (2) In enabling him to enjoy goods and services before accumulating the income to pay cash for them, does consumer credit benefit or harm the consumer? (3) Does consumer credit benefit producers by expanding product markets and allowing the production economies that go with an increased volume? (4) If the objective and subjective gains from the use of credit, whether they be monetary or nonmonetary, are greater than the costs, is not consumer welfare really increased? These questions have been raised by economic writers since the earliest days of installment credit. See Neufeld, The Economic Significance of Consumer Credit, in Consumer Credit in Canada S (Ziegel & Olley ed. 1966). 388 PAGENO="0361" CONSUMER CREDIT PROTECTION ACT 943 In a sense, definitions are names we agree to give to things, and the most important element is precision of expression and consistency of use both by the definer and by all others dealing with the same reality. It is quite true that a definition, to be meaningful, must be related to the purpose of the discussion in which it is used. For this reason, legal and economic definitions do not have to withstand the same tests. In eco- nomic analysis, for instance, trends in the magnitude of consumer credit are important items of information. For legal purposes, however, the precise nature and essence of the business transactions are more im- portant than their volume or fluctuation. One way to define consumer credit is to say that it is purchasing power advanced to individual consumers, usually in relatively small amounts, for the purchase of consumer goods and services.3 This defini- tion advances the present discussion only insofar as it includes all those transactions to which consumer-credit legislation can reasonably be directed. Because of the difficulties in classifying types of credit, the definition, to be helpful, must be construed broadly. If legislation cannot precisely include those activities which are capable of producing the evil sought to be prevented, it seems more appropriate, in view of the desired objectives, that such legislation be overinclusive rather than underinclusive. The difficulties inherent in defining and classifying the various types of consumer credit were well stated by Albert Hart: The loan classification of the Federal Reserve . . . shows a mixture of at least three classification principles: (A) the line of business in which the borrower is engaged . . .; (B) the type of collateral . . .; (C) the purpose of the loan . Since the "purpose" of a loan can often be described in sev- eral alternative ways, many economists are skeptical of principle C. If either A or B-preferably both-could be carried consistently across the whole mass of loans, bank statistics would be more illuminating.4 In viewing broadly the nature of consumer credit, therefore, one must consider an important principle more properly applied to all credit and not just to consumer credit: The purpose of consumer credit is to enable the borrower to enjoy income before he has earned it or received it. Consumer credit comes into existence whenever an individual acquires 3 As normally used in banking statistics, the figures for consumer credit exclude borrowing for investment in securities, real estate, or home construction. 4 Hart, Money, Debt, Economic Activity 55 (2d ed. 1953). 389 PAGENO="0362" 944 CONSUMER CREDIT PROTECTION ACT funds or goods for personal use in return for a promise to pay for the same in the future.5 An important economic truth which is embodied in this quotation has, unhappily, been freely ignored and distorted by legislators and courts for too many years. It should be emphasized that credit or a loan is involved in every exchange in which there is delay in completing the transaction. In any case in which the buyer does not render payment to the seller upon acquisition of the seller's goods or services, the economic reality of the situation requires us to acknowledge that the seller is making a loan to the buyer of the value of those goods or services for as long a period as it takes the buyer to complete his pay- ment.° This concept is often obscured and disfigured by legislated subterfuge, either to avoid the honest statement of actual interest and finance charges or to evade legally prescribed maximum rates of inter- est. Its importance, however, requires that it be embodied in the defini- tion of consumer credit. A difficulty in a definition as a basis for regulation can arise be- cause of the nature of the goods for which consumet credit is used. The general distinction between a consumer good and a producer good is frequently obvious; there are not too many overlapping or indistinguish- able cases that present much difficulty. However, it does make sense to conceive of consumer credit as any method by which an individual consumer has access to immediate purchasing power, in return for which he obligates himself to make specified future payments out of his income. Thus, a definition should include the transactions which permit the consumer to acquire certain goods that might also be con- sidered producer goods. Furthermore, in those cases where an item that is ordinarily a consumer good can also be used as a producer good (e.g., an automobile), it would seem that legal regulations on the matter should tend to include all loans made for that particular good, on the theory that no great harm will be done by overinclusion, but that great complexity and harm may result from opening loopholes that might be exploited. Because of the nature of personal cash loans, it seems ap- propriate to include all such loans under the heading of consumer credit without attempting to find out whether the money will be spent to buy a consumer good, to pay off previous debts incurred for the purchase of consumer goods, to lend the proceeds to an uncle for the purchase of securities, or to put the funds to any of the hundreds of uses consumers can find for the proceeds of personal loans. Stokes & Arlt, Money, Banking and the Financial System 593 (1955). ~ Writers of books on credit frequently admit this point in early chapters and then proceed to ignore it in subtle attempts to justify the "time-price differential." See Barteis, Credit Management 4 (1967); Neufeld, Manual on Consumer Credit 4, 88-92 (1961). 390 PAGENO="0363" CONSUMER CREDIT PROTECTION ACT 945 What has been said so far about the difficulty of defining and isolating consumer credit emphasizes the problem of data-gathering in this field.7 From an economic point of view, the main objective of gathering such information is the ascertainment of significant trends in the use of credit-trends that may have important bearing on the national economy as a whole or on the behavior of consumers speci- fically. From the particular point of view of protecting individual con- sumers, all credit transactions should be included in which research has uncovered some element of deception or abuse. On this principle, we must recognize the unreality of the legal distinction between cash credit and vendor credit. No useful analytical purpose is served by the attempt to separate transactions of this sort. They are each in essence one and the same thing-a postponement of one half of the exchange transaction. Thus, both must be included in the definition of consumer credit. Care should be taken to exclude from coverage those transactions which are not forms of consumer credit, even though they may include consumer-credit elements. Some authors, for example, attempt to identify lease arrangements as a form of consumer credit.8 Such a classification, however, appears to be a mistake, because there really is no granting of credit in a lease. With the possible exception of lease arrangements that include an option to purchase at the end of the term, straight leases are nothing more than the purchase, for a fixed amount, of a specified service for a specified time. For instance, if one leases an automobile for a week or a month, he purchases for a price expressed simply in dollars the use of this machine for that period of time. Since everything is "pay as you go," such economic transactions do not belong under the heading of consumer credit.9 To call these arrange- ments merely other means of financing simply confuses the picture. It is true that, in a long-term lease, the lessee obligates himself to definite payments for definite future time periods. But these payments are tied to the enjoyment of definite future services which the lessor obligates himself to provide. In effect, the lessee is as much granting the lessor credit as the lessor is granting it to the lessee. Moreover, if the leased item should be destroyed, the lease ceases to operate. The con- tinued existence of a consumer good purchased on time, however, in no way affects the validity of the installment contract; money which has been advanced must be repaid. 7 See generally Jones, Measurement of Consumer Credit, 48 U. Ill. Bull. 83-99 (1951). 8 See, e.g., The Mortgaged Society, Forbes, Dec. 1, 1965, p. 51. 9 It should be noted, however, that credit can be extended in conjunction with a lease arrangement. To the extent that use of the leased item precedes payment for such use, the lessor has extended credit to the lessee, in the same manner that a vendor grants credit to a vendee by permitting use before payment. 391 PAGENO="0364" 946 CONSUMER CREDIT PROTECTION ACT A recent article in Forbes discussed a "new look" at personal debt, and by implication suggested that adoption of this view would make discussion of consumer credit more meaningful. Some economists-notably economists in the Federal Government and in the nation's major corporations-argue that a whole new look should be taken at exactly what is personal debt. If renting an apartment is not considered a debt but a cost, is it fair to assess mortgage payments as "credit" payments? If a man signs a three-year lease at $150 a month, isn't he as much "in debt" (for $5,400) as a man who borrows money to buy a house? Similarly, no one regards the cost of going to work by commuter train as "going into debt." Should payments on a car used for the same purpose be regarded as evidence of debt? Isn't much of what is now called consumer debt merely a replacement for services that people used to buy?'° Unfortunately, this supposed insight is not an improvement but a further confusion. Credit laws should be aimed at protection of owner as borrower, not as user, and thus consumer credit must be defined accordingly-in terms of borrower. It is important to distinguish carefully between the product or the service obtained by a purchaser and the time and the source of the funds or other thing of value by which the transaction is consummated. If there is any delay between the obtaining of the good or service and the handing over of its equivalent price in goods, or more commonly money, then we have an instance of consumer credit. Someone-the purchaser-has come into possession of useful assets whose employ- ment could otherwise produce a return to the person in control or possession of them. Whether the repayment interval be small or great, the possession of assets or the enjoyment of services prior to the fulfill- ment of the other side of the exchange is properly called credit. The law can reasonably decide which varieties Of credit phenomena present problems of public welfare that deserve control, but the law should never speak or act as if certain transactions do not involve credit when essentially they do, nor as if certain transactions do involve credit when essentially they do not. III. LEGAL CONTROL OF MARKET FRAMEWORK CONDITIONS Most economists would agree on the fundamental requirements for the proper functioning of a mixed capitalistic economy such as exists in the United States today. Given the proper institutional framework, 10 The Mortgaged Society, supra note 8, at 51. 392 PAGENO="0365" CONSUMER CREDIT PROTECTION ACT 947 free producer and consumer decisions-to buy and sell, to save and invest, to produce this product or that product-lead to the best possible allocation of resources. Such choices must be made through a market operating within a social framework which is at least partially the result of legal requirements. Strictly speaking, these legal requirements are not interferences with market operation, but instead are needed guide- lines or boundaries which preserve the possibility of a truly free and informed expression of buyers' and sellers' preferences in the market. From the buyer's point of view, the two chief requirements are adequacy of information on which to base a rational choice and freedom from any coercion that could force his choice along certain lines. From the point of view of the selling side of the market, fairness requires that there must be no collusion or constraints on the offerings of competing sellers. Because the system is fueled by self-interest, legal proscriptions to prevent forms of monopolistic control, deceit, and misrepresentation are absolutely essential to the proper operation of a market economy. Only then is there a possibility of achieving maximum consumer welfare. For this reason, even the most libertarian economists and political scientists should and do logically accept the principle of some legal control of consumer credit. What matters is that the controls promise to accomplish the objectives italicized above. The justification for governmental control of consumer credit, as well as of credit in general, is closely intertwined with the economic nature of money and credit." Indeed, in most modern economies, many transactions between buyer and seller, or borrower and lender, are based ultimately upon the lender having access to the money-creating powers of the commercial-banking system.'2 As R. I. Robinson put it: The collective demar(ds of consumers for credit are chan- neled back to the money and' capital markets through a variety of financial institutions. The most important and also the most complex of these institutions in the market are commercial banks. Commercial banks have at least three different channels of extending credit to consumers: they do it directly in the form of cash loans, they purchase installment paper from the auto and other dealers who originate it, and 11 Bartels, op. cit. supra note 6, at 474, states: "Still another criterion of the stature of credit in our economy is the extent and manner in which it has been subjected to social regulation. This is an indjcation of the esteem in which it is held and of the disrepute which it has attained." 12 The commercial-banking system creates new checkbook money in the form of demand deposits when it makes loans to borrowers Its money-creating power arises from the fractional reserve requirements against demand deposits permitted by the Federal Reserve System under authority from Congress. Almost 80% of the U.S. money stock in the hands of the public consists of deposit money. See Whittlesey, Freedman & Herman, Money and Banking 20 (1963). 393 PAGENO="0366" 948 CONSUMER CREDIT PROTECTION ACT they lend to sales or consumer finance companies that make loans or buy paper.'3 In the last analysis, these money-creating powers are delegated by the federal government itself. This provides an additional reason then, for governments at all levels to be sensitive to the need for legal controls over practices associated with lending and borrowing. State regulation of consumer-credit practices generally includes the following provisions: (1) licensing of firms engaged in this activity; (2) detailed require- ments pertaining to contract terms and to practical methods of oper- ating by such firms; (3) some stipulations about rates or maximum charges; and (4) supervision, examination, and code enforcement by a state agency, usually the bank commissioner. A. The Capital Market The consumer-credit market is only a tiny segment of the much larger and economically crucial capital market. On the demand side of the capital market are grouped the entrepreneurs or producers who have plans for expansion of production and need to borrow capital. They expect to sell their goods at a margjn great enough to yield a profit over and above the sum necessary to pay the interest cost of the borrowed capital. Many agencies catering to the demands for consumer credit are in fact on both sides of the market. They are on the demand side of the capital market because they anticipate putting borrowed funds to work by lending them to consumers, thereby earning sufficient income to pay the interest cost of the borrowed capital and to create profits for themselves. On the supply side of the general capital market are all those financial agencies that specialize in attracting and collecting income from "savers." "Savers" are those people willing to forego temporarily the use of newly earned income in return for interest. In addition to this source of supply of capital funds, the commercial-banking system, operating under federal-reserve requirements, can provide a further source of funds that have never been income and are newly created demand-deposit money. Thus, the supply side of the capital market is made up of two rather different segments. Consumers of goods and services (including the services of money- lenders) appear in the capital market only indirectly through the agencies (e.g., banks and finance agencies), whose credit is much stronger. Consumer-credit demand, therefore, as anticipated by these financial intermediaries, is translated into the demand side of the 13 Robinson, Money and Capital Markets 261-62 (1964). For a comparison of the roles played by commercial banks and financial intermediaries in this process, see Smith, Financial Intermediaries and Monetary Controls, 73 Q.J. Econ. 535 (1959). 394 PAGENO="0367" CONSUMER CREDIT PROTECTION ACT 949 capital market, and the bidding prices create the interest rate when they interact with the supply prices of lenders.'4 It is entirely possible that defects in the demand side of the con- sumer-credit market can affect the prices paid in the other parts of the capital market. Imperfections in both the demand side and the supply side of the consumer-credit market itself are of concern not merely to consumers, but to everyone interested in the proper functioning of interest rates in capital markets. If the imperfections of the consumer- credit market are such as to attract into consumer lending (through artificially high rates) an excessive amount of the total supply of loan- able funds, this inevitably has a disruptive effect upon the productive side of the economy. Some entrepreneurs would be denied funds com- pletely, while others would be made to pay a higher rate of interest than if consumer-credit rates were lower. Therefore, an understanding of the real demand from the consumer-credit side would contribute to a general improvement in the functioning of the whole economic system. B. Demand Side of the Consumer-Credit Market On the demand side of the consumer-credit market, the most important question is whether or not borrowers are in a position to understand the charges they are paying for consumer credit, because, without this understanding, a rational decision as to whether or not to borrow cannot be made. In most consumer-credit transactions, terms are stated as "add-on" or discount charges or as monthly dollar payments. Often borrowers, or purchasers, have no idea of the price they are paying for credit, as compared to the knowledge they have of the interest rates they receive on savings deposits or government bonds, for example. One of the most important legal regulations suggested by con- sumer associations is the requirement that lenders state charges in terms of simple annual interest rates. The basic notion of a rate is nothing more than a measure of flow-of water, income, or what have you. Every rate is a ratio involving a time period, a base amount, and an increment related to that base over the time period. An annual interest rate is derived from the number of dollars which must be paid to borrow one hundred dollars for a year. It is what the market establishes as the price that borrowers pay for command over present purchas- ing power and that lenders receive for relinquishing, command over 14 Here again, it is useful to put to rest once and for all the artificial attempt to inject a distinction between "pure" interest rate (the actual interest cost) and other service costs or charges associated with the demand for funds. As many others have pointed out, there is practically no interest rate anywhere in the economy that is not a mixture of elements of pure interest, service charges, and risk elements. 395 PAGENO="0368" 950 CONSUMER CREDIT PROTECTION ACT present purchasing power for one year.15 This form of disclosure has been resisted by most lending agencies. In doing so, however, the op- ponents of annual-rate disclosure completely ignore the fact that con- sumers are always beset with annual-rate quotations when banks and lending institutions attempt to attract savings and deposits from the public. The necessity for a consumer to compare what he is able to earn when he puts his money in a bank with what it will cost him when he takes money out of a bank-the necessity of having these com- parisons available in identical percentage terms-is a chief and most compelling consumer argument for disclosure of annual-rate informa- tion. The opponents of such disclosure generally attempt to draw fine distinctions among the actual cost elements in the charges on loans. For instance, Professor Robert Johnson has said: Examination of the operating costs of credit institutions reveals that the dominant component of this "credit package" is the service element, that only a relatively small portion of the finance charge paid by the consumer can be attributed to pure interest. Because the major component of a consumer finance charge is for service and risk, it is more properly viewed as a service charge. If it is treated as a service charge, the consumer finance charge need not be converted into an annual rate. Indeed most service charges are presented in much the same manner as finance charges are now stated to the consumer.'6 Two comments are in order. First, what Johnson says about the components of cost included in the credit package is correct, but it is likewise applicable to any and every interest rate charged either to con- sumers or to businesses.'7 Second, the fact that service charges have long been presented in a certain way does not at all mean that their conversion into an annual rate could not be done and would not be an improvement. As far as the borrower is concerned, all types of charges are the same: they are part of the total cost of credit to him. What the consumer needs to know is whether 5 per cent interest from a savings bank provides a better use of his funds than paying off what is called a "4 ~/2 per cent" auto loan. It usually does not, and it is highlyun.. 15 The function of interest rates is so critical to the operation of the economy that sophisticated commercial dealers convert practically every financial instrument and financial transaction into percentage terms. This is done to make as fine a profit calcula- tion as possible, to guide the businessman in the selection of the most profitable invest- ment of his assets. ~ Johnson, Methods of Stating Consumer Finance Charges 14 (1961). 17 Messner, Social Ethics, Natural Law in the Western World 814-15 (rev. ed. 1965). 396 PAGENO="0369" CONSUMER CREDIT PROTECTION ACT 951 fortunate that communications media are bombarded with such mis- leading advertisements.18 According to the opponents of annual-rate statement, "the most appealing of the arguments for use of the interest-rate form of state- ment is that it will enable consumers to shop more effectively for credit."1° They concede that this argument implies also that this more effective shopping for credit will generally reduce its cost. In addition, some of these opponents, notably Professor Johnson, allege the "impossibility" of expressing finance charges as annual rates. There are two main objections proposed by Professor Johnson: (1) "The finance charge can be buried in the prices of items sold on credit"; and (2) "The charge cannot be computed at the time credit is granted on a wide variety of credit transactions."2° Let us examine these two arguments and their implications. It is perhaps true that a retailer could raise the price of a product and either totally eliminate any mention of installment financing or quote a ridiculously low rate. The total elimination of explicit finance charges occurs even now in some types of credit-card and department-store credit, for instance, when one gets thirty-day "free" credit. However, the consumer, as long as he has a single price to deal with, is perfectly able to compare the price on the goods or services he is getting with prices for that same benefit in competing stores. This goes on all the time, and the consumer is well accustomed to handling these situa- tions. The popularity of discount stores, which have eliminated such 18 The attempt to distinguish lender profit from borrower interest is a determined, if misguided, one. Ray McAllister, speaking of revolving credit and installment credit, noted that these . . . seem to be interest rates, which in fact they are not since in both types of credit interest "on the use of money" represents only a part of the total credit costs. It is argued that because regular installment credit charges are not usually expressed as a "true" annual rate it is improper to express revolving credit charges as a true annual rate. Again, it is pointed out, this would equate the charge for revolving credit in the mind of the buyer with an interest rate, which it is not. McAllister, An Analysis of Proposed Federal Legislation Covering Consumer Instalment Credit, in Business Studies 31, 38 (No. Tex. State Univ. Fall 1966). ~ Johnson, op. cit. supra note 16, at 15. Professor Johnson does indeed reach some strange conclusions by his arguments. He decides that consumers will not only be no better off, but will actually be more confused if annual-rate expressions are imposed. It is interesting to examine the reason for his conclusion. He argues that unless each and every type of credit offered to consumers is able to be stated in the annual-rate formula, the consumer will still be confused. To achieve comparability of rate statements for 90% of the types of credit offered to consumers would not, in Johnson's eyes, be an improve- ment. This argument is totally unacceptable. This is a field in which one is grateful for even a small improvement in the information available to consumers-for even the slightest correction of deceitful and confusing methods of telling the consumer what he is paying. 20 Id. at 16. 397 83-340 0 - 67 - pt. 2 - 24 PAGENO="0370" 952 CONSUMER CREDIT PROTECTION ACT ancillary services as free delivery or charge accounts, proves that the customer can make the distinction between the goods and services he gets for different product prices in different stores. To think otherwise is seriously to demean the natural intelligence of our countrymen. We must, therefore, totally reject the argument that consumers cannot uncover finance charges buried in the price of items sold on credit.2' Let us now turn to Professor Johnson's second objection, namely the fact that on many types of credit the precise rate cannot be calcu- lated in advance, because the conduct of the customer during the life of the loan or the payment period is unknown. By this is meant that no one can precisely foretell, on a revolving-credit plan, how much and on what precise day the customer will buy on this plan and how much he will pay back. Professor Johnson also argues that "on many types of consumer credit it is difficult to identify the finance charge accurately because of various fees or insurance premiums accompanying the pay- ment of the finance charge."22 The substance of Professor Johnson's argument completely falls, however, when the proponents of the annual rate minimize the need for an expression of the precise annual interest rate equivalent that a revolving-credit Customer actually has paid. It is quite satisfactory, for purposes of consumer information, if sellers reveal that, in the initial computation of charges on these revolving plans, they are using a broad formula which is roughly equivalent to a particular annual rate under estimated typicalpayment conditions. So long as some such formula is worked out by the authorities charged with enforcement, and all sellers are required to use a similar formula and manner of expression, then the information available to the public is actually uniform and suffi- cient. The public would be forewarned that deviations from the assumed conditions will alter the precise rate paid by each individual. This arrangement is perfectly feasible and will give the customer information of exactly the type he needs. What matters is not whether each consumer gets the mathematically precise rate paid on every single contract. Instead, it is important that he get an honest estimate with a margin of error that is relatively small.23 21 This rejection is based, of course, upon the assumption that the `retail market is free from collusive pricing. To further strengthen consumer awareness of the problem, consumer groups have in the past mounted campaigns encouraging customers to demand discounts for cash, on the principle that if "free" services of credit or delivery are furnished to a credit customer for exactly the same product price that a cash customer pays, cash customers are made to subsidize credit customers.' Consumer education about this practice could eventually force retailers into the practice of cash discounts. 22 Johnson, op. cit. supra note 16, at 17. This quotation appears to confirm the contention that confusion already exists on a vast scale, and that the only way to avoid multiplication of these deceitful fees and premiums is to force the whole package of fees to be converted into a single percentage rate. 23 There is no need to fear that there will be a weakening of the competitive position 398 PAGENO="0371" CONSUMER CREDIT PROTECTION ACT 953 Finally, it should be pointed out that some arguments employed against consumer-credit controls and contract terms miss the point entirely. For instance, it has often been alleged that consumers do not want and will not use information such as annual-rate percentages. It may be freely conceded that there are some pieces of information that the buyer does not now realize are important for him to know. If, however, it is objectively true that a certain piece of information is essential to a rational decision, then it is perfectly reasonable for the law to require it to be given. It then becomes a matter for consumer education to bring the people to the point where they appreciate the necessity of making a decision only after considering this information. It is inconceivable that anyone can sincerely argue that pertinent in- formation should not be made available just because present-day con- sumers either do not know enough to ask for it or do not use it where it is now available. If the consumer-credit industry really thought this information would have no effect, there would never have been any controversy at all.24 Fortunately for the consumer, several federal agencies supervising financial institutions have recently stepped into this matter with a simultaneous release to all agencies under their control. In it they set out guidelines to be followed by financial institutions in advertising to attract deposits from the public. Chief among these directives is the following: Interest or dividend rates should be stated in terms of annual rates of simple interest, and the advertisement should state whether such earnings are compounded and, if so, the basis of compounding. Neither the total percentage return if held to final maturity nor the average annual rate achieved by com- pounding should be stated unless the annual rate of simple interest is presented with equal prominence.25 of individual sellers, since all firms will be required to follow the same formula for the specific type of credit. 24 Some of the arguments or positions advanced by credit-industry spokesmen are obviously well calculated to inject confusion and bewilderment into the debate and should hardly be seriously advanced. For instance, all the talk about how difficult or impossible it would be for companies to train their people to tell customers the true annual interest rate sounds hollow when faced with assurances from the publishers of financial tables that they can add a true annual-rate column to their charts with no difficulty or delay, and at minimal expense. See generally Mors, Consumer Credit Finance Charges 108 (1965). 25 See Letter From Board of Governors of the Federal Reserve System to State Member Banks, Dec. 16, 1966, in 52 Fed. Reserve Bull. 1774 (1966). The agencies involved were the Comptroller of the Curr6ncy, the Federal Deposit Insurance Corpora- don, the Federal Home Loan Bank Board, and the Board of Governors of the Federal Reserve System. See also Business Week, Dec. 24, 1966, p. 81. It is also a source of considerable gratification that the 1967 consumer message from President Johnson contained a request for a percentage rate disclosure per year. 399 PAGENO="0372" 954 CONSUMER CREDIT PROTECTION ACT Interestingly enough, this joint action was stimulated by a veiled threat from the Securities and Exchange Commission to apply the anti-fraud provisions of the securities acts to advertising by financial institutions. C. Supply Side of the Consumer-Credit Market To appraise the adequacy of a legislative program which controls market practices of sellers and lenders, several factors must be con- sidered. An effective program must be of sufficient scope to encompass within its provisions all types of credit transactions and institutions, covering all consumer goods and services. The effective program must provide for the licensing and supervision of lenders, and must include appropriate sanctions for abusive activity. Further, the legislation, if it is going to accomplish its objectives, must indicate what contract provisions are to be required, permitted, or prohibited; it must also specify the requirements for inclusion of provisions covering insurance, extensions, and refinancing, as well as the procedures as to collections, defaults, and repossessions. Lastly, the legislation must establish the rate-determination process. Many of the above factors exist, in varying degrees, in legislation which often takes the shape of small loan laws. The included types of transactions and institutions, the licensing and related items, and rates are reasonably well covered. In addition, state requirements relative to contract terms generally present no great economic issue beyond the elimination of coercion, fraud, or deceit. Several practices, however, still remain in the category of unfinished consumer-protection business. Credit-Rating Bureaus. For their own protection, lenders have set up a system of credit-rating bureaus. While this system is now mainly local, it is in the process of being developed into a national network. In an age in which access to credit can be a very important aspect of a consumer's economic welfare, a close examination of the operation of such credit-rating bureaus is necessary, and public control of them may be required. In too many instances, consumers have been forced into paying debts by a form of blackmail which insinuates that the credit-rating-bureau files will forever bar that delinquent customer from access to credit anywhere in the world. In some of these cases, payments were made on demands that never should have been honored. In other cases, reputations of debtors and consumers have been blackened and credit denied on the basis Of completely unjustified allegations conveyed to the credit-rating bureau. In a recent newspaper article, Vance Packard wrote: An acquaintance discovered quite by accident that his local credit bureau, in a litigation report on him, said he had been the target of three law suits for failure to meet commit- 400 PAGENO="0373" CONSUMER CREDIT PROTECTION ACT 955 ments; on the record he obviously was a bad credit risk. In fact, the first case was a $5 scare suit back in the nineteen- thirties over a magazine subscription he had never ordered; the second involved a disagreement over a $200 lawyer's fee and was later compromised amicably; the third concerned a disputed fee he had charged a client, and this suit he won in court. It took my friend two days of digging to clear his record with the credit bureau.26 It will be necessary for legal experts to consider ways and means of protecting the public from potential injury caused by such mistaken reports in the files of private credit-rating bureaus. Relationship of Seller, Lender, and Customer. Another aspect of the supply side of the credit market that calls for regulation and improvement pertains to the relationship between the seller of goods, the customer, and the lender of the money used to purchase the goods. Frequently there is a sharp legal separation between financing agency and retailer. The lending agency buys the customer's promissory note from the retailer and becomes a detached "third party" to the transac- tion. The customer is then in a borrower-lender relationship with the finance company or bank. The latter is a "holder in due course" of the customer's promise to pay certain sums of money independent of the underlying transaction. This principle is sacrosanct in the law in order to protect the negotiability of commercial paper. This protected status was abused, however, by some financing institutions who allowed their credit, their forms, and their good names to be used by unscrupulous businessmen in soliciting business. Abuses multiplied, particularly in the home-improvement field. Fly-by-night operators absconded with down-payments and never completed the jobs they had contracted for, while the bank or finance agency had the legal power to compel the customer to keep paying installments on loans used to pay for goods or work he had never received. Massachusetts has pioneered in the move to eliminate the divorce between the sellers of goods and the grantors of credit. Several years ago the legislature passed and the Governor signed a bill abridging the holder-in-due-course privilege for any financing agent who takes a promissory note originating from the purchase of a consumer good. Such a note must explicitly state that it is a "consumer note."27 In such cases, the financing agent is also liable for any defenses that the buyer might have against the original seller. The principle on which this law is based is very simple. Were a bank or finance company to know 26 Packard, Don't Tell It to the Computer, N.Y. Times, Jan. 8, 1967, § 6 (Magazine), p. 44, at 90. 27 Mass. Gen. Laws Ann. ch. 255, § 12C (Supp. 1966). 401 PAGENO="0374" 956 CONSUMER CREDIT PROTECTION ACT that it could be liable to the ultimate customer, it would be very concerned about the reliability and honesty of the businessman or contractor whose installment sales it was financing. This author can testify, from personal experience with businessmen who were affected by this law, that it actually had the intended effect-banks became much more careful about the integrity of the businessmen whose install- ment paper they purchased. The interconnected nature of this tripartite transaction is clearer from the way the British system of hire-purchase works. Instead of the trader giving credit to the customer he sells the goods to the finance company and thus obtains his price in cash. The finance house then hires the goods to the customer and derives the profits and expenses from the dif- ference between the cash price, less the deposit, paid to the trader and the total of the installments received from the customer.28 The English have thus been wrestling with essentially the same problem from a different angle, created by the different historical development taken by English law. As seen above, the dealer is not considered the owner of the goods purchased on installment plans by a customer, because the dealer has executed a contract of sale to a finance company. However, the finance company has not been considered liable for any defects in the goods. These were serious gaps in the protection of English purchasers on the installment plan. Some have suggested a law making the dealer the agent of the finance company, but even this may not be enough.29 IV. RATES AND CEILINGS The two previous sections have treated the nature of consumer credit and some required conditions that the government must establish as the framework within which the consumer-credit market must function. Essentially these conditions encompass full disclosure of information to buyers, freedom of buyers from fraud, deceit, or coer- cion, and the prevention of monopolistic or restrictive trade practices by the credit industry. This latter goal, of course, can only be achieved by vigorous enforcement of all the antitrust laws. It is hard to imagine how the consumer-credit market might have developed in the absence of government regulation. Historical and economic factors made it necessary to have state regulation of the small loan business. Restrictions on charges for extensions of credit 28 Final Report of the Committee on Consumer Protection, Stat. Instr., 1962, No. 505, at 166. 29 See generally Borne & Diamond, The Consumer, Society and the Law (1964). 402 PAGENO="0375" CONSUMER CREDIT PROTECTION ACT 957 began in ancient times and continued through the Middle Ages.3° In the United States, there have been many usury laws which set maximum ceilings on interest rates somewhere in the range of 6 to 10 per cent. With such ceilings, however, it was totally impossible to make small loans profitably. Lending to the consumer in small amounts was much costlier and more risky than business lending. Investigation, service, collection and other handling costs, plus the market rate of interest, drove the total cost of a loan to a consumer well above the ceilings set in traditional usury laws. If the state did not wish to leave the whole field of small loans to illegal "loan sharks," with interest-rate charges sometimes as high as 50 or 100 per cent a year, it had to make it possible for legitimate capital and legitimate lenders to function within the law. This conflict between law and economic reality led to the practice of special small loans licensing and to controlled exemp- tion from ordinary maximum rates. As one author on consumer credit has written, "The lending of money to consumers is an economic activity which apparently thrives with or without legal sanction. The only choice is whether such lending is to be done in large part by loan sharks or by legitimate lenders."3' Most states now have laws establishing ceilings on the interest rates and finance charges that may be applied to consumer credit. This is particularly true of most categories of what are commonly called "small loans." Presuming, therefore, that the government has done all it can to establish the proper framework conditions for the credit market to operate in the public interest, is this enough, or must the state go further? Should it attempt to fix any rates at all, or should it leave the whole matter to the forces of competition at the market? Assuming it is decided that the state should fix some maximum rates, at what level should these be set? Should they be set deliberately high in order to make it possible for all, even the most inefficient suppliers of credit, to function in the market, or should they be set very low so that only the most efficient suppliers can stay in the market, and if so will this accentuate whatever trend to monopoly already exists? Should ceilings be set close to prevailing market prices, or should they be set rather high in order to prohibit only the most exorbitant charges? The issue raised by this problem-freedom of pricing-is one on which hot debate and lively dissent take place among economists. On the one hand is a school of thought which believes that, apart 30 Those governmental and church restrictions on interest stemmed largely from several aspects of the borrower-lender relationship in early times; loans were frequently made to a person in distress, while capital and money were not considered productive goods as they are today. In fact, in some periods a negative interest rate was paid by the owner to someone who guaranteed to keep his principal safe for him. 31 Edwards, Consumer Credit Institutions Other Than Banks, in American Financial Institutions 716 (1951). 403 PAGENO="0376" 958 CONSUMER CREDIT PROTECTION ACT from assuring truthful and accurate information to the customer, the state should keep out of the credit-pricing process and leave it to the forces of the market. Some of their objections to state-set rates are quite persuasive. By what criteria will rates be set? Frequently, they are set on a cost-plus basis, thus encouraging continuing support even to inefficient and costly suppliers of this service. In addition, it is claimed, with a fair amount of evidence, that whatever ceiling is set automatically becomes a floor, if not the actual price, that the majority of lenders charge. Is the credit industry to be treated like a public utility? What theory of a fair price will govern the action of the state in setting rates? Intçrminable delays and problems are also involved when a legislature or an administrative board attempts to set rates. On the other side of the argument, those who maintain that the state must set rates point to several considerations: (1) The borrowers in the market for consumer credit are often not in a financial position to shop around among competing sellers; (2) they frequently are not intellectually able to judge or digest the meaning of the information currently furnished them about rates and terms of credit;82 and, (3) the supply side of the credit market is not sufficiently competitive to trust it to force rates down to a reasonable level.33 The evidence on this third ~point is voluminous but frequently contradictory. One writer, however, has summarized his study of banking concentration by saying: Examining bank performance in 36 major metropolitan areas, we found that structural differences among these markets exert an important influence on bank performance. Market concentration, especially, was found to be significantly asso- ciated with the pricing, output, and profits of banks-high 32 Note the significant conclusion on this point from the Juster & Shay study. "Since the majority of consumers probably fall into the rationed category, there will be little rate response observable in the population as a whole under existing conditions [Riationed consumers showed virtually no knowledge of rates." Juster & Shay, Consumer Sensitivity to Finance Rates: An Empirical and Analytical Investigation 2-3 (1964). "Rationed consumers are defined as those who, given the finance rate, desire more credit than the major or "primary" credit sources . . . are willing to grant; unrationed consumers are those whose demand for credit is satisfied by their actual borrowing from primary credit sources." Id. at 1. See also the types and levels of ignorance discussed by the Malony Committee Report in the section on hire-purchase and the English consumer. Final Report of the Committee on Consumer Protection, supra note 28, at 168-71. 33 Past efforts of lenders and vendors seem to have been directed to avoiding competition on price alone. Bartels, op. cit. supra note 6, at 36. "Clear distinction has not been made between the total charge and the charge for credit service; therefore the purchaser has not always been critical of price or aware of competitive practices." Id. at 471. To increase competition it is necessary to require suppliers of credit to state their charges in ways that facilitate price comparision. Ibid. 404 PAGENO="0377" CONSUMER CREDIT PROTECTION ACT 959 concentration being associated with high loan rates, low rates on time and savings deposits, and high profits.34 ~ Professor Donald Jacobs, too, has reached the conclusion that changes in the regulations governing bank operations and changes in entry restrictions on new banks are necessary if banks are really going to be able to compete with other financial intermediaries.35 In a recent credit conference in Canada, Professor Wallace P. Mors stated the case for ceilings as follows: There are some grounds . . . for believing that interest or finance rate ceilings might be necessary even with rate and dollar disclosure. Like most markets, the consumer credit market is imperfectly competitive. Imperfections are many and include differentiation of loan services among financing agencies, limitation of buyer-seller contracts, and borrower inability to determine price. Rate and dollar disclosure of finance charges would reduce only one of the many factors which contribute to market imperfections.3° Prof essor Neufeld, upon whose paper Professor Mors was commenting, had suggested the desirability of making entry into the credit industry easier, and of thus avoiding monopoly profits by encouraging compe- tition. Mors answered this by saying: Proliferation of installment lenders might increase competi- tion and reduce monopoly profits without reducing prices to consumers. Judging from small-loan experience, the greater the number of loan offices, the smaller is the size of the average office and the greater is the cost of operations. Any intensification of competition takes the form of increased advertising and other forms of sales promotion, rates of charge remaining at the ceiling level allowed by law.37 Several conclusions should be drawn from this discussion. First, the essence of a credit transaction-delay of payment by the buyer- should be acknowledged and laws revised to agree with economic reality. Second, the imperfectly competitive nature of the market should be faced. On the buyer's side of the market there are imper- fections because of the lack of knowledge of alternatives in rates, 34 Edwards, The Banking Competition Controversy, in Studies in Banking Competi- tion and The Banking Structure 327 (1966). ~ Jacobs, The Framework of Commercial Bank Regulation: An Appraisal, in id. at 350. ~ Mors, The Economic Significance of Consumer Credit: Commentary, in Consumer Credit in Canada 2 1-22 (Ziegel & Olley ed. 1966). ~ Id. at 22. 405 PAGENO="0378" 960 CONSUMER CREDIT PROTECTION ACT terms, and sources, and differences in creditworthiness between buyers. On the seller's side there is a naturally differentiated product because of the nature or availability of the goods offered, and an artificially differentiated product created by brand-name advertising; no two sellers are really selling identical, homogeneous commodities or ser- vices. Other elements of differentiation between one lender and another may be: collection methods and policies, ease of obtaining loans, down- payment and/or security needed. Third, state governments should still do all in their power to introduce more competitive features into the market. On the demand side this means (a) encouraging full disclosure of all pertinent facts, rates, and terms to enable comparisons, and (b) consumer education to make consumers aware of their choices and their rights. On the supply side, the state should encourage (a) entry of new credit grantors, and (b) expansion of the types and fields into which old and new lenders may enter. Even after all these improvements in market conditions and practices have been achieved with the aid of state law, there remains the nagging question: Will banks and finance agencies engage in sufficient price competition to keep interest and finance rates at levels reasonably fair to the consumer? The answer to that question is prob- ably "no." Even with vigorous regulation by banking authorities and diligent application of antitrust law to bank structure and conduct, it seems likely that state control of interest rates on consumer credit will still be necessary in the public interest. If so, the proper course of action should be to set rates and not ceilings. V. CoNcLusIoN In the larger context, it is clear that glaring abuses in the con- sumer-credit field have led to popular demands for state regulation. - This raises an economic issue that far transcends the credit field: How do we reconcile and relate the interests of business and the public within the broad context of a free capitalistic economy? It is com- monly accepted that the general public makes very little distinction between abuses associated with the financing of a sale and problems caused by the seller or his product. In the eyes of a buyer, it is all one. He usually attributes all problems directly and immediately to the original seller and focuses his complaints accordingly. How much popular conflict and disenchantment with business is really due to finance industry abuses is anyone's guess, but in no event is it small. Otherwise, consumer associations and consumer groups throughout the fifty states would hardly have made consumer-credit abuses the focal point of their attack. Popular disenchantment with business is emphasized by those economists and social psychologists who are devoting their attention 406 PAGENO="0379" CONSUMER CREDIT PROTECTION ACT 961 to the study of conflict in society and the requirements of social harmony One European author recently wrote [I]n the majority of cases hire purchase could better have been avoided First save, then spend, is as a rule better than the other way around This is quite clear in the cases in which the original harmony between seller and buyer changes into an open conflict the buyer has become overburdened by debts which exceed his means [Most consumers] believe that they are often over charged This brings us to the clash of interests which, next to that on wages, is perhaps the strongest in contemporary folklore the businessman is frequently regarded as the con sumers' natural enemy, if not as a swindler 38 This is a very disturbing state of affairs, mainly because it is so unnecessary. If the businessman ceased looking on consumer credit as an additional source of profit for him, and concentrated his attention on making a profit from his real business-selling good quality products to satisfied customers-this suspicion and hostility toward businessmen in general might diminish or even disappear It was a sorry commentary on business when a consumer magazine could headline its credit article "Bait the Hook with Merchandise "~ Hopefully, businessmen will see that it is in their own interest to work for an equitable system of regulation of the consumer credit field ~ This will then restore credit to what it was intended to be-a valuable and convenient tool to facilitate the production and exchange of goods and services to the mutual benefit of business and the consumer. 38 Pen Harmony & Conflict in Modern Society i35 36 (i966) 39 3i Consumer Reports 457 61 (i966) 40 Some actual business deeds along this line would be much more effective than the pious declarations adopted by The Better Business Bureau Managers and widely published in November i966 The following is an example of such language The Better Business Bureaus decry and regret actions or pubhcity by whomsoever which create the false impression that American Business generally is opposed to consumer interests-or which unfairly disparage or degrade the general dependability and integrity of American Business. [Theyj deplore any attempts to set up business and their customers as antagonists when in fact they are dependent on each other for the mutual benefit of both The Bulletin Better Business Bureau Nov i966 p 1 407 PAGENO="0380" 962 CONSUMER CREDIT PROTECTION ACT (Mr. Clive W. Bare, referee in bankruptcy for the Eastern District of Tennessee, submitted the following material pertaining to bank- ruptcy proceedings in the State of Tennessee:) TN THE UNITED STATES DISTRICT COURT~FOR THE EASTERN DIS- TRICT OF TENNESSEE, NORTHERN DIVISION IN THE MATTER OF WILLIAM SYLVESTER BRANCH, DEBTOR In Proceedings Under Chapter XIII, No. 23,372 MEMORANDUM OPINION Section 656(b) of Chapter XIII of the Bankruptcy Act (wage earner plans) provides that before confirming any plan the court shall require proof from each creditor filing a claim that such claim is free from usury. General Order 55(4) which applies to proceedings under Chapter XIII provides that each proof of claim based upon the loan of money shall contain proof that the claim is free from usury as defined by the laws of the place where the debt was contracted. William Sylvester Branch, the above debtor, filed an original petition under Chapter XIII on February 21, 1966. The debtor is 46 years old, married, and employed as a porter at the East Tennessee Tuberculosis Hospital, earning $200.00 per month. With his petition, he submitted his wage earner plan provid- ing for payment out of his future earnings and wages the sum of $20.00 each week. The plan further provided that Merit Finance Company (Merit), a secured creditor, receive fixed monthly payments of $60.00. Merit, on March 9, 1966, filed its proof of claim in the amount of $2,870.00, accepting the debtor's plan. Merit is an industrial loan and thrift company operating under the provisions of Tennessee Code Annotated. Sees. 45-2001-45-2017. Merit aisserts that it holds a note secured by a second mortgage on the debtor's home, and a security interest in the debtor's household goods and an automobile, all executed November 19, 1965, at Knoxville, Tennessee. Merit's claim is based upon the following trans- actions. (1) On December 22, 1964, the debtor negotiated a loan with Merit. He executed a note in the sum of $72.00 payable in 12 monthly installments of $6.00 each. Merit's ledger card (Account No. 63-235) indicates the $72.00 note was made up of the following items and charges: Cash received by debtor $59.04 Interest 4.32 Investigation charge 2. 88 Life insurance premium 1. ~ Accident and health premium 4. 32 Total of note 72.00 (2) On January 23, 1965, the first loan was renewed or "flipped."1 The debtor executed a new note in the amount of $378.00 payable in 18 monthly payments of $21.00 each. Merit's ledger card (Account No. 63-337) indicates the following items and charges: Payment to Merit on unpaid balance old loan (credit given for insurance premium rebate, $4.94) $68.06 Paid Franklin Finance Company for borrower 108.00 Cash to borrower 95. 11 Property insurance 15.00 Interest 34. 02 Investigation charge 15. 12 Life insurance premium 11. 34 Accident and health premium 28.35 Recording fee (security agreement, household furniture) 3. 00 Total of nole 378. 00 1 "Industrial loan and thrift companies . . . freely engage 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 combining the new amount with the old balance on which all allowable charges have already been made. and the full amount of allowable charges is gain imposed on the new balance." FMaZ Report of the Legislative Council of the 80th General 4_s8embly, ~&tate of Tennessee (1968). PAGENO="0381" CONSUMER CREDIT PROTECTION ACT 963 Repayments by debtor: $21.00-February 22, 1965; $84.00-March 6, 1965. (3) On March 6, 1965, the second loan was renewed or "flipped." Merit's ledger card (Account No. 63-483) indicates a new note in the amount of $552.00 was executed, payable in 24 monthly installments of $23.00 each. The ledger card in- dicates the following items and charges: Payment to Merit on unpaid balance old loan (rebate insurance premium, $45.58) $227.42 Cash to borrower 149.70 Interest 66.24 Investigation charge 22. 08 Life insurance premium 22. 08 Accident and health premium 41.40 Property insurance premium 22. 08 Recording fee 1. 00 Total of note 552. 00 Repayment by debtor: $21.85-April 24, 1965 (late fee charged $1.15) ; $23.00- July 1, 1965. (4) On August 10, 1965, the third loan was renewed or "flipped" and a new note executed in the amount of $672.00, repayable in 24 monthly installments of $28.00 each. Merit's ledger card (Account No. 63-1074) indicates the following items and charges: Payment to Merit on unpaid balance old loan (rebate insurance premium, $56.72) $450.43 Cash to debtor 9. 89 Interest 80. 64 Investigation fee 26. 88 Life insurance premium 26. 88 Accident and health premium 50.40 Property insurance premium 26. 88 Total of note 672. 00 Repayments on `the above loan appears as follows: $28.00-September 9, 1965; $28.00-October 9, 1965. (5) On November 19, 1965, the fourth loan was renewed or "flipped" and this time a note executed in the sum of $2952.00, payable in 36 ifionthly payments of $82.00 each. Melit's ledger (Account No. 63-1396) indicates the following items and charges: Payment to Merit on unpaid balance old loan (rebate insurance prem~ ium, $79.90) $536. 10 Paid City Finance Company 1,044.00 Paid Consolidated Credit Company 72.00 Cash received by debtor 10.28 Interest 531. 36 Investigation charge 118. 08 Life insurance premium 177. 12 Accident `and health premium 280.44 Property insurance premium 177. 12 Recording fee 5. 50 Total of ii~~tc~ 2, 952.00 Repayment by debtor on this loan: $82.OG- , 1966. A resume of `the debtor's five loans with Merit, from December 22, 1964 to No- vember 19, 1965, indicates the following: Received by debtor or paid to others for his benefit $1, 548. 02 Interest charges 716. 58 Investigation charges 185. 04 Insurance premiums (net after rebate) 678.41 Recording charges 9. 50 Repayments by the debtor total $287.85. As indicated heretofore Merit says the debtor owes it $2870.00 at this time. The question before the court is whether Merit's claim is free from usury. In Chapter XIII proceedings, where a loan of money is involved, General Order PAGENO="0382" 964 CONSUMER CREDIT PROTECTION ACT 55(4) places the burden of proof upon the claimant to show that its claim is free from usury. In my opinion Merit's claim is not free from usury and such usurious charges must be disallowed. To creditors and leaders in the business community who are constantly asking why there is such a large number of bankruptcy petitions filed in Tennessee each year,2 an analysis of the financing charges in the loans under consideration in this opinion furnishes one of the principal answers. USURY In the United States the meaning of usury l's the taking or reserving of illegal interest. The test of usury in a contract is whether it would, if performed, result in securing a greater rate of profit than i's allowed by law. The form of the agreement is immaterial, since any sihift or device by which illegal interest is arranged to be received or paid is usurious. "A profit made or loss imposed on the necessities of the borrower, whatever form, shape or disguise it may assume where the treaty is for a loan and the capital is to be returned at all events, has always been adjudged to be `so much profit taken upon a loan, an'd to be a violation of these law's which limit the lender to a specified rate of interest." Bank of United states v. Owens, 27 U.S. 527. Lenders o'ften `seek to augment the interest which they charge for a loan by requiring borrowers to pay for pretended services rendered or for fictitious expense's incurred by the lender. "The cupidity of lenders and the willingness o'f borroweris to concede `whatever may `be demanded or to promise whatever may `be exacted in order to obtain temporary relief from financial embarrassment have resulted in a great variety of `devices to evade the usury law's. To frustrate such ev'asions the courts look `beyond the form of transaction's, to their substance. The general rule is that a cou'rt in determining w~hether or not a contract or transaction is usurious will `disregard its form and look to the `substance, condemning it when it finds the requisites of usury present, regardless of the disguises they may wear. No c'ase i's to be judged by what the parties' appear to `be or represent themselves to be doing, but by the transaction as disclosed by the whole evidence, and if from that it is in `substance a receiving or contracting for the receiving of usurious inte'rest for a loan or f*bearance of money, the parties are subject `to the statutory consequences, no `matter what device they `may have employed to `conceal the true character of their dealings." 55 Am. Jur., Usury, at p. 332. It i's often contended that the parole evidence rule bars evidence of intent, but the rule is otherwise. Parole eviden'ce always is admissible to show that `the party intended an illegal contract even though the evidence contradi'cts the recitals or varies the promise's of written instruments. `Such an exception to the parole evidence rule i's obviously sound, for to `bar oral evi'dence of in'tent would make it possible fo'r anyone to avoid t'he penalties of the law by the simple expedient of casting an unlawful transaction in the form of a written contract having the appearance of legality on its face, in which form it would be unassailable. By their nature, devices to con'ceal usury have the appearance of legality: the disguised tran's'aCtion is u'surious fo'r the very reason that the true intent of the parties to the transaction differs from the a'pparent or professed intent. It is, therfore, necessary to discover every fact that Shows the true character of the transaction and to apply the fundamental principles of interest and usury, regardless of the disarming form in which the transaction may have `been cast. INTEREST Interest i's the `compensation which may `be `demanded by the lender from the borrower, or the `creditor from the deb'tor, for the use of money. Tennessee `Code Annotated 47-14-103. The legal rate of interest in this `state i's fixed by Tennessee `Code Annotated 47-14-104 at t'he rate of six dollars ($6.00) for the use of one hundred dollars ($100) for one (1) year. ". . . and every exce'ss over that rate is usury." 29,281 petitions filed in Tennessee during the fiscal year ending June 30. 1965. This number was excee"led on1v ir three states-Alabama, California, and Ohio. Report of the Administrative Office of the Ufi. Courts. PAGENO="0383" CONSUMER CREDIT PROTECTION ACT 965 Tennessee Code Annotated 45-2007 (f) authorizes industrial loan and thrift companies ". . . to deduct interest in advance on the face amount of the loan for the full term thereof." Merit's records filed in this proceeding indicate the following charges for interest: Amount of Term of Loan No. note loan Interest (months) 63-235 $72 12 $4.32 63-337 378 18 34.02 63-483 552 24 66.24 63-1074 672 24 80.64 63-1396 2,952 36 531.36 Total interest charges 716. 58 As pointed out heretofore the first loan was "flipped" four times within a period of eleven months; total benefits received by the debtor amounted to some $1548.02; interest totaling $716.58 was charged.3 In no instance was interest rebated when the loan was "flipped." It will also be observed from the notes filed in this proceeding that in every instance interest has been charged on interest, e.g., consider the fifth loan made by the debtor. The debtor executed a note in the amount of $2952.00 which in- cludes interest amounting to $531.36. The interest figure was arrived at by charging interest on the face amount of the note, to which the interest had already been added, thus interest is charged on interest. Did the "flipping" of the loans by Merit in the transactions under considera- tion enable it to obtain an excess over the legal rate of interest? T.C.A. 47-14- 103, 104. When the first loan was made, the debtor executed a note in the amount of $72.00. This amount includes $4.32 interest for twelve months. One month later the loan was "flipped." The face amount of the new note includes $08.06 pay- ment to Merit on the first loan (rebate given for insurance premiums). Although the debtor had already been charged with interest on $72.00 for twelve months, the $68.06 balance is added into the face amount of the second note ($378.00) and interest is again charged-this time for eighteen months. In the third loan interest is again charged on $227.42 remaining unpaid on the second loan, again for eighteen months. In the fourth loan interest is again charged on $450.43 balance on the third loan, this time for a thirty-six month period. In the fifth loan interest is again charged on $536.10 balance on the fourth loan, again for a thirty-six month period. These transactions indicate interest on interest on interest on interest on interest. Yet the statute says the legal rate of interest in this State is $6.00 for the use of $100.00 for one year "and every excess over that rate is usury." T.C.A. 47-14-lOfi, 104. When the first loan was made the debtor was entitled to the use of $72.00 for one year. He was charged $4.32 interest. When the loan was "flipped" at the end of one month, however, he was again charged interest on $08.06 of the original $72.00. Six per cent interest on $72.00 for one month (deducted in advance) is $0.36.~ Yet the debtor was given no rebate for interest when the loan was "flipped." A period of one and one-half months intervened between the "flipping" of the second and third loans. The second note is for $378.00, interest charged is $34.02 for an eighteen-month period. Interest on $378.00 for one and one-half months is $2.84. Again the debtor was given no rebate when the loan was "flipped." The third note is for $552.00, interest charged is $66.24. A period of approxi- mately five months* intervened between the third and fourth loan. Interest on $552.00 for five months is $13.80. Again the debtor was given no rebate for interest when the loan was flipped. The fourth note is for $672.00, interest charged is $80.64. A period of approxi- mately three and one-half months intervened between the fourth and fifth loans. The belief held by many that loan companies in Tennessee charge only six percent interest is a mistaken one. What is overlooked is that they are permitted to deduct interest In advance on the face amount of the loan for the full term thereof. 4 As heretofore pointed out, T.C.A. 45-2007 (f) authorizes imiustrial loan and thrift companies to deduct interest in advance on the face amount of the loan for the full term thereof. T.C.A. 45-2007 (f). PAGENO="0384" 966 CONSUMER CREDIT PROTECTION ACT Interest on $672.00 for three and one-half months is $11.76. Again the debtor was given no rebate when the loan was "flipped." The fifth note is for $2952.00, interest charged is $531.36. Although the fourth loan had some 21 months yet to run and interest had been charged for that period, the debtor was given no rebate for interest. Had new loans been made instead of "flipping" the prior loans Merit could not have charged ibterest on the old loan, e.g., the second loan would have been for $203.11 plus legal charges, which total considerably less than the $378.00 note executed by the debtor. The same is true of the other loans. When the third loan was "flipped" the debtor received only $9.89; the face amount of the note was increased however from $552.00 to $672.00 even though the debtor had repaid $44.85 on the third loan. The reason for "flipping" the loans is obvious. It is my conclusion that Merit "flipped" the loans so that it could again collect interest (and investigation charges) on the old balances even though interest (and investigation charges) had already been imposed. Does such practice con- stitute usury under the Tennessee statute and decisions? If the transaction is intended as a device to evade the statute, it constitutes usury. Na~shville Bank v. Hays, 9 Tenn. 243; Lawrence v. Morrison, 9 Tenn. 444; Weatherhead v. Boyers, 15 Tenn. 545; Turney v. state Bank, 24 Tenn. 467; Doak v. S~napp, 41 Tenn. 180. When the facts are made to appear, no scheme or device to avoid application of usury statutes, regardless of how ingenious or intricate scheme or device may be, will permit anyone guilty of participating in a usurious transaction to escape its consequences, and consent or cooperation of one paying the usurious interest is immaterial. Providence A.M.B. Church v. Sauer, 45 Tenn. App. 287. In determining whether or not a given transaction is usurious, the court will disregard form and look to substance. ". . . it is not to be tolerated for men to do indirectly what they are forbidden to do directly, the courts of justice have always stripped the transaction of its guise, and pronounced upon it according as the intention may be spelled out." Weat her! ord v. Boyers, 15 Tenn. 545,563. Any method through which usurious rate may be obtained is violation of law. Dowler v. Georgia Bnterprises, 162 Penn. 59. In Cobb v. Puckett, Tenn. App. ,Judge Parrott labeled the prac- tice by loan compt~nies of charging investigation foes where no investigations are made and charging for insurance premiums without the knowledge of the borrower as "one step removed from pickpocketing and larcency." An intention to violate the law, as a necessary element of usury, may be implied if other elements are present. Jenkins v. Dugger, 96 F. 2d 727. It is my conclusion that the "flipping" of loans in the transactions under con- sideration was a plan or scheme to enable Merit to obtain an excess over the legal rate of interest. The consent or cooperation of the debtor is immaterial. The transaction is a continued one; although new advances were made and new instruments were executed, each note refers to the previous one. INVESTIGATION CHARGES Tennessee Code Annotated 45-2007(i) authorizes industrial loan and thrift companies- "To charge for services rendered and expenses incurred in connection with investigating the moral and financial standing of the applicant, security for the loan, investigation of titles and other expenses incurred in connection with the closing of any loan an amount not to exceed four dollars ($4.00) per each one hundred dollars ($100) of the principal amount loaned, and a proportionate amount for any greater or lesser amount loaned, provided no charge shall be collected unless a loan shall have been made." Merit's records filed in this proceeding indicate the fàllowing charges for investigation: Loan No. Amount of Investigation note charge 63-235 $72 $2.88 63-337 378 15.12 63-483 552 22.08 63-1074 672 26.88 63-1396 2,952 118.08 PAGENO="0385" CONSUMER CREDIT PROTECTION ACT 967 It will be noted that Merit in each instance deducted a flat 4% investIgation charge. Is Merit entitled to these charges? In Cobb v. PucI&ett supra, the loan company deducted a 4% investigation charge for 19 loans within a period of some four years. The loan company manager testified be could not say what expenses, if any, bad been incurred in checking the credit of the complainant. The court allowed the first investigation charge of $1.92 but disallowed all others. At the hearing on Merit's claim In this proceeding the loan company introduced no proof in support of its charges for investigation. Under the statute it would be entitled to reimbursertient for actual expenses incurred in connection with its investigation, assuming, of course, that some expense was incurred. In my opinion the statute does not authorize a flat 4% fee to be deducted from every loan made, regardless of whether any investigation expense is incurred. The purpose of the statute is to reimburse the lender for actual expenses incurred, not to authorize collection of addition interest. It will also be noted from an examination of Merit's note that the 4% Investiga- tion fee has been been charged on the face amount of the nate which Includes the amount of the loan, insurance premiums, interest and the investigation fee itself. The statute authorizes a charge "not to exceed four dollars ($4.00) per each one hundred dollars ($100) of the principal adnount loaned." (Underscoring added.) This raises the question of whether Merit's instrument is usurious on its face and therefore unenforceable. White v. Kaminsky, 196 Penn. 180, 185.6 It does not appear necessary at this time to determine this question, however. Merit's claim will be allowed in an amount equitable to the parties involved. Although Merit failed to show that it incurred any expense in investigating the debtor's moral and financial standing, security for the loan, etc., when given a opportunity to do so, Its first investigation charge will be allowed in accordance with Cobb V. Puckett, supra. All other investigation charges will be disallowed. It must be rememibered that the burden of proof Is upon Merit to show to the satisfaction of the court that its claim is free from usury and all unauthorized charges. General Order 55(4). Merit failed to carry this burden of proof and in fact introduced no proof whatsoever in support of any investigation charge. INSURANCE PREMIUMS Tennessee Code Annotated 45-2007(k) authorizes industrial loan and thrift companies to require at the expense of the borrower, insurance against the hazards to which the collateral used to secure the loan is subject, and upon failure of the borrower to supply suck insurance, to procure the same. It further authorizes them to accept, but not reqwire, as collateral, insurance against the hazards of death or disability of a borrower. Merit's records indicate the following charges for insurance premiums: Loan No. Premiums charged ~ Rebates when loan "flipped" Net premi- ums'charged 63-235 $5.76 $4.94 $0.82 63-337 54.69 45.58 9.11 63-483 85.56 56.72 28.84 63-1074 104.16 79.90 24.26 63-1396 634.68 634.68 1 This does not include interest and investigation fee charged on insurance premiums. No part of such charges was rebated when the loans were flipped. Mr. John N. Culvahouse issued the life and accident and health and property insurance policies as agent for American Bankers Insurance Company of Florida. Mr. Culvahouse is manager of Merit Finance Company. Apparently the debtor was given one or more certificates along with various other documents when the loans were negotiated. The certificates refer to a "master policy" but the debtor 8 When the provisions of the note and trust deed are construed as a single instrument ($531.36 interest added Into the face amount of the note, 6% additional interest provided for in the deed of trust) the transaction is not only usurious but the usury appears on the face of the instrument, See Braniff Invest. (.10. V. Robertson, 124 Texas 524, 81 SW (2d) 45, 83-340--67-Pt. 2-25 PAGENO="0386" 968 CONSUMItR CREDIT PROTECTION ACT was not given a copy of the master policy nor was one filed with the court. When questioned by the court concerning the insurance, the debtor testified: "To tell you the truth I didn't know anything about it." The debtor signed a so-called "Insurance Authorization" in which he purport- edly made application to the insurance company, declaring that "the purchase (of insurance) is entirely voluntary and has not been made compulsory by the cred- itor." It is my conc~usion however that the debtor signed the insurance applica- tions without knowledge of their contents, just as he signed all documents placed in front of him. His testimony that the signing "was right fast and right quick" aptly describes the transactions in which the debtor signed financing statements, security agreements, deed of trusts, insurance applications, and possibly other forms, many in triplicate. This conclusion i~ fully Supported by an examination of one of the documents signed by the debtor. I refer to the so-called deed of trust on his home. This incredible instrument (Ex. 1) provides that a vendor (not otherwise identified in the instrument) for the consideration of $200.00 contracts and agrees to sell to a purchaser (also not identified) certain real estate which in fact is the debtor's home. This instrument further recites a sale price of $7750.00 payable in monthly installments of $90.22 each. Mr. Culvahouse testified that certain language was copied inadvertently from another instrument when this so-called trust deed was prepared. This instrument as well as all other instruments was prepared in the loan company office. The trust deed further provides that the debtor is indebted to Merit in the sum of $2952.00 payable in 36 monthly installments of $82.00 each, "with interest thereon from date at 6 per cent per annum." A~ heretofore stated, interest amounting to $531.36 had already been added into the $2952.00 note. Again, Mr. Culvahouse testified that the inclusion of interest in the trust deed was a mistake. Yet this is one of the instruments the loan company would have the court believe was signed by the debtor with full knowledge of its contents. These may have been mistakes but clearly it shows that the debtor was signing all instruments placed in front of him `by the loan company officials, including an instrument With provisions that even the loan company officials now say are erroneous, without having the slightest knowledge of what he was signing. Merit's officials testified that the loan in this instance was handled exactly in the same manner as all other loans. I am sure this is true. A review of some nine claims filed by Merit in Chapter XIII proceedings now pending in this court indi- cates that in every instance life and accident and health insurance premiums have been included, as well as a fiat 4 per cent investigation charge, plus interest thereon. In my opinion, the "tie-in" sale of credit insurance in connection with small loan transactions is being used to evade the statutory limitations on the costs of the loan.6 The practice followed by Merit is the same practice followed by most, if not all, loan companies in this area. In most instances, if not all, the lenders are profiting by the transactions in that there are "adjustments" between the lender and the insurance company of the premiums charged, if not an actual re- tention by the company of a part of the premium. In the case before the court, Mr. Culvahouse, manager of Merit, testified that at the end of the year "so much per cent" of the Insurance premiums was returned to Merit's home office by the insurance company. Thus it is clear that Merit is profiting from the insuranne transactions. It is my conclusion that all insurance charges must be stricken from Merit's claim, as well as all interest and investigation fees charged thereon. The life and aocident and health insurance policies were issued by Merit without the debtor's consent. This is in violation of the Tennessee statute. T.C.A. 47-2007(k). There is no proof in this record that the debtor was given an opportunity to obtain prop- erty insurance which a loan company can require, providing the coverage bears a reasonable relation to the existing hazard or risk of loss. Instead Merit's man- ager, as agent for the insurance company, issued all policies in question. In Hagler V. American Road Insurance Company and Ford Motor Credit Com- pany, Tenn. App. -~----~----, the same individual represented both the credit company and the insi~trance company. In that case Chancellor Phillips (Sullivan County Chancery Court at Bristol) found that the plaintiff had been required to pay $367.00 for an `automobile insurance policy "but in addition thereto was 6 For an ezcellent discussion and history of tie-in sales of credit insurance in connection with sm~l1 loan transa~t1ons, see In the Matter of Richards, Bk. No. 63-1324, Dist. of Maine, opinion of Reftaee PoulOs. PAGENO="0387" Ct~NS1J~ C~t~1T ~i11I~fl~ ~ gouged for another $43.50 for a life insurance policy which he did not have any k:nowledge of or know anything about." The Chancellor found that the credit company official played a dual role of conflicting interest when he represented with one hand the credit company and with the other the insurance company. The Chancellor's findings leave no doubt as to his conclusion in the matter: "The Court has tried many cases that would shock the conscience of the Court. This Court is brought to realize that a situation exists where an overreaching, usurious, unlawful, scheme and plan and design by a right hand and a left hand working in collusion and scheming for the purpose of defrauding and deceiving and taking money away from unsuspecting persons in an unlawful, inequitable and unconscionable manner, so as to be a public outrage ot decent principles of banking and financing in the business world. `The Court, therefore, brands the entire transaction one that smells with frtnid, deceit, overreaching, deception and unlawful financing. The very fact that the same man undertakes to represent two masters constitutes a badge of fraud on its face." [Italic added.I Upon appeal, the Court of Appeals affirmed. Judge Parrott, expressing the unanimous opinion of the Court, quoted the findings of the Chancellor in this regard and stated that be could see how his conscience was' shocked. Judge Parrott pointed out that the finance charges and insurance policies were ar- ranged for by the same person who turned out to be the manager of the finance company `as' well as the agent for the insurance company. "In our opinion, to permit such a dual agency on the part of these defendants creates a bad situation. If such is not a violation of the law it is a practice which could only lead to trouble and misunderstanding and presents a breeding ground for fr'aud." Thus in Tennessee a court of equity has held that when the same man under- takes to represent two masters, a loan co'mpany on one hand and an insurance company on the other, the transaction is fraudulent on its face. In Cobb v. Puckett, supra, the complainant sued the defendants to recover alleged usury paid to them under a series of notes. Defendants were operating under the Industrial Loan and Thrift Act and had collected some $176.30 insur- ance premiums when a loan in the original amount of $4800 had been "flipped" some eighteen times. Chancellor Brock (Chancery Court of Hamilton County) found that the premiums charged for life insurance and accident and health insurance constituted usury since the defendant required complainant to pur- chase such insurance, contrary to T.C.A., Sec. 45-2007(k). The Chancellor pointed out that while the law permits' such insurance to be purchased at the request of the borro'wer. it expressly prohibits the lender from requiring such insurance. Chancellor Brock found that Cobb did not request such insurance and held that the insurance premiums deducted constituted usury. Chancellor' Brock no't only entered a judgment in favo'r of complainant for the usurious insurance pre- miums deducted but awarded him punitive damages in the' sum of $500.00. Upon appeal the Court of Appeals affirmed, stating: "We are in accord with the Chancellor that the repeated charges of an investi- gation fee and the charges for the insurance premiums which the plaintiff had not requested were designed to conceal and secure excessive charges for the use of the money." The cou'rt quoted the Supreme Court o'f Tennessee, Mallory v. Columbia Mort- qage and Trust Company, 150 Penn. 219, as follows: "In determining whether or no't a given transaction is tainted with usury it is generally held `that the co'urt will disregard the' form and look to the substance. Good faith is the decisive factor when compensation is exacted and received by an intermediary (lender) in addition to the legal rate." Although all insurance charges deducted by Merit will be stricken, the debtor will be required to furnish Merit, within ten days, insurance against the hazards to which its collateral is subject. This coverage will be obtainad from an insur- ance carrier of the debtor's own choosing. JURISDICTION OF BANE1~UPTCY COURT Courts of bankruptcy are essentially courts of equity and their proceedings inherently proceedings in equity. Local Loan Co. v. Hunt 292 U.S. 234. In the exercise of equitable jurisdiction the bankruptcy court has the power to sift the circumstances surrounding any claim to see that injustice or unfairness is not PAGENO="0388" 97I~P co~sc~rn~ri~ ~ done in the admjnistra'tion of the bankrupt estate. Popper v Litton, 308 U.S. 295. As pointed out by Mr. Justice Douglas in that case- "Courts of bankruptcy are constituted by sections 1 and 2 of the Bankruptcy Act (30 Stat. 544) and by the latter section are invested "with such jurisdic- tion at law and in equity as will enable them to exercise original jurisdiction in bankruptcy proceedings." Consequently this Court has held that for many pur- poses "courts of bankruptcy are essentially courts of equity, and their pro- ceedings inherently proceedings in equity." Local Loan Co. v, Hunt, 292 U.S. 234, 240. By virtue of section 2 a bankruptcy court is a court of equity at least in the sense that in the exercise of the jurisdiction conferred upon it by the Act, it applies the principles and rules of equity jurisprudence. Larson v. First State Bank, 21 F. 2d 936, 938. Among the granted powers are the allowance and disallowance of claims; the collection and distribution of the estates of bank- rupts and the determination of controversies in relation thereto; the rejection in whole or in part "according to the equities of the case" of claims previously allowed; and the entering of such judgments "as may be necessary for the en- forcement of the provisions" of the Act. In such respects the jurisdiction of the bankruptcy court is exclusive of all other courts. United States Fidelity ~ Guar- anty Co. v. Bray, 225 U.S. 205, 217. "The bankruptcy courts have exercised these equitable powers in passing on a wide range of problems arising out of the administration of bankrupt es- tates. They have been invoked to the end that fraud will not prevail, that sub- stance will not give way to form, that technical considerations will not pre- vent substantial justice from being done. By reason of the express provisions of section 2 these equitable powers are to be exercised on the allowance of claims, a conclusion which is fortified by section 57 (k) ." General Order 55(4) requiring claimants when the claim is based upon the loan of money to establish that the claim Is free from usury has already been referred to. Also, Sec. 656(b) of Chapter XIII (11 USC 1056(b)) places the un- mistakable duty upon the court to require proof from each creditor filing a claim that such claim is free from usury. The purpose of Chapter XIII proceedings is to aid those wage earners of limited means who wish to avoid straight bankruptcy and who desire to liquidate their debts out of future earnings through the medium of Federal Courts. If rehabilitation of the wage earner under Chapter XIII is to be effective, be must be relieved of obligations which he has been induced to undertake through fraud or other unlawful means, or which by their terms are illegal. To aid in attain- ing this objective, Congress has provided that every creditor asserting a claim against a wage earner must prove that his claim is not usurious. Sec. 656(b) General Order 55(4). CONCLUSIONS (1) Burden of Proof. In a Chapter XIII proceeding, when a claim is based upon the loan o~ money, the creditor must show to the satisfaction of the court that the claim Is free from usury and all illegal charges. Sec. 656(b) Bank- ruptcy Act (11 U.S.C. 1056(b)) ; General Order 55(4). (2) Interest-"Flipping of Loans." Merit "flipped" the loans under consid- eration for the purpose of obtaining an excess over the legal rate of interest. T.C.A. 47-14-104. Providence A.M.E. Church v. Sauer, supra; Weath~erhead v. Boyers, supra. (3) Insurance Prcmfums. (a) The debtor did not request life or accident or health insurance. The issuance of such policies by Merit is contrary to the provisions of the statute. T.C.A. 45-2007(k) ; Cobb v. Puckett, supra. (b) All insurance policies (life and accident and health and property) were issued by Merit's manager acting in a dual role of a conflicting interest. Hagler v. American Road Insurance Company and Ford Motor Credit Co., supra. (c) The debtor was not given an opportunity to supply Merit with prop- erty insurance. Merit can require Insurance against the hazards to which its collateral is subject only upon failure of the borrower to supply such insurance. T.C.A. 45-2007(k). The debtor will be given an opportunity to supply such insurance from an insurance carrier of his own selection. (4) Investigation Charges. Merit submitted no proof that it incurred any ex- pense in investigating the moral and financial standing of the applicant, security PAGENO="0389" CONSIJMER CREDIT PROTECTION ACT 971 for the loan, etc. T.O.A. 45-2007(1). These charges, other than the charge for the first loan, must be disallowed. Cobb v. Puokett, supra. (5) Merit's claim will be allowed as follews: Loan No. Principal allowed Investigation fee Interest Total 63-235 63-337 63-483 63-1074 63-1396 I $59. 04 2206.11 150. 70 49.89 1 126. 28 $2. 88 $3. 54 (12 months) 18. 54 (18 months) 18. 08 (24 months) 1.18(24months) 202.68 (36 months) $65. 46 224.65 168. 78 11.07 1, 328. 96 Total Less payments made by debtor 1,798.92 287. 85 Claim allowed 1, 511. 07 I Cash received by debtor. 2 $95.11 cash; $108 payment to Franklin Loan; $3 recording fees. $149.70 cash; $1 recording fees. Cash received by debtor. 5 $10.28 cash; $1,044 payment to City Finance; $72 payment to Consolidated Credit. (6) From this computation it will be noted that interest has been allowed on the principal amount loaned. Merit contends that it is entitled to deduct in- terest on the face amount of the note which includes interest. No brief has been submitted on this point, however. If Merit is mistaken in this position, its in- strument is usurious on its face and therefore unenforceable, White v. Kaminsky, supra. Also, Merit charged interest on investigation fees and such fact appears on the face of the instrument. T.C.A. 45-2007(i) authorizes an investigation fee not to exceed 4 per cent on the "principal amount loaned." This also raises the question of the instrument being usurious on its face and therefore unenforceable. No determination of this question appears necessary at this time. Merit's claim is allowed in an amount deemed equitable to the parties involved; the money advanced by Merit will be repaid in full with interest. ORDER At Knoxville, Tennessee, in said district, on the 8 day of June, 19G6. In accordance with' the foregoing findings of fact and conclusions of law, it is ORDERED, that claim No. 5, filed by Merit Finance Company on the 9 daty of March, 196l~l, be, and the same hereby is, alloweid as a secnred claim in the amonnt of $1,511.0~'. OLIVE W. BARE, Referee in Bankruptcy. IN THE COURT OF APPEALS OF TENNESSEE, EASTERN SECTION JULIUS C. Coun, COMPLAINANT-APPELLEE, VS. PAUL E. PUCKETT, ET AL., DItFENDANT-APPRLLANP From the Chancery Court for Hamilton County-Honorable Ray L. Brock, Jr., Chancellor AFFIRMED Wood & Wood of Chattanooga for Julius 0. Cobb. Eugene N. Collins of Chattanooga for Paul El. Puckett, et al. OPINION Parrott, (J.) Julius 0. Cobb filed the bill in `this case against the in~1ivi'dually named de- fendants and their partnership company which is engaged in the small loan busi- PAGENO="0390" 972 CONSUMER CREDIT PROTECTION ACT ness in Chattanooga, operating under the Industrial Loan & Thrift Act, to recover alleged usury and overcharges. The Chancellor, in a well-written and comprehensive opinion, awarded and the defendant a judgment in the amount of $114.36 for usury and overcharges and $500.00 punitive damages. The original loan in question was made on April 23, 1960, with the complainant receiving $38.98 and signing a note in the amount of $48.00 and giving a chattel mortgage on a General Electric television set. On this transaction he was charged $1.00 for life insurance, $2.50 for fire insurance, $2.88 for accident and health insurance, $1.92 for investigation fee, and 72 cents interest. From the date of the original note until February 1, 1964, this note was renewed or "flipped" eighteen different times [see attached chart]. On each occasion com- plainant was charged similar fees as on the first note. On various of these transactions, a~ shown by the chart, he was given refunds on insurance and interest. A computation of all the transactions shows the complainant has re- ceived $442.9s ~rom the loans and has paid a total of $653.00 which includes $19.00 life insurance, $61.78 fire insurance, $95.22 accident and health insurance, $63.68 investIgation fees, $31.36 interest and has received a total in refunds of $21.82. Of the above mentioned charges, the Chancellor found the defendant was justified in charging the fir,st investigation fee of $1.92 but the remaining inves- tigation fees of $61.76 bore no reasonable relation to the expenses and services of the lender. He further found the borrower had made no request for life insurance, accident and health insurance and such insurance was purchased by the defendant without complainant's knowledge. After giving credit for the refunds on the life and accident and health insur- ance, the Chancellor found there was an overcharging of $108.80 of insurance premiums. This amount plus the $61.76 overcharge on investigation fees totals $170.56. After deducting $56.20, the amount owed by complainant on the last note, a judgment of $114.36 for usury and overcharges was entered plus $500.00 for punitive damages. Defendants in this appeal insist the Industrial Loan & Thrift Act does not vest a right of action in a borrower but is regulatory in nature and only vests police powers in the Department of Insurance and Banking. This question is not raised by any of the pleadings and it appears it was not called to the attention or decided by the Chancellor. Hence, this Court could ignore the issue. Since this appears to be the first `time this' question has been raised in the appellate courts, in an effort to avoid future couttoversy, we deem it proper for us to respond. In other cases hwolving this same act, this Court has as;s'umed the borrower had a cause of actioi~ for charges in excess of those provided by the act. We are of the opinion this poisition is' sound and now do so hold. The legal intent and purpose of the Industrial Loan & Thrift Act and the Small Loan Act are the same. It is true both acts are regulatory in nature but neither precludes a borrower from bringing a suit for charges of fees, interest and insurance premium which are in exces~ of those provided for in the act. Our Supreme Court, in discu,sising the purpose and intent of the Small Loan Act in the case of Family Loan Co. v. Hickerson, 73 S.W. 2d 694, at page 607, said: "As held in Personal Finance Co. v. Hammack, 163 Teirn. 645, 45 S.W. 2d 528, the act is regulatory. The purpose was' to impose restraint on tho'se engaged in dealing with impecunious borrowers, by regulating the maximum that could be charged and by providing penalties' and forfeitures for exceeding the maximum. By the adoption of this regulatory statute the Legislature conferred no right upon lenders operating under it to exact more as compensation for the use of money than otheEs are permitted to receive and collect. Whether the contract between the borrower and lender was designed to evade law;s that forbid usury is always a question of fact determinable by inquiry into the particular transac- tion. Extraneous charges and expenses cannot be added. It is the rule repeatedly expressed in the actions~ involving claims for usury that the courts disregard form and look to the substance. McWhite v. State, 143 Tenn. 222, 226 S.W. 542." We think the court's reasoning in the Hickerson case is applicable to the In- clustrial Loan & Thrift Act. If the Legislature had intended to preclude actions by the borrower for overcharges, it would have said so in the act. PAGENO="0391" CONSUMER CRJ~DIT PROTECTION ACT 973 Defendant also insists the Chancellor erred in holding the complainant was overcharged or did not know he was' being charged with life, accident and health insurance. We reject this insistence and concur with the Chancellor. The complainant testified be had no knowledge of being charged with insurance premium's except the fire insurance and be wais never given any policies. lf'rom the proof as a whole, it appears that as a matter of course the defendant included these in- surance premiums on all loans. Defendant also challenges' the Chancellor's holding on the investigation fees. As pointed out by the Chanoellor, the defendant's manager testified he could not say what expenses, if any, had been incurred in checking th'e credit o~ the com- plainant. With the frequency and regularity with which these loans were "flipped," we doub't if the defendant had sufficient time to make an investigation on each loan. We are' in accord with the Chancellor that the repeated charge's of an Investi- gation fee and the charges for the insurance premiums which the plaintiff had not requested were designed to conceal and to' secure excessive charges for the use of the money. Our Supreme Court, in the case of Mallory v. Columbia Mortgage & Trust Co., 150 Tenn. 219, said: "In determining whether o'r not a given transaction is tainted with usury it is generally held that the court will disregard the form `and look to the substance. Good faithS is the decisive factor when coni~pensatiO* is ecoacted and received by an intermediary [lender] in addition to the legal rate." In our opinion these charges are in no way expenses' incident to the making of the loan o'r d'o they bear a reasonable relation to the service extended by the lender. On the contrary, they are evidence that the lender did not deal with the borrower in good faith. Under Tennessee law where usury appears upon the face of an instrument, the obligation is unenforceable. White v. Kaminsky, 196 Tenn. 180, 264 S.W. 2d 813. If, however, usury does not appear upon the face of the contract, it is valid to the extent of the money loaned and lawful interest and voidable only as to the usurious excess and to this extent the court will enforce the contract. Bank v. Walter, 104 Tenn. 11, 558W. 301. `There being no usury on the face of these instruments, the Chancellor cor- rectly applied the latter rule by enforcing the contract and giving the respective parties credit due for all amounts within the contract. This brings us to the Chancellor's holding the defendants were liable for punitive damages. Our Supreme Court, in the case of Bryson v. Bramlett, 321 SW. 2d 555, reversed this court and held that a borrower may recover punitive damages from a money lender in acts involving fraud, malice, gross negligence, oppression or harassment. `The reason given for the allowance was to serve as an example or warning to the parties and to deter similar transactions. So. there seems no question that the Chancellor had the authority to award punitive damages. As to the amount of punitive damages, the case of Lichter v. Fuicher, 28 Tenn. App. 670, 125 `SW. 2d 501 at page 508 gives a clear and succinct statement: "Where the case is tried before the `Chancellor it is obvious that it is peculiarly within the discretion of the Chancellor as to how much, if any, punitive damages should be allowed. It is a matter of discretion which will not `be interfered with by this court. We know of no fixed rule which could guide this or any other court in fixing the amount of exemplary damages to `be awarded. And we know of no reason why we should substitute our judgment for the judgment of the Chancellor in this respect. `The fact that we have the latter say in the mattcr offers no reason for altering the decree entered, and we are not inclined to do so." We are of the opinion it is wrong for a lender of money to charge investigation fees when no investigations are made and to charge for insurance premiums without the knowledge of the borrower. `T'o do such on eighteen successive loans compounds these wrongs and is unconscionable-one step removed from pick- pocketing and larceny. `Such action is a gross display of bad faith on the part of the lender and justifies an award of punitive damages. After considering the entire record, we find the evidence preponderates in favor of the `Chancellor's decree and there was no a'buse of discretion on the part of the Chancellor in a'warding punitive damages. PAGENO="0392" 00 ~J20 ~ 0~ CD C) ~ C) ~ p -. CD -4 ~-4 C) ni -u ~ C) 0 c:1~ FP P -4 ~ 00000000 ~ ~ 0000(0 (000 00 C) C) N) N) 00 N)1\) C) N) C) N) N)00 ~ 0000 t it ~ e-~- pCI) CD ~ CD ~+ 0 4 ~CD 1 ~` CD C) CD CD 4 e+ I CD I p ~I CD 0 4 Ci) C 0> 4- -1 ~ 0> PAGENO="0393" CONSUMER CREDIT PROTECTI~ ACT 975 While the average amount of liability was approximately $2,900 each, it is interesting to examine 20 of the eases (10 per cent), *whet~e a very small amount of debt was shown in the bankruptcy schedule: Liabilities Amount Secured Unsecured Annual income 1 2 3 4 5 6 7 8 $533.00 $533.00 299.13 0 572.50 0 525. 20 0 369. 05 0 364.00 0 365.00 264.00 607.86 299.25 0 299.13 572.00 525. 00 369. 05 364.00 101.00 208.61 $1,000 1,000 2,800 (1) 2, 000 2,250 5,800 700 9 10 11 12 13 728.00 0 561.00 561.00 340.13 120.65 296.15 289.00 446.00 413.00 728.00 0 219.48 47.15 33.00 1,200 2,288 2,458 3,200 720 14 352.00 218.00 89.00 730 15 16 17 659.00 523.00 576.00 152.00 370.00 110.00 136.00 424.00 260.00 2,750 3,000 500 18 19 20 674.00 10.00 495.00 280.00 668. 75 120. 00 664.00 215.00 548. 75 2,100 2,300 2, 100 Total 9, 801. 77 3, 992. 90 5, 803. 17 38, 896 I Unknown. When court costs and fees are considered, it would appear that in some cases the creditors could have been paid about as easily `as the costs. It should be pointed out that in some cases a pauper's oath is filed in payment of costs in these cases. The following study was made to determine if perhaps some of those filing petitions might have avoided `doing so if they had bad the proper guidance from their creditors; their employers; their attorneys, or from the court. Amount of liability Number of petitions Percent Less than $1,000 - $1,000 to $2,000' $2,000 to $3,000 $3,000 to $4,000 $4,000 to $5,000 Over $5,000 39 73 36 19 7 26 19. 5 36. 5 18. 0 9. 5 3. 5 13.0 156 percent. For the purpose of trying to determine if there is any relation between the type of creditors being listed in bankruptcy petitions and the type of creditors filing suits in the sessions court, a study of 10,209 suits filed during the 12-month period ending in April 19t~0 was made and the following facts charted: Type of creditor suing Number of suits filed Pe rcent of total Total amount of suits Average size of suit Medical Loan and finace Clothing Furnitureand appliance Automotive Food Jewelry All other 3, 632 2, 624 2, 609 1,917 1, 556 854 694 2, 323 22. 5 16. 2 16. 1 11.8 9. 6 5.2 4.3 14. 3 $217, 794. 88 371, 108. 89 163, 051. 24 279,238.09 143, 957. 76 41,506.89 49, 137.00 373, 270. 00 $59. 96 142. 60 62. 49 145.66 92. 51 48.60 70. 80 160. 69 Total 16, 209 100% 1, 642, 064. 75 PAGENO="0394" 976 CONSUMER CREDIT PROTECTION ACT A comparison of the two charts showing the percentage `of those listed in bankruptcy sehecbiles and those filing suits in sessions court is as follows: Type of creditor Percent of suits filed Percent of listings in bankruptcy Medical 22.5 22.3 Loan and finance 16.2 19.6 Clothing Furniture and appliance Automotive 16.1 11.8 9.6 11.7 11.4 9.5 Food 5.2 6.2 Jewelry All others 4.3 14. 3 3.4 15. 9 Total 100.0 100.0 The bankruptcy law is being badly abused in Chattanooga and many pers'ons are recklessly filing petitions with little or no regard to the serious moral and financial consequences of their future. This i's reported in a study made by the Retail Credit Men's Association a summary of which was released for publication. George W. Lundy, manager `of the credit bureau, explained that because of the up'war'd trend in bankruptcies `being filed in this federal district and the wide publicity being given to this "unfortunate" situation the president of the `association appointed a committee to make a study of the matter for the benefit of its members. The committee is composed of C. R. Belcher, president, Citizens Savings' & Loan Corp.; R. B. Br'otheck, credit manager, Mil]er Bros. `Co.; Walter P. C'oppedge, senior vice president of the American National Bank and Trust Co.; Leslie L. Hudson, vi'ce president, Johnson Tire Co. and president `of the association, Lundy, secretary of the association and cre'dit bureau manager, and Johni Parry, vice p'r'e'sident of Fowler Bros. `Co. These persons represent a cro'ss~section o'f the credit grantors in the com- munity, Lundy pointed out. The purpose of the study was to' determine the causes of the increase in the number of cases being filed and to learn why, in a period of relatively low unemployment `and high pro'spe'rity, bankruptcies wer'e not `decreas'i~ng, as it would normally appear they should, he continued. A table given in the report analyzes a total of 200 bankrup'tcy petitions involving total liabilities of $585,270.33 and 3,368 creditors. In first p'la'ce were niedi'cal creditors numbering 770, o'r 22.3 per cent of the total. The average account wa's $80.68 and the total amount $62,124.81. Second in number but first in dollars and cents involved were 657 finance companies list- ing a total of $239,048.90, or an aver'age' `of $363.85. Another table shows that of 20 petitions the average amount of liability per petiti'o'ner `was $2,900, but that 10 percen't of the cases' showed only a small amount of debt ranging from $299.13 to $728. Another table show's that 56 per cent of t'he 200 petitions were for more than $2,000 each.. Thirty-nine bad liabilities of less than $1,000 and 78 o'w'e'd from $1,000 to $2,000 each. MEDICAL CREDITORS StIR A fourth table showed that `of creditors in sessions court, the lai~gest num- ber-3,632-----or 22.5 p'er cent of a total of 16,209, invo'lved medical creditors. The total amo'unt of suits was $217,794.88 of an ave'rage medical sui't of $59.96. `Second in numbe'i~ of suits and first in `amount involved were' those of loan and finance conipa'nieis with 2,624 suits' for $374,108.89 or an average of $142.60. A fifth table compares suits filed in sessions court with listings in bankruptcy. Medic'al suits represented 22.5 of the total and me'di'cal listings in bankruptcy were 22.3 p'er ce'nt, while 16.2 `per cent o'f `the suits listings finance companies accounted for 19.6 per cent of the bankruptcy listings. "It is difficult to understand why more `peo'p'le are see'king relief from de'bts during times when pers'o'nal `savings are at an all~time hig'h figure, when sav- ings an:d loan associations report the highest amount of s'hare accounts, in the hi'story o'f such institution's, when wages and salaries' are at a high level, PAGENO="0395" CONSUMER CREDIT PROTECTION ACT. 977 when fewer people are unemployed than average, when more people have more life insurance savings and when more people own or are buying their homes," Lundy said. MANY PHASES C0NSInEREn "Many phases of the dilemma were considered by the committee. First, they asked themselves: Has the sysitem and the machinery of cions'umer credit broken down? Are `credit grantors too lax in the manner they extend credit or is it the fault of the people Who do the buying? Is John Q. Public, after all, as honest as we have been assuming he is? "Is the manner of exchanging credit information thr~ugh the credit bureau adequate `or does the' fault lie in the fact that enough credit information is available to avoid getting these defaulters on the books but no heed is paid to the information that is available? Do credit grantors rely too strongly on the fact that if a person does no't pay you can `sue him? Are too many suits being filed? Is our Tennessee garnishment law too severe? "Should the garnh~hment law be repealed and credit be extended on the basis of the debtor's established willingness to p'ay, rather than as now on the creditor's ability to sue and force payment? "If it is the fault of those extending credit, then which group of credit grantors is most guilty of leading o'r influencing people to go int'o' bankruptcy? Is it the butcher, the baker, or the candle stick maker; the' clothing merchant; the jeweler; the grocer; the automobile dealer; the doctor; the' loan and finance company; the furniture store; the' banker, etc. "Second, the question was asked as to whether any fault could be laid in the mechanics of obtaining a disrc'harge in bankruptcy. Do attorneys' simply file petitions because a client or prospective client asks them to do so, or do they counsel with the client `and seek always to advi'se him of the entire con- sequences of bankruptcy, and offer some alternate p'lan of relief? COMPREHENSIVE STUDY "Third, many questions were raised ab'out the person bankrupting. He is the person who was the beneficiary of the goods or services purchased. He is the person, after all, who made the de'bt and it is he the creditor's were looking to for payment. He is the person who the re's't of his life will be called upon to `explain' each time he asks s'o'meone else to trust him in a financial transaction. "Here are s'ome of the questions the committee asked about him: How old is he? Is he married, divorced or single? Does he have a large or a small family? Has he ever bankrupted before? Is he employed? If so, how long has he been on the job? What was his' general credit rating before he bankrupted? Do women bankrupt too? "Why did he elect to `throw in the towel' rather than to suffer the' inconven- iences and discomforts of meeting his obligations when the going got rough? Are there Sometimes' moral `implications' involved in personal bankruptcy? Does modern advertising create s'uch a strong desire in him for the finer things of life and modern sales and credit plans make it so easy for him to get these finer things., that he is unable to resist `biting off more than he c'an chew? "It was the hope o'f the committee that th~ answers to many of these ques- tions might lead `to the answer of the one big question-why an increasing number of Ch'attanoogan,s-more so than in other adjoining communities-are bankrupting during a period of prosperity." "In art attempt to find thes'e answers 200 bankruptcy petitions filed here be- tween January 1059 and June 1960 were picked at random and examined in detail. He explained some of the facts revealed by `the'se court records have been rather startling `and have, the committee thinks, led to some conclusions it will be well to examine. Among these are the fact that 10'/2 per cent of them had bankrupted before. Sixty-one per cent of them ha'd p'o'o'r credit ratings during the period proceeding their bankruptcy, and 31 per cent had only fair credit ratings, while 8 per cent had good ratings. On the basis of this it would appear that either the peti- tiomiers were very `adept at getting credit or that credit managers and shop keepers were lax in letting their wares out on the cuff," it was stated. PAGENO="0396" 978 CO~'St1MER CREDIT PROTECTION ACT MOST ITAD JOBS "Normally, when ~ou think of some poor fellow being `forced' to go into bankruptcy you would assume the fellow was out of work, owed a lot of money, and bad a big family to feed." Lundy said. "The court records show practically all were working, and that on an average their earnings were greater during the year they bankrupted than they bad been during the preced- ing year. "Of the names on the petitions, the credit bureau had recently made reports on 108 of them. 1~'rom these reports it was learned that the average bankrupt had been on his job five years and nine months. These same reports show that persons with large families rarely ever bankrupt, and that the average petitioner had 1.48 dependents. Eighty~one per cent are married, 15 per cent are divorced, and 4 per cent are single. "An interesting statistic is the fact that 76.5 per cent of those filing are men and 23.5 per cent are women. Because the researching committee was surprised that approximately one person out of four bankrupting was a woman, it was decided that a search of the records 20 years ago would be made for comparison. In 1940 the ratio average was 83.3 per cent men and 11.7 per cent women, thus indicating that the percentage of women bankrupting, as compared to men, has about doubled in 20 years." The 200 petitions were filed by 63 of the approxImately 350 attorneys practic- ing locally, with 102 of them, or about 50 per cent being filed by nine attorne~Vs, the committee found. There were total liabilities, in the cases checked, amounting to $585,270.33. A detailed tabulation of all creditors listed in the schedules was made and distributed as `to type of creditor owed. CALLED SERIOUS After consideration of the disclosures of the survey and conferences with lead- ers in the consumer credit field, the committee said it came to the conclusion that the situation with regard to bankruptcy in the community has reached serious proportions. The seriousness of the situation lies not so much in the economic loss to cred- itors as it does in the breakdown or moral considerations of some of those bankrupting. "The committee takes no issue with the ba~krruptcy law," the report continues. "It is a good law, and serves a good purpose in our American economic system, and a vast majority of the bankruptcies are justifiable cases. On the other hand, there appears to be evidences of abuse of the intent of the law. It might even be said that in some cases the court is being used as a dumping ground-a place to discard debts the petitioner no longer has the moral stamina to pay, even though be might possess the physical means to do so. "Such conclusions as these raise the question as to who is responsible for the situation. It was concluded that the primary blame must rest on the abuser-he who comes into court with his problems. It was also concluded that there may be others who have unwittingly contributed to his delinquency. There are evi- dences of retailers making their wares too easy to obtain on credit. Some credit managers are often reluctant to say no when that word would be a kindness to the applicant who has demonstrated be is a poor manager of his financial affairs. "Those engaged i~ the lending `of money, while being `a friend in need' when they bail a person qut by consolidating his many debts into one, are sometimes inclined to allow a person to overload because they are secured on the trans- action. Some trades~nen appear inclined to extend credit more on the strength of the fact they can~ sue and garnishee than they would be were it not possible to enforce payment in this manner. "It appears to the committee that perhaps too many suits are being filed in our community and a close parallel is noted in that the groups filing the greatest number of suits are also the groups `being listed the greatest number of times in the bankruptcy schedules. It is unfortunate indeed that in spite of the large number of our citizens who `carry health insurance that the medical group is forced to resort to the courts to collect their fees in so many instances. It was noted in the survey that a majority of those bankrupting did so after having been sued. PAGENO="0397" CONSUMER CREDIT PROTECTION ACT 979 "The committee feel's that further study of our garnishment law should `be made, for there appears to be some relation between the number of suits filed and the number of bankruptcies filed. The fact that many persons bankruft soon after being sued is also a matter deserving further study. "It is the hope of the committee that the attorneys who file the petitions are now and that t'hey will continue to counsel their clients with reference to the stigma attached to `bankruptcy. It is hoped that attorneys are `taking full advantage of their o'ppo'rtunities to advise methods of setting debts in ways other than through bankruptcy, particularly so in those cases where the amount of debt appears to be so small. "The committee admits it has no knowledge of the technical responsibility, functions and discretionary powers of the bankruptcy court, nor has it employed counsel to advise it in such matters'. It relies solely in Webster's dictionary, the elementary edition, which defines a court as a place where justice is administered and on the o'ld concept that be who comes into court must come with clean hands. At least one case came to the attention of the committee where the petitioner, in its opinion, did not go into court with clean bands. It is regrettable that this should have happened. "Now as to those who obtain go'ods and services on their promise to pay at a later date and, because of `their inability or inconvenience to discharge the debt seek relief in bankruptcy court, the committee feels that in too many cases petitions are filed `because of poor advice or because they are mad at someone for suing them. "It appears from the records that many petitions have been filed when much less drastic solutions could have been found. It also would appear that some petitions have been filed simply because it `was an easy way out and these are the cases which appear `to Indicate moral `degradation. "In former years `bankruptcy was considered, except In unusual case's, a badge of dishonor and disgrace. Although today it has lost some of its stigma, it is still nonetheless, considered as strictly derogatory in appraising one's fitness for trust in financial matters. As has been stated, a vast majority of the cases of bankrnptèy are legitimate, but even so, many firms refuse credit solely on the basis of the fac't that the person has in some previous year bankrupted. Most mortgage companies will refuse to take applications for the financing of homes from persons who have bankrupted unless the failure was a long number of years ago and the person is able `to give a satisfactory explanation of the failure. Also, he must `show evidence of complete recovery, and even then it is difficult fo'r a former bankrupt to get a home financed. "The better class retailers' requirements are ajout the same. Even those who do extend credit to a former bankrupt do so wi'th a wary eye to the future, and the account is usually marked `wa'tch' unti'l sufficient experience is had to assure them the person is stable. They fear that 10 per cent who will bankrupt again. "Many persons have visited the credit bureau to see what can be done about get- ting that bankruptcy off my record. Their trip is in filed it becomes a part of their permanent record and remains with them `until death `do us part.' Many persons claim they were `forced' to' bankrupt, but that they have since paid off their debts, and some-very few-do. "What does happen is that they pay the company holding the mortgage on the car, otherwise they would have to give it up. They pay the note for borrowed money on which Uncle Joe is endorser, otherwise there would be a family `inci- dent.' They pay the mortgage on the furniture unless it is so worn out they think the loan and finance company would no't have it. They pay the installment on the TV, otherwise it goes back to the dealer. Very very few ever pay the doctor, the grocer, and the other unsecured creditors. "The committee conclude's with `the advice that bankruptcy is in many cases the only solution to a serious financial disaster, )u't that it is a most serious step for the person filing the petition. It l's something that, whether justifiable or not, will live to' haunt the bankrupt the rest of his life." (Mr. James E. Moriarty, referee in bankruptcy, TJ.S. District Court, Central District of `California, submitted the following material on the various codes in California and the bill introduced by Assembly- PAGENO="0398" 980 CONSUMER CREDIT PROTECTION ACT woman Yvonne t3rathwaite in the California Legislature pertaining to garnishment and other material relation to her bill:) CALIFORNIA FINANCIAL CODE Small Loans-Section 24000 et seq. Sections 24005 24410 24411 24412 24451 as amended 24452 a~ amended 24453 as amended 24454 24468 NOTES OF DECISIONS In general 3 Purpose 2 Validity 1 Library references Pawnbrokers and Money Lenders 3~3. O.J.S. Pawnbrokers § 4. 1. VaUdity The Small Loan~ Act exempting from its operation banks, trust companies, building and lean associations, industrial loan companies, credit tLnions, licensed pawnbrokers, nonprofit agricultural cooperatives, cOrporations loaning money pursuant to Agricultural Credit Act, bona flde conditional contracts of sale in- volving disposition of personal property when not used for purpose of evading the Act, licensed personal property brokers, and licensed real estate brokers does not deny "due process" and "equal protection" of law because it does not uniformly apply to all classes of lenders. Ex parte Fuller (1940) 102 P.2d 321, 15 C.2d 425. The Small Loan Act does not deny "due process" and "equal protection" of law because of fact that it applies only to loans of $300 or less. Id, 2. Purpose The purpose of this division was to forbid use of credit as a substitute for money in what would be usurious transactions if money were loaned directly. Master Charge v. Daugherty (1954) 267 P.2d 821, 123 C.A.2d 700. The purpose of legislation regulating the operations of persons procuring or making small loans is to protect the public from lenders who wonld otherwise take advantage of the needy. People v. Vanderpool (1942) 128 P.2d 513, 20 C.2d 746. ~. In general In action by notary against employer, a personal property broker and small loan agency, to recover notary fees, evidence that notary, under threat of dis- charge from employment, indorsed check for fees to which she was entitled under Personal Property Brokers Act and Small Loan Act to employees' association organized by employer, supported finding that employer exercised duress upon notary. Millsap v. National Funding Corp. (1944) 152 P.2d 634, 66 C.A.2d 658. § 24001. Definitions. Unless the context otherwise requires, the definitions given in this article govern the construction of this division. (Stats. 1951, c. 364, p. 1146, §24001.) Derivation: Stats. 1939, c. 1045, p. 2886, §2. § 24002. Broker. "Broker" includes all who are engaged in the business of nego- tiating or performing any act as broker in connection with a loan to be made by a lender. (Stats. 1951, c. 364, p. 1146, § 24002.) Derivation: Stats. 1939, c. 1045, p. 2886, § 2. § 24003. Charges; costs. "Charges" includes the aggregate fees, bonuses, com- missions, brokerage, discounts, expenses, and other forms of costs, except interest charged, contracted for or received by a lender or a broker, or any other person in connection with the investigating, arranging, negotiating, brokering, guaran- teeing, making, servicing, collecting, and enforcing of a loan or a forbearance PAGENO="0399" CONSUMER CREDIT PROTECTION ACT 981 of money, credit, goods, or things in action, or ~tny other service rendered. (Stats. 1951, c. 364, P. 1146, § 24003.) Derivation: Stats. 1939, c. 1045, p. 2886, § 2. § 24004. Charges; profit or advantage. "Charges" include any profit or ad- vantage of any kind that any licensee may contract for, collect, receive, or obtain by a collateral sale, purchase, or agreement, in connection with the negotiating, arranging, making, or otherwise in connection with any loan of three hundred dollars ($300) or less. (Stats. 1951, c. 364, p. 1146, § 24004.) Derivation: Stats. 1939, c. 1045, p. 2895, § 19; Stats. 1943, c. 251, p. 1165, § 2. § 24005. Charges; ea~clusion of certain commissions. "Charges" do not include commissions received as a licensed insurance agent or broker in connection with insurance written as provided in Section 24466. (Stats. 1951, c. 364, p. 1146, § 24005.) Derivation: Stats. 1939, c. 1045, p. 2895, § 19; Stats. 1943, c. 251, p. 1165, §.2. § 24006. Commissioner. "Commissioner" means the Commissioner of Corpora- tions of the State of California. (Stats. 1951, e. 3~34, p. 1146, § 24006.) Derivation: Stats. 1939, c. 1045, p. 2886, § 2. § 24007. Lender. "Lender" includes all persons who are engaged in the business of lending their own money, credit, goods, or things in action. (Stats. 1951, c. 364, p. 1146, § 24007.) Derivation: Stats. 1939, c. 1045, p. 2886, § 2. NOTES OF DECISIONS In general 1 Loan of credit 2 1. In genera' Whether a finance company purchasing conditional sales contracts for auto- mobiles and trade acceptances on accounts receivable, is doing business within the Personnel Property Brokers Act or Small Loan Act depends on whether a sale or a loan of money is involved, and all circumstances of a particular transac- tion must be considered, but if there is a bona fide sale of a conditional sales con- tract, the mere fact that there is a guarantee of payment by the seller is not in itself enough to constitute the transaction a loan rather than a sale, nor would an agreement to repurchase a defaulted contract itself be sufficient to make the transaction a loan rather than a sale. 8 Ops. Atty. Gen. 157. 2. Loan of credit Where corporation proposed to issue cards which would enable holders to pur- chase, on credit, merchandise or service at specified business places and card holder would sign an invoice which corporation would purchase at a discount from 6 to 10% and corporation would bill card holder for face amount of invoice and collect from him, transaction would be "loan of credit" to its card holders and corporation must procure a license as a lender before engaging in such a business. Master Charge v. Daugherty (1954) 267 P. 2d 821, 123 C.A. 2d 700. § 24008. Lender; broker. "Lender" and "broker," do not include employees of the lender or broker regularly employed at the particular location specified in the license of the lender or broker. (Stats. 1951, c. 364, p. 1146, § 24008.) Derivation: Stats. 1939, c. 1045, p. 2886, § 2. § 24009. Licensee. "Licensee" means any lender or broker licensed under this division. (Stats. 1951, c. 364, p. 1146, § 24009.) Derivation: Stats. 1939, c. 1045, p. 2886, § 2. CROSS REFERENCES Cooperative corporations, generally, see Corporations Code § 12200 et seq. Nonprofit corporations, generally, see Corporations Code § 9000 et seq. NOTES OF DECISIONS 1. Validity The Small Loan Act exempting from its operation, nonprofit agricultural co- operatives, corporations loaning money pursuant to Agricultural Credits Act, 12 U.S,O.A. § 1151 et seq., does not deny "due process" and "equal protection" of law because it does not uniformly apply to all classes of lenders. Bx parte Fuller (1940) 102 P.2d 321, 15 C.2d 425. § 24052. Conditional contracts of sale. This division does not apply to bonn fide conditional contracts of sale involving the disposition of personal property, when PAGENO="0400" 982 CONSUMER CREDIT PROTECTION ACT such forms of sales agreements are not used for the purpose of evading this division. (Stats. 1951, c. 364, p. 1147, § 24052.) Derivation: Stats. 1939, c. 1045, p. 2887, § 3. NOTES OF DECISIONS 1. Validity The Small Loan Act exempting from its operation, hona fide conditional con- tracts of sale involving disposition of personal property when not used for purpose of evading the Act, does not deny "due process" and "equal protection" of law because it does not uniformly apply to all classes of lenders. Ex parte Fuller (1940) 102 P.~d 321,15 C.2d 425. § 24053. Personal froperty brokers. This division does not apply to any per- sonal property broker or broker licensed under the Personal Property Brokers Law,1 when transacting business as authorized by that law. (Stats. 1951, c. 364, p. 1147, § 24053.) Derivation: Stats. 1939, c. 1045, p. 2887, § 3. NOTES OF DECISIONS 1. Validity The Small Loan Act exempting from its operation licensed personal property brokers does not deny "due process" and "equal peotection" of law because it does not uniformly apply to all classes of lenders. Ex parte Fuller (1940) 102 P.2d 321, 150. 2d 425. § 24054. Real estate brokerr. This division does not apply to any broker licensed under the Real Estate Law, Part 1, Division 4, of the Business and Professions Code,' when transacting business as authorized by that law. (Stats. 1951, c. 364, p. 1147, § 24054.) Derivation: Stats. 1939, c. 1045, p. 2887, § 3. NOTES OF DECISIONS 1. Validity The Small Loan Act exempting from its operation real estate brokers does not deny "due process" and "equal protection" of law because it does not uniformly apply to all classes of lenders. Ex parte Fuller (1940) 102 P.2d 321, 15 C.2d 425. § 24407. Preservation of records. Licensees shall preserve their books, accounts, and records, including cards used in the card system, if any, for at least two years after making the final entry on any loan recorded therein. (Stats. 1951, c. 364, p. 1150, § 24407.) Derivation: Stats. 1939, c. 1045, p. 2891, § 14. § 24408. Annual report. Each licensee shall file a report with the commissioner annually on or before the fifteenth day of March, giving such relevant informa- tion as the commissioner reasonably requires concerning the business and opera- tions during the preceding calendar year of each licensed place of business within the State conducted by the licensee. The report shall be made under oath and in the form prescribed by the commissioner. (Stats. 1951, c. 364, p. 1150, § 24408.) Derivation: Stats. 1939, c. 1045, p. 2891, § 14. CROSS REFERENCES Annual examination by commissioner, see § 24603. § 24409. Uomposite of a'anual reports. The commissioner shall make and file annually with the Division of Corporations as a public record a composite of the annual reports and any comments on the reports that he deems in the public interest. (Stats. 1951, c. 364, p. 1150, § 24409.) Derivation: Stats. 1939, c. 1045, p. 2891, § 14. § 24410. False or misleading advertising. No person shall advertise, print, dis- play, publish, distribute, or broadcast or cause to permit to be advertised, printed, displayed, published, distributed, or broadcast, in any manner any statement or representation with regard to the rates, terms, or conditions for making or negotiating loans, which is false, misleading, or deceptive, or, in the case of a licensee, which refers to the supervision of such business by the State or any department or official ~f the State. (Stats. 1951, c. 864, p. 1150, § 24410.) Derivation: Stats. 1039, c. 1045, p. 2891, § 15. 1§ 22000 et seq. 1 BusIness and ProfessiOns Code § 10000 et seq. PAGENO="0401" CONSUMER CREDIT PROTECTION ACT 983 CODE COMMISSION NOTES 2nd Sent. re order to cease, deleted as covered by § 24607. CROSS REFERENCES Penalty for violation, see § 24651. ADMINISTRATIVE CODE REFERENCES Advertising, rules and regulations, see 10 Cal. Adm. Code 1467-1476. § 24411. statement of rates of charge. The commissioner may require that rates of charge, if stated by a licensee, be stated fully and clearly in such manner as the commissioner deems necessary to prevent misunderstanding by prospective borrowers. (Stats. 1951, c. 364, p. 1150, § 24411.) Derivation: Stats. 139, c. 1045, p. 28.91, § 15. § 24412. Advertisement of rd4es and cost of loans. Tf any person engaged, in the business regulated by this division refers in any advertising to rates of `in- terest, charges, or cost of loans, the commissioner shall require that they are stated fully and clearly in such manner as he deems necessary to give adequate information to prospective borrowers. If the rates or costs advertised do not apply to loans of all classes made `or negotiated by such person, this fact shall be clearly indicated in the advertisement. (Stats. 1951, c. 364, p. 1150, § 24412.) Derivation: Stats. 1939, c. 1045, `p. 2891, § 15. § 24413. Use of disapproved advertising copy. No advertising copy shall be used for its use has been disapproved by the commissioner and the licensee is notified in writing of such disapproval. (Stats. 1951, c. 364, p. 1151, § 24413.) Derivation: Stats. 1939, c. 1045, p. 2891, § 15. CROSS REFERENCES Penalty for violation, see § 24651. § 24414. File of advertising copy. The cemmissioner may require licensees to maintain a file of all advertising copy for a period of 90 `days from the date of its use. This file shall be available to the commissioner upon request. (Stats. 1951, c. 364, p. 1151, § 24414.) Derivation: Stats. 1939, c. 1045, p. 2891, § 15. ARTICLE 2 LOAN REGULATIONS Sec. 22450. Charge without loan. 22451. Maximum interest rate. 22452. Charges for service and expense; maximum aggregate amount of charges and interest. 22453. Insurance of property securing loan; maximum aggregate charge. 22454. Charges in excess `of maximum. 24455. Statutory fees. 24456. Computation of `charges and interest; payment in equal installments. 24457. Advance payment and compounding of charges and interest. 24458. Enforcement `of out-of-state loans. 24459. `Collection of out-of-state loans. 24460. Contracting or negotiating for out-of-state loans. 24461. Schedule of charges; display; approval. 24462. Charge in excess of maximum. 24463. Splitting loan. * * * * * * * annum and also denying a licensee the right to contract for or receive service or expense charges beyond actual ou'tlay and limiting the aggregate amount of such interest and charges `to 2% per cent. per month on loans of less than $100 and 2 per cent. on any remainder of an unpaid balance of principal in excess of that amount, is not invalid on ground that it discriminates between lenders charging 83-340--67-pt. 2-26 PAGENO="0402" 984 CONSUMER CREDIT PROTECTION ACT different rates of interest on theory that the m~tximum limitation on the aggregate amounts which could be charged borrowers did not take into consideration varia- tions in interest charges. Id. The Small Loan Act which prohibits an interest charge of more than 10 per cent. per annum and also denies a licensee the right to contract for or receive service or expense charges beyond the actual outlay and limits the aggregate amount of such interest and charges to 21/2 per cent. per month on loans of less than $100 and 2 pe~ cent. on any remainder of an unpaid balance of principal in excess of that amount, is not invalid on ground that it authorizes greater charges than permitted by the usury law, an initiative measure, and constitutional amend- ment, limiting interest to 10 per cent. Id. 2. Construction and application The Small Loan Act limiting interest to 10 per cent. per annum did not permit rate of interest greater than 10 per cent. allowed .by Const, art. 20, § 22 because of provision that a month should be a period of 30 consecutive days, and that the aggregate total of interest and charges should not exceed 21/2 per cent. per month on the first $100 of any loan and 2 per cent. per month on the remainder of the loan. Ex parte Fuller (1940) 102 P.2d 321, 15 C.2d 425. The restrictions on interest, fees, bonuses, commissions, discounts, or other compensation set forth in Const. art. 20, § 22 which is fixed In the aggregate at 10 per cent. per annum, applies to loans in excess of $300.00 made by a person licensed under the Small Loan Act but a loan made by a licensee under said act in excess of $300.00 cannot be divided so that the charge as fixed by the Small Loan Act applies to the first $300.00 and thO constitutional provisions to the remainder. 8 Ops. Atty. Gen. 133. Under California Small Loan Act, persons engaged exclusively in the business of lending money in amounts in excess of $300.00 are not required to obtain a license from the Commissioner of Corporations under the Small Loan Act. Id. 3. In general Small Loan Act, as amended, does not prohibit a licensee under said act from making unsecured loans in amounts in excess of $300.00. 8 Ops. Atty. Gen. 133. 4. Amount of loa'n~ Where an indu~trial loan company, under the Industrial Loan Act, has an existing contract with a borrower and is charging the maximum on the first $300 on such loan, and a second loan is made to the same borrower, the two loan are to be considered together, and on the excess over $300, 10% per annum is the limit of the charges. 13 Ops. Atty. Gen. 144. Small Loan Act may legally be amended to specifically limit the amount of interest and charges that may be exacted from borrowers on loans regardless of size. 9 Ops. Atty. Gen. 49. Small Loan Acit, may legally be amended to specifically limit the amount of interest and charges that may be exacted from borrowers of amounts up to and including $500, instead of $300. Id. Small Loan Act may legally be amended to specifically limit the amount of interest and charges exacted from a borrower of an amount in exces's of $300 to ten per cent per annum permitting however, a rate of charge of 21/2 per cent per month for the first $100 and two per cent per month for the next $200 of such loan. Id. § 24452. Charges for service and ewpense; ma~rimunm aggregate a'mount of charges and interest. No licensee shall contract for or receive any service or expense charges beyond the actual outlay. The charges for actual outlay, when added to interest computed at the rate permitted by this article, shall not exceed an aggregate amount of two and one-half per cent (21/2%) per month on that portion of the unpaid principal balance of any loan not in excess of one hundred dollars ($100), and two percent (2%) per month or any remainder of such unpaid principal balance. (Stats. 1951, c. 364, p. 1151, § 24452.) Derivation: Stats. 1939, c. 1045, p. 2892, § 16. LAW nxvixw COMMENTARIES Discounted interest as usury. (1945) 18 So. Cal. L.R. 274. Interest on obligations after maturity. (1945) 18 So. CaL L.R. 258. Protectiofi afforded the borrower by California Usury Law. (1932) 20 C.L.R. 361. PAGENO="0403" CONSUMER C1~EDIT PROTECTION ACT 985 The small loan problem. (1939) 27 O.L.R. 286. Usury. Raymond B. McConlogue (1928) 1 So. Cal. L.R. 253. Usury, remedies of borrower and defenses of lender. (1951) 3~ C.L.R. 604. NOTES OF DECISIONS Amount of loan 4 Construction and application 2 Purpose 3 Validity 1 1. Validity The Small Loan Act prohibiting an interest charge of more than 10 per cent. per annum and also denying a licensee the right to contract for or receive service or expense charges beyond actual outlay and limiting the aggregate amount of such interest and charges to 21/2 per cent. per month on loans of less than $100 and 2 per cent. on any remainder of an unpaid balance of principal in excess of that amount, is not invalid on ground that it discriminates .between lenders charging different rates of interest on theory that the maximum limitation on the aggregate amounts which could be charged borrowers did not take into con- sideration variations in interest charges. Ex parte Fuller (1940) 102 P. 2d 321, 15 C. 2d 425. The Small Loan Act limiting amounts which may be exacted for brokerage or other compensation paid to a third person or expense items such as appraisals, recording fees, insurance or similar charges is not invalid as in conflict with the usury law, an initiative measure, which restricts interest but leaves the Legis- lature supreme in all other fields of loan regulation. Id. The Small Loan Act limiting amounts which may be charged for brokerage or other compensation paid to a third person or expense items such as appraisals, recording fees, insurance or similar charges, could not be held unconstitutional on theory that it deprives lender of right to collect legal costs authorized by usury law, an initiative measure, since the failure of the uSury law to limit charges did not operate as a prohibition against any limitation being imposed upon charges. Id. 2. Construction and application The Small Loan Act limiting Interest to 10 per cent. per annum did not permit rate of interest greater than 10 per cent. allowed by Const. art. 20, § 22, because of provision that a month should be a period of 30 consecutive days and that the aggregate total of interest and charges should not exceed 21/2 per cent. per month on the first $100 of any loan and 2 per cent. per month on the remainder of loan. Ex parte Fuller (1940) 102 P.2d 321, 15 C.2d 425. The Small Loan Act limiting amounts which may be exacted for brokerage or other compensation paid to a third person or expense items such as appraisals, recording fees, insurance or similar charges is not invalid as in conflict with the usury law, an initiative measure, which restricts interest `but leaves the Legis- lature supreme in all other fields of loan regulation. Id. 3. Purpose Brokerage or other compensation paid to a third person for procuring loan or expense items such as appraisals, recording fees, insurance or similar charges are proper subjects of regulation, and one purpose of the Small Loan Act was to limit the amounts which may be exacted therefor. Ex parte Fuller (1940) 102 P.2d 321,15 C.2d 425. 4. Amount of loan Small Loan Act may legally be amended to specifically limit the amount of interest and charges that may be exacted from borrowers on loans regardless of size. 9 Ops. Atty. Gen. 49. Small Loan Act may legally be amended to specifically limit the amount of interest and charges that may `be exacted from borrowers of amounts up to and including $500, instead of $300. Id. Small Loan Act may legally be amended to specifically limit the amount of interest and charges exacted from a borrower of an amount in excess of $300 to ten per cent. per annum permitting however, a rate of charge of 21/2 per cent. per month for the first $100 and two per cent. per month for the next $200 of such loan. Id. PAGENO="0404" 986 CO?~UMER CREDIT E~QTECTI0N ACT §24458. Insurance of property securing loan; maa~inium~ aggregate charge. If any property securing ~ loan made by a licensee is insured against loss in favor of the licensee, the service or expense charges for actual outlay, when added to inter- est computed at the rate permitted by this article, shall in no event exceed an aggregate amount of two percent (2%) per month on the unpaid principal balance of the loan. (~Stats. 1951, c. 364, p. 1151, § 24453.) Derivation: Stats. 1939, c. 1045, p. 2892, § 16. LAW REVIEW COMMENTARIES Discounted interest as usury. (1945) 18 So.Cal.L.R. 274. Interest on obligations after maturity. (1945) 18 So.OaLL.R. 258. Protection afforded the borrower by California Usury Law. (1932) 20 C.L.R. 361. The small loan problem. (1939) 27 C.L.R. 286. Usury. Raymond B. McConlogue. (192&) 1 So.Cal.L.R. 253. Usury, remedies of borrower and defenses of lender. (1951) 39 0L.R. 604. §24454. Charges in e~vcess of maximum. No amount in excess of that ex- pressly permitted by this article shall be directly or indirectly charged, eon- tracted for, or received, by any person, and the total charges including interest, of the lender, the broker, and any other person, in the aggregate, shall not exceed the amount permitted by this article on any one loanfor the negotiating, making, collecting, and enforcing of the loan. (Stats. 1951, c. 364, p. 1151, § 24454.) Derivation: State. ~.989, c. 1045, p. 2892, § 16. CROSS REFERENCES * Similar provision, see § 24462. LAW REVIEW COMMENTARIES Discounted interest as usury. (1945) 18 So.OaI.L.R. 274. Interest on obllgat~ons after maturity. (1945) 18 So.Cal.L.R. 258. Protection afforded the borrower by California TJsury law. (1932) 20 C.L.R. 361. The small loanproidem. (1939) 27 C.L.R. 286. Usury. Raymond B. MeConlogue. (1928) 1 So.Cal.L.R. 253. Usury, remedies of borrower and defenses of lender. (1951) 39 C.L.R. 604. NOTES OF DECISIONS 1. In general In action by notary against employer, a personal property broker and small loan agency, to recover notary fees, evidence that notary, under threat of dis- charge from employment, indorsed check for fees to which she was entitled under Personal Property Brokers Act and Small Loan Act to employees' associa- tion organized by employer, supported finding that employer exercised duress upon notary. Milisap v. National l?unding Corp. (1944) 152 P. 2d 634, 66 C.A. 2d 658. § 24455. ~S'tatutory fees. This article does not prohibit any licensee from con- tracting for, collecting, or receiving the statutory fee paid by the licensee to any public officer for acknowledging, filing, recording, or releasing in any public office any instruments securing the loan or executed in connection with the loan. Such fees are not included in determining the maximum charges which may be made under this article. (Stats. 1951, c. 364, p. 1151, § 24455.) Derivation: Stats. 1939, c. 1045, p. 2892, § 16. CODE COMMISSION NOTES Provision re recording fees added to make it clear that such fees are not a part of the charges. § 24467. Real estate liens. No licensee shall take a lien upon real estate as security for any loan made under this division, except such lien as is created by law upon the j~ecording of an abstract judgment. (Stats. 1951, c. 364, p. 1.153, § 24467.) Derivation: Stats. 1939, c. 1045, p. 2891, § 15. PAGENO="0405" CONSUMER CREDIT PROTECTION ACT 987 CROSS REFERENCES Creation of lien, see Code of Civil Procedure § 674. § 24468. Confession of judgment; power of attorney. No licensee shall take any confession of judgment or any power of attorney, except a power of attorney taken to effectuate transfer of the ownership of any mator vehicle at the time of making the loan. (Stats. 1951, c. 364, p 1153, § 24468.) Derivation: Stats. 1939, c. 1045, p. 2891, § 15. onoss REFERENCES Confession of judgment, see Code of Civil Procedure § 1132 et seq. § 24469. Required provisions of loan instruments. No licensee shall take any note, promise to pay, or security that does not accurately disclose the actual amount of the loan, the time for which it is made, and the agreed rate of charge. (Stats. 1951, c. 364, p. 1153, § 24469.) Derivation: Stats. 1939, c. 1045, p. 2891, § 15. § 24470. Incomplete loan instruments. No licensee shall take any instrument in which blanks are left to be filled in after execution. (Stats. 1951, c. 364, p. 1153, § 24470.) Derivation: Stats. 1939, c. 1045, p. 2891, § 15. § 24471. Maaimum loan term. No licensee shall enter into a contract for a loan for a longer period than 24 months after the making of the loan. (Stats. 1951, c. 364, p. 1153, § 24471.) Derivation: Stats. 1939, c. 1045, p. 2895, § 19; Stats. 1943, c. 251, p. 1165, § 2. § 24472. Wage assignments. The payment of three hundred dollars ($300) or less by a lender or broker in money, credit, goods, or things iii action as considera- tion for any sale or assignment of, or order for, the payment of wages, salary, commissions, or other compensation for services, whether earned or to be earned, is for the purposes of regulation under this division, a loan secured by such assignment, and the amount by which the assigned compensation exceeds the amount of the consideration actually paid is interest and charges upon or for the loan from the date of payment to the date the compensatiQn is payable. The section shall not be construed as modifying or affecting existing statutes governing wage assignments in the State, or as authorizing such assignments. (Stats. 1951, c. 364, p. 1153, § 24472.) Derivation: Stats. 1939, c. 1045, p. 2895, § 18.5. Library references: Pawnbrokers and Money Lenders ~=~6.7; CJ.S. Pawn- brokers § 5. CROSS REFERENCES Assignment of wages, generally, see Labor Code § 300. § 24473. Loan requirements; lender. Each licensed lender shall: (a) S~tatement of terms of loan. Deliver or cause to be delivered to the borrower, or any one thereof, at the time the loan is made, a statement showing in clear and distinct terms the name, address, and license number of the lender and the broker, if any. The statement shall show the date, amount, and maturity of the loan contract, bow and when repayable, the nature of the security for the loan, and the agreed rate of charge. (b) S'igned statement of borrower. Obtain from the borrower a signed state- ment as to whether any person has performed any act as a broker in connection with the making of the loan. If such statement discloses that a broker or other person has participated, then the lender shall obtain a full statement of all sums paid or payable to the broker or other person. The lender shall keep such state- ments for a period of two years from and after the date the loan has been paid in full, or has matured according to its terms, or has been charged off. (c) Advance payments. Permit payment to be made in advance in any amount on any contract of loan at any time, but the licensee may apply such payment first to all charges due at `the agreed rate up to the date of such payment, not to exceed the maximum rate permitted by this article. (d) Receipt for payments. Deliver or cause to be delivered to the penson making any payment, at the time each payment is made on account of any loan, a plain and complete receipt showing the total amount received, identifying the loan contract upon which the payment is applied, and stating the unpaid prin- cipal balance of the loan. (e) Cancellation and return of loan instruments and security. Upon repayment of any loan in full, release all security for the loan, endorse and return any PAGENO="0406" ~88 CONSUMER CREDIT PROTECTION ACT certificate of ownership, cancel or plainly mark "paid" and return to the bor- rower or person making final payment, any note, chattel mortgage, assignment, or order signed by the borrower, except such as are a part of the court record In any action, or such as have been delivered to a third person for the purpose of carrying out their terms. (Stats. 1951, c. 364, p. 1153, ~ 24473.) Derivation: Stats. 1939, c. 1045, p. 2893, § 17. ADMINISTRATIVE conn REFERENCES Statement delivered to borrower, contents, see 10 Cal. Adm. Code 1431. NOTES or DECISIONS 1. In general Requirements of law that could only apply to loans of money were not in- tended to apply to loans of credit and one engaged in loaning credit would not be expected to comply with them. Master Charge v. Daugherty (1954) 267 P.2d 821, 123 C.A.2d 700. § 24474. Loan requirement; broker. Each licensed broker shall: (a) statement of agreement mith broker. Deliver to the borrower, or any one thereof, at the time the final negotiation or arrangement is made, a statement showing in clear and distinct terms the name, address, and license number of the broker and the lender. The statement shall show :the date, amount, and terms of the agreement with such broker, and all amounts paid or to be paid to such broker and to any person other than the lender. (b) Delivery of' statement to lender. Deliver to the lender making the loan a copy of the statement referred to and described in subdivision (a) of this section. (c) Receipt for pthjments. Deliver to the person making any payment to the broker to be retained by the broker, a plain and complete receipt for each pay- ment made, at the time it is made, showing the total amount received, identi- fying the brokerage agreement and the loan contract upon which such payment is applied and showlhg the application thereof. If the payment is made by a person other than the lender, a copy of the receipt shall be delivered to the lender. (d) Cancellation and return of instruments end security. When the borrower pays the loan in full, ~ee to it that the lender fully complies with subdivision (e) of Section 24473. (Stats. 1951, c. 364, p. 1154, § 24474.) Derivation: Stats. 1939, c. 1045, p. 2893, § 17. ADMINISTRATIVE CODE REFERENCES Statement delivered to borrower, contents, see 10 Cal. Adm. Code 1431. DivisioN 10 SM~L LOANS CHAPTER 1. DEFINITIONS ARTICLE 1. DEFINITIONS § 24000. Title of' Division Law Review Convnientcvries Small loan legislation (1960) 7 U.C.L.A. Law Ii 649. 1. VaUdity Small Loan Law, which is primarily to protect citizens of California from fraudulent and unconscionable conduct of those in the lending business, is matter of local concern for purpose of determining whether it violates commerce clause insofar as a lender engaged in interstate commerce is concerned. People v. Fairfax Family Fund, Inc. (1965) 47 Cal. Rptr. 812,238 CA. 2d 881. 2. Purpose Small Loan Law of California is legislation designed for the public welfare. People v. Fairfax Family Fund, Inc. (1965) 47 Cal. Rptr. 812, 238 CA, 2d 881. 3. In general Activities of lender, licensed under Small Loan Law, § 24000 et seq., who engages in business of lending money to borrowers to enable them to purchase automobile PAGENO="0407" CONSUMER CREDIT PROTECTION ACT 989 insurance, do not fall within purview of Unruh Act. Civ. 0., § 1801 et seq. 34 Ops. Atty. Gen, 288. The Small Loan Law precludes licensee from carrying on a small loan business through the medium of insurance agents and brokers scattered about the state, whose places of business are not designated in the licensee's license, unless the licensee obtains a license for each office or place where the loans are to be initiated, and otherwise complies with the Small Loan Law. 27 Ops. Atty. Gen. 403. ARTICLE 2. EXEMPTIONS Sec. 24051.1 Inapplicability of division to certain loans of credit [New]. 24055. Cemetery brokers [New]. § 24051.1 Inapplicability of division to certain loans of credit This division does not apply to any loan of credit made pursuant to a plan having all of the following characteristics: (a) Credit cards are issued pursuant TO WRITTEN APPLICATION THERE- FOR AND to the plan whereby the organization issuing such cards shall be enabled to acquire those certain obligations which it~s members in good standing incur with those persons with whom the organization has entered into written agreements setting forth said plan, and where the obligations are incurred pur- suant to such agreements; or whereby the orgailization issuing such cards shall be enabled to extend credit to its members. (b) The fee for such credit cards is designed to cover the administrative costs of the plan and does not exceed * * * TWENTY-FIVE dollars * * * ($25) per year. (c) Any charges, discounts, or fees resulting from the acquisition of such charges shall be paid to the organization issuing said credit cards by the persons, corporations, or associations with whom the organization has entered into such written agreements (Added Stats. 1955, c. 1943, p. 3574, § 1, as amended Stats. 1959, c. 1249, p. 3325, § 1; Stats. 1965, c. 271. p. 1267, § 1.) (Language in capital letters indicates changes or additions by amendment. Asterisks indicate deletions by amendments.) 1959 Amendment. Rewrote subds. (a) and (c), which prior thereto related to drivers cards. 1965 Amendment. Inserted, in subd. (a), the words "to written application therefor and"; and increased fee, in subd. (b), from $10 to $25. Library references: Pawnbrokers and Money Lenders ~=z~6.1; C.J.S. Money Lenders § 5. § 24055. Cemetery brokers This division does not apply to any cemetery broker licensed under the Cemetery Act, Chapter 19 (commencing at Section 9600) of Division 3 of the Bi~siness and Professions Code, when transacting business as authorized by the Cemetery Act. (Added Stats. 1957, c. 474, p. 1509, § 1.) Library references: Cemeteries 3=3; Pawnbrokers and Money Lenders ~3; C.J.S. Cemeteries § 2; C.J.S. Pawnbrokers §4. § 24405. Name and place of transaction of business 1. Construction and application The Small Loan Law precludes licensee from carrying on a small loan business through the medium of insurance agents and brokers scatter~ed about the state, whose places of business are not designated in the licensee's license, unless the licensee obtains a license for each office or place where the loans are to be initiated, and otherwise complies with the Small Loan Law. 27 Ops.Atty. Gen. 403. § 24451. Maximum interest rate No licensee shall make any loan of * * * ONE THOUSAND DOLLARS ($1,000), or less, and contract or receive thereon interest at a rate exceding ten percent (10%) per year, computed on the unpaid balance of the loan. (As amended Stats.1965, e. 1202, p. 3023, § 2.) 1965 Amendment. Increased amount from $300 to $1,000. § 24452. Charges for service and expense; maximum aggregate amount of charges and interest No licensee shall contract for or receive any service or expense charges beyond the actual outlay. The charges for actual outlay, when added to interest corn- PAGENO="0408" 990 CONSUMER CREDIT PROTECTION ACT puted at the rate permitted by this article, shall not exceed an aggregate amount of `two and one-half percent (2'/2%) per month on that portion of the unpaid principal balance of any loan not in excess of one hundred ($100), and two per- cent (2%) per month ON THAT PORTION OF THE UNPAID PRINCIPAL BALANCE IN EXC1~SS OF ONE HUNDRED DOLLARS ($100) BUT NOT IN EXCESS OF TI1RE1~ HUNDRED ($300) AND FIVE-SIXTHS' OF ONE PER- CENT (5/s of 1%) ~n any remainder of `such unpaid principal balance. (As amended Stats. 1965, c. 1202, p. 3023, § 3.) 1965 Amendment. Inserted, in second `sentence, the words "on that portion of the unpaid principal balance in excess of one hundred dollars ($100) but n'ot in excess of three hundred ($300) and five-sixths of one percent (% of 1%)." § 24453. Insurance of property securing loan; mawimum aggregate charge If any property securing a loan made by a licensee is insured against los's in favor of the licensee, the service or expense `charges' for actual outlay, when added to in'terest computed at the rate permitted by this article, shall in no event exceed an aggregate amount of two percent (2%) per month on ALL PORTIONS OF the unpaid principal balance of the loan NOT IN EXCESS OF THREE HUNDRED DOLLARS ($300). (As amended Sta'ts. 1965, c. 1202, p. 3024, § 4.) 1965 Amendment. Xnserted the wo'rds "all portions of" and "not in excess of three hundred dollar~ ($~OO)." § 24458. Enforcement of out-of-state loans A loan lawfully made outside the state of the amount or value of * * * ONE THOUSAND DOLLARS ($1,000) or less, may be enforced in this `state as to the unpaid principal balance of the loan `together with the interest, considera- tion, brokerage, and all other charges, `to the extent of but not to exceed the unpaid principal balance and the aggregate amount of interest, consideration, brokerage, and all other charges permitted `by this division in connection with a loan of `the same amount made within this state. (As amended Stats.1965, c. 1202, p.3024, § 5.) 1965 Amendment. Iticreased amoun't or value from $300 to $1,000. § 24472. Wage assignments The payment of * * * ONE THOUSAND DOLLARS ($1,000) `or less by a lender or broker in money, credit, goods, or `things in ac'tio'n as consideration for any sale or assignment of, or order for, the payment of wages, salary, commis- sions, or other compe~s'ation for services, whether earned or to' `be earned, is for the purposes of regulation und'er this division, a lo'an secured by such assign- meut, and the amount by whi'ch the `assigned compensation exceeds the amount of the `consideration ac'tually paid is interest and charges upon or for `the loan from the date of payment to the date the compensation is payable. This section shall not be construe~1 as modifying or affecting existing statutes governing wage assignments in `the siate, or as authorizing such assignments. (As amended Stats.1965, c. 1202, p. 3024. § 6~) (Language in c'ap~tal letters indicates changes or additions by amendment. Asterisks indica'te `del~ti'on `by amendment.) 1965 Amendment. Increased amount from $300 `to $1,000. CHAPTER 4. REVOCATION AND PENALTIES § 24611. Conduct of hearings; applicability of Government Code Law Review Commentaries Administr~itive hearings. Paul A. Winton (1961) 36 S.Bar ~T. 331. Divisiox 11. NATIONAL HOUSING Acr LOANS CHAPTER 1. INVESTMENTS § 27000. First liens accepted for insurance Law Review Commentaries Redevelopment and clearance of municipal slum area's. Eugene B. Jacob's and Jack G. Levine (1957) 8 Hastings L.J. 241. PAGENO="0409" CONSUMER CREDIT PROTECTION ACT 991 CALIFORNIA CIVIL ConE Automobile Sales Finance Act-Section 2981 et seq. SectIons: 2982 2983 2983.1 2983.2 2983.3 2984.1 2984.2 2984.3 CHAPTER 2b. AUTOMOBILE SALES FINANCE Acr [Nnw] Sec. 2981. Definitions. 2982. F~rma1ities of conditional sales contracts. 2983. Enforceability of contract; improper form or finance or delinquency charges; correction; recovery by buyer. 2983.1 Enforceability of cioiitract; violation of provisions relating to prepayment, refinancing, or refund of finance charge; election to enforce or rescind. 2983.2 Notice of intent to sell repossessed motor vehicles; ftrm; prerequisite to liability for delinquency. 2983.3 Default as prerequisite to repossession or acceleration of maturity. 2983.4 Prevailing party's right to attorney's fees and costs. 2983.5 Outting off right of action or defense by assignment; notice of assignment; necessity and form. 2984. Correction of contract to comply with chapter. 2984.1 Oontract provision regarding insurance coverage. 2984.2 Enforceability of provision for inclusion of title to or lien on other property. 2984.3 Buyer's acknowledgement of delivery of copy of contract; presumptions. Ukapter 2b added by ~8tats. 1961 c. 1626, p. 3534, § 4, effective Jan. 1, 1962. § 2981. Definitions As used in this chapter, unless the content otherwise requires: (a) "Cendit'ional sale contract" means: (1) Any contract for the sale of a motor vehicle between a buyer and a seller, with or without `accessories, under which possession is delivered to the buyer but the title vests in the buyer thereafter only upon the payment of all or part of the price, or upon the performance of any other condition, or (2) Any contract for the bailment or leasing of a motor vehicle between a buyer and a seller, with or without accessOries, by which the bai'lee or lessee agrees to pay as compensation a sum substantially equivalent to the value of the property, and by which it is agreed that the bailee or lessee is bound to become, or has the option of becoming, the owner of the property upon full compliance with the terms of the contract, or (3) Any contract for the sale of a motor vehicle between a buyer and a seller, with or without accessories, under which possession is delivered to the buyer, and a lien on the property is to vest in the seller as security for the payment of part or all of the price, or for the performance of any other condition. (b) "Seller" means a person engaged in the business of selling or leasing motor vehicles under conditional sale contracts. (`c) "Buyer" means the person who buys or hires a motor vehicle under a conditional sale contract. (d) "Person" includes an individual, company, firm, association, partnership, trust, corporation, or other legal entity. (e) "Cash price" means the amount for which the seller would sell and transfer to the buyer unqualified title to the motor vehicle described in the conditional sale contrhct, if the property were sold for cash at the seller~s place of business on the date the contract is' executed, and includes `any applicable sales taxes and the total amount paid or to be paid to any public officer in connection with the transaction. (f) "Down payment" means that part of the cash price which the buyer pays or agrees to pay to the seller in cash or property value or money's worth at or PAGENO="0410" 992 CONSUMER CREDIT PROTECTION ACT prior to delivery by the seller to the buyer of the motor vehicle described. in the conditional sale contract, including the cash, property or thing of value which the buyer deposits With the seller pending exedution of a conditional sale contract, which cas~i1 property or thing of value shall be refundable to the buyer in the event a conditional sale contract is not executed, or if the property or thing of value traded in can~o't be returned, the cash value thereof. (g) "Unpaid balance" means the difference between (e) and (f), plus all insurance premiums (except for credit life or disability insurance when the amount thereof i's included in the finance charge), which are included in the contract balance. (h) "Finance charge" means any amount which the buyer agrees to pay to the seller in excess of the unpaid balance. (i) "Contract balance" means the amount unpaid under the conditional sale contract, which the buyer agrees to pay in installments' as originally provided therein, and shall not include amounts for which the buyer may later beco'me obligated under the terms of the contract in connection with insurance, repairs to or preservation of the motor vehicle, preservation of the security interest therein, or otherwise. (j) "Motor veh~c1e" means any vehicle required to be registered under the Vehicle Code which is bought for use primarily for personal or family purpose's, and does not mean any vehicle which is bought for use primarily for business or commercial purposes. (k) "Purchase order" means a sale's order, car reservation, statement of transaction or any other such instrument used in the conditional sale of a motor vehicle pending execution of a conditional sale contract. The purchase order shall conform to the disclosure requirements of paragraphs 1 to 8, inclusive, and paragraph 10 of subdivision (a) of Section 2982 and Section 2984.1. (Added Stats. 1961, c. 1626, p. 3534, § 4, effective Jan. 1, 1962.) Sections 6 and 7 of Stats. 1961, c. 1626, p. 3541, read as follows: "Sec. 6. This act shall take effect on January 1, 1962, and shall not apply to conditional sale contracts executed prior thereto. "Sec. 7. This act will be known as the Rees-Levering Motor Vehicle Sales and Finance Act." Former section 2981 repealed by Stats. 1961, c. 1626, p. 3534, § 1. Prior to repeal, the former section was amended by Stats. 1959, c. 1466, p. 3762, § 1. The 1959 amendment of former section 2981 added after the words insurance premiums in subd. (g) "(except for credit life `or disability insurance when the amount thereof is included in the time price differential) ". It also added the following clause at the end of subd. (i) "and shall not include amounts for which the buyer may later become obligated under the term of the contract in connection with insurance, repairs to or preservation of the motor vehicle, preservation of the security interest therein, or otherwise." § 2982. Formalities of conditional sales contracts (a) Form; signatures; delivery of copy of contract; contents. Every condi- tional sale contract for the sale `of a motor vehicle, with or without accessories, shall be in writing and, if printed, shall be printed in type no smaller than six point, and sh,all contain in a single document all of the agreements of the buyer and seller with respect to the total cost and the terms of payment for the motor vehicle, including any promissory notes o'r any other evidences of indebtedness. The conditional sale contract or a purchase order shall be signed by the buyer or his authorized representative and by the seller or its authorized representa- tive, and an exact copy thereof shall be furnished the buyer by the seller at the time the buyer and the seller have signed the contract or purchase order. No motor vehicle shall be delivered under this' chapter until the seller delivers to the buyer a fully executed copy of the conditional sale contract or purchase order. The seller shall not obtain the signature of the buyer to a contract when it contains blank spaces to be filled in after it has' been signed. Every conditional sale contract shall contain, although not necessarily in the sequence or brder set forth below, the following separate items. 1, The cash price' of the motor vehicle described in the conditional sale contract. 2. The amount of the buyer's down payment, and whether made in cash or represented by the net agreed value of described property traded In, or both, together with a statement of the respective amounts credited for cash and for such, property. PAGENO="0411" CONSUMER CREDIT PROTECTION ACT 993 3. The amount unpaid on the cash price, which is the difference between Items 1 and 2. 4. The cost to the buyer of any insurance, the premium for which i~ included in the contract balance. Any such cost for credit life or disability insurance may be included in the finance charge if the amount thereof is separately stated on the face of the cotitract. 5. The amount of the unpaid balance, which is the sum of Items, 3 and 4. 6. The amount of the finance charge. 7. The contract balance owed by the buyer to the seller, which is the sum of items 5 and 6. 8. The number of installments required to pay the contract balance, the amount of each installment, and the date for payment of the installments. 9. The names and addresses of all persons to whom the notice required under Section 2983.2 and permitted under Sections 2983.5 and 2984 of this code is to be sent. 10. A notice, in at least eight-point bold type if the contract is printed, reading as follows: "Notice to the buyer: (1) Do not sign this agreement before you read it or if it contains any blank spaces to be filled in. (2) You are entitled to a completely filled-in copy of this agreement. (3) Under the law, you have the right to pay off in advance the full amount due and under certain conditions to obtain a partial refund of the finance charge. (4) If you default in the performance of your obligations under this agreement, the vehicle may be repossessed and you may be subject to suit and liability for the unpaid indebtedness evidenced by this agreement." (b) Insurance. If any charge for insurance (other than for credit life or disability) is included in the contract balance and disbursement of any part thereof be made more than one year after the date of the conditional sale contract, any finance charge on the amount to be disbursied after one year shall be computed from the month the disbursmnent is to be made to the due date of the last installment under the conditional sale contract. (c) Finance charge; delinquency charge; cotlection costs and fees. The amount of the finance charge in any conditional sale contract for the sale of a motor vehicle, with or without accessories, shall not exceed 1 percent of the unpaid balance multiplied by the number of months (computed on the basis of a full month for any fractional month period in excess of 15 days) elapsing between the date of the contract and the due date of the last installment, or twenty-five dollars ($25), whichever is greater. The contract may provide for a delinquency charge or charges on any installment in default for a period of not less than 10 days in an amount not to exceed in the aggregate 5 percent of the instafl~ent, which amount may be collected only once on any installment regard- less of the period during which it remains~ in default. The contract may provide for reasonable collection costs and fees in the event of delinquency. (d) Payment before maturity; refund of unearned itnance charge. Any pro- vision in any conditional sale contract for the sale of a motor vehicle tot the contrary notwithstanding, the buyer shall have the privilege of paying at any time in full the indebtedness evidenced by the contract. Whenever an indebted- ness is liquidated prior to maturity by prepayment or refinancing, or upon sur- render or repossession and resale of the motor vehicle, the holder shall there- upon refund to the buyer the unearned portion of the finance charge. The re- fund may be made in cash or credited to the amount due on the obligation of the buyer. The amount of the refund shall represent at least as great a propor- tion of the finance charge, after first deducting therefrom twenty-five dollars ($25), as the sium of the periodic time balances payable more than 15 days after the date of prepayment (or other event entitling the buyer to the refund) bears to the sum of all of the periodic time balances under the schedule of install- ments in the contract. The provisions of this subdivision shall not impair the right of the seller or his assignee to receive deliquency charges on delinquent installments and reasonable costs and fees as provided in subdivision (c) of this section. Where the amount of such refund is less than one dollar ($1), no refund need be made. (e) Compensation fOr referral of customers. The contract shall also' include any promise by the seller or anyone with his knowledge, made as an induce- merit to the buyer to become a party to the conditiOnal sale contract or made incidental to negotiations relating thereto, to compensate the buyer for referring customers or prospective customers to the seller or for referring the seller to such customers or prospective customers. PAGENO="0412" 994 CONSUMER CREDIT PROTECTION ACT In any case in which, pursuant to this subsection, the contract contains a promise to compensate the buyer for referring customers or prospective customers to the seller or the seller to such customers, the contract must contain a provi- sion to the effect that the outstanding balance at any time is reduced by any amount of compensation owing pursuant to such promise. (Added Stats. 1961, c. 1626, p. 3535, § 4, as amended Stats. 1963, c. 1319, p. 2839, § 1.) Former section 2982 repealed by Stats. 1961, c. 1626, p. 3534, § 2. Prior to repeal, the former section was amended by Stats. 157, c. 613, p. 1822, § 1; Stats. 1959, c. 1466, p. 3763, § 2; Stats. 1961, c. 243, p. 1269, § 1. Former section 2982, as last amended by Stats. 1961, c. 243, p. 1270, § 1, read as follows: "(a) Every conditional sale contract for the sale of a motor vehicle, with or without accessories, shall be in writing, and if printed, shall be printed in type no smaller than six point, and shall contain all of the agreements between the buyer and the seller relating to the personal property described therein. It shall be signed by the buyer or his authorized representative and by the seller or its authorized reptesentative, and when so executed an exact copy thereof shall be delivered b~ the seller to the buyer at the time of its execution. It shall recite the following separate items as such, in the following order: "1. The cash price of the personal property described in the conditional sale contract. "2. The amount of the buyer's down payment, and whether made in cash or represented by the net agreed value of described property traded in, or both, to- gether with a statement of the respective amounts credited for cash and for such proprty. As soon as received by the dealer the dealer shall refund to the buyer or credit to the buyer on the next payment due the amount realized on any insur- ance policy, or rights thereunder, assigned to the seller by the buyer in con- nection with the eon4itional sale. Failure of the dealer to comply with the fore- going provision shall in no way affect the validity or enforceability of the condi- tional sale contract. "3. The amount uflpaid on the cash price, which is the difference between Items 1 and 2. "4. The cost to the buyer of any insurance, the premium for which is included in the contract balance; provided, any such cost for credit life or disability insurance may be included in the time price differential if separately stated on the face of the contract. "5. A description and itemization of amounts, if any, which will actually be paid by the seller or his assignee to any public officer as fees in connection with the transaction, which are included in the contract balance. "6. The amount of the unpaid balance, which is the sum of Items 3, 4, and 5. "7. The amount of the time price differential. "8. The contract balance owed by the buyer to the seller, which is the sum of Items 6 and 7. "9. The number qf installments required to pay the contract balance, the amount of each installment, and the date for payment of the installments. "10. The names and addresses of all persons to whom the notice required under subdivision (g) of this section is to be sent. "(b) If any charge for insurance is included in the contract balance, an insurance policy or policies or a certificate of insurance under a master policy shall be issued and the seller shall within 30 days after the execution of the conditional sale contract send or cause to be sent to the buyer the original or an exact copy of such policy or policies or certificate. "(c) The amount of the time price differential in any conditional sale contract for the sale of a motor vehicle, with or without accessories, shall not exceed 1 percent of the unpa~d balance multiplied by the number of months, including any excess fraction thereof as one month, elapsing between the date of such contract and the du~ date of the last installment, or twenty-five dollars ($25), whichever is greater; provided, that such contract may provide for interest on any delinquent installment from and after the date of delinquency, and for reasonable collection costs and fees in the event of delinquency. "(d) Any provision in any conditional sale contract for the sale of a motor vehicle to the contrary notwithstanding, the buyer may satisfy in full the indebtedness evidenced by such contract at any time before the final maturity thereof, and in so satisfying such indebtedness shall receive a refund credit thereon for such ar~ticipation of payments. The amount of such refund shall represent at least as great a proportion of the time price differential, after first PAGENO="0413" CONSUMER RBIDIT P~1DEC~ION ACP 995 deducting from such time price differential a minimum charge of not to exceed twenty-five dollars (~25), au the sum of the periodic time balances after the month in which such contract is paid in full bears to the sum of all of the periodic time balances under the schedule of payments in the contract, both sums to be determined according to the monthly balances' which would result if the indebtedness were paid according to the terms of the contract* provided however, that the provisions of this subsection shall not impair the right of the seller or his assignee to receive a minimum time price differential of twenty- five dollars ($25), or to receive interest on delinquent installments or reasonable collection costs and fees, as provided in subsection (c) of this section; and provided further, that where the amount of such refund credit would be less than one dollar ($1), no refund need be made. "(e) If the seller, except as the result of an accidental or bona fide error in computation, shall violate any provision of subdivisions (c) or (d) of this section, the conditional sale contract shall not be enforceable, except by a bona fide purchaser for value, and the buyer may recover from the seller in a civil action the total amount paid on the contract balance by the buyer to the seller or his assignee pursuant to the terms of such contract. "(f) If the holder of such contract, except as the result of an accidental or bona fide error in computation, shall violate any provision of subdivision (d) of this section, the buyer may recover from such holder in a civil action the total amount paid on the contract balance by the buyer to such holder pursuant to the terms of such contract. "(g) Any provision in any conditional sale contract for the sale of a motor vehicle to the contrary notwithstanding, at least five days' written notice of intent to sell a repossessed motor vehicle must be given to all persons liable on the contract. Such notice may be given by mail and need be given only to such persons as have furnished the seller or his assignee with an address to which such notice may be sent. If given by mail and either the place of deposit in the mail or the place of address is outside of this State, however, the period of such notice shall be 10 days instead of five days. During such period after such notice is sent, the person or persons liable on the contract may pay in full the indebtedness evidenced by such contract. Such persons shall be liable for any deficiency after sale of the repossessed motor vehicle only if notice has been given pursuant to this subdivision. "(b) No such contract shall contain any provision by which, in the absence of default by the buyer in the performance of any of his obligations under the contract, the holder may accelerate the maturity of any part or all of the amount owing thereunder or repossess the motor vehicle." § 298.5. Repealed. $tats. 1961, c. 1626, p. 3534, § 3, effective Jan. 1, 1962 This section, added by Stats. 1959, c. 1874, p. 4435, § 1, read as follows: "A conditional sales contract may contain a statement to the effect that the buyer or registered owner shall give written notice to the legal owner of any change of address of the buyer or registered owner within 30 days of such change of address. This statement may be printed in the contract in 0 point type or larger and may be separately signed or acknowledged by the buyer at the time of entering into a contract. If this statement is signed or acknowledged it then becomes a part of the contract." § 2983. Enforceability of contract; improper form or finance or delinquency charges; correction; recovery by buyer If the seller, except as the result of an accidental or bona fide error in com- putation, violates any provision of subdivisions (a) or (c) of Section 2982, the conditional sale contract shall not be enforceable, except by a b'ona fide pur- chaser, assignee or pledgee for value or until after the violation is corrected as provided in Section 2984, and if the violation is not corrected the buyer may recover from the seller the total amount paid, pursuant to the terms of the contract, by the buyer `to the seller or his assignee. The amount recoverable for property traded in as all or part of the down payment shall be equal to' the agreed cash value of such property as the value appears on the conditional sales contract. (Added Stats. 1061, c. 1026, p. 3537, § 4, effective Jan. 1, 1902.) PAGENO="0414" COi~S(Th4EE C11Et~1T P1~UllTECT'T~N A~ § 2983.1 Enforceability of contract; violation of provi~io~a8 rekitlng to pre~o~y.~ ment) refln~anoing, or refund of finance charge; election to enforce or rescind If the seller `or holder of a conditional sale contract, except as the result of an accidental o'r bona fide error of computation, violates any provision of subdivi- sion (d) of Section 2982, the buyer may recover from such person three times the amount of any finance charge paid to that person. If a holder acquires a conditional sale contract without actual knowledge of the violation by `the seller of subdivisions (a) or (c) of Section 2982, the con- tract shall be valid and enforceable by such holder except (unless the violation is corrected as provided in Section 2984) the buyer is excused from payment of the unpaid finance charge. If a holder `acquires a conditional sale contract with knowledge of such violation of subdivisions (a) or (c) of Section 2982, the conditional sale contract shall not be enforceable except by a bon'a fide purchaser, assignee or pledge'e for value or unless the violation is' corrected as provided in Section 2984, and if the violation is not corrected the buyer may recover from the person to whom payment was made the amounts specified in Se~tio.n 2983. When a conditional sale contract is not enforceable under Sections 2983 or 2983.1, the buyer may elect to retain the motor vehicle and continue the contract in force or may, with reasonable diligence, elect to rescind the contract and return the motor vehicle. The value of the motor vehicle so returned shall be credited as restitution by the buyer without any decrease which results from' the passage of time in the cash price of the motor vehicle as such price appears on the conditional sale contract. (Added Stats. 1961, c. 1626, p. 3538, § 4, effective Jan. 1, 1962.) § 2983.2 Notice of inteat to sell repossessed motor vehicles; form; prerequisite to liability for delinquency Any provision in any conditional sale contract for the sale of a motor vehicle to the contrary notwithstanding, at least five days' written notice of intent to sell a repossessed motor vehicle must be given to all persons liable on the con- tract. The notice shall be given in person or shall be sent by mail directed to the address of the persons shown on the co'ntract, unless such persons have notified the holder in writing of a different addres's. The notice shall set forth that there is a right to redeem the motor vehicle and the total amount required as of the date of the notice to redeem; may inform such persons of their privilege of rein- statement of the contract, if the holder extends such privilege; shall give notice of the holder's intent to resell the motor vehicle at the expiration of five days from the date of giving or mailing the notice, or if given by mail and either the place of deposit in the mail or the place of address is outside of this state, the period of notice shall be 10 days instead of five days; shall disclose the place at which the motor vehicle will be returned to the buyer upon redemption or rein- statement; and shall designate the name and address of the person to whom payment shall be made. During the perio'd provided under said notice, the person nr persons liable on the contract may pay in full the indebtedness evidenced by the contract. Such persons shall be liable for any deficiency after sale of the repossessed motor vehicle only if the notice prescribed by this section is given within 60 days of repossession and includes the following: 1. A notice, in at least eight-point bold type if the notice is printed, reading a~s follows: "Notice: You are subject to spit and liability if the amount obtained upon sale of the vehicle is insufficient to pay the contract `balance and any other amounts due." 2. An itemization of the contract balance and of any delinquency, collection or repossession costs and fees. In addition, `the notice shall either se't forth the computation or estimate of the amount of any credit for unearned finance charges or canceled insurance as of the date or the notice or shall state that such a credit may be available against the amount due. (Added Stats. 19G1~ c. 1626, p. 3538, § 4, as amended Stats. 1965, c. 804, `p. 2400, § 1.) Section 2 of Stats. 1965, c. 804, p. 2400, provided: "Section 2983.2, as amended in the 19435 Regular Session of the Legislature shall be operative on March 15, 1966, however, a notice given prior thereto pursuant to its provisions shall be effective in all respects." PAGENO="0415" CONSUMER ~EDIT PROTECTION ACT 997 ~ 2983. Default as prereiuisite to repossession or acceleration of maturi~ty In the absence of defattlct by the buyer in the performance of nny of his obli- gations under the contract, the holder may not accelerate the maturity of any part or all of the amount owing thereunder or repossess the motor vehicle. (Added Stats. 1961, c. 1626, p. 3539, § 4, effective Jan. 1, 1962.) § 29813.4 Prevailing party's right to attorney's fees and costs Reasonable attorney's fees and costs shall be awarded to the prevailing party in any action on a conditional sale contract subject to the provisions of this chapter regardless of whether the action is instituted by the seller, holder or buyer. Where the defendant alleges in his answer that he tendered to the plaintiff the full amount to which he was entitled, and thereupon deposits in court, for the plaintiff, the amount so tendered, and the allegation is found to be true, then the defendant is deemed to be a prevailing party within the meaning of this section. (Added Stats. 1961, c. 1626, p. 3539, § 4, effective Jan. 1, 1962.) § 2983.5 Cutting off right of action or defense by assigniment; notice of assign- ment; necessity and form No right of action or defense arising out of a conditional sale contract which the buyer has against the seller, and which would be cut off by assignment, shall be cut off by assignment to any third party whether or not he acquires the contract in good faith and for value unless the assignee gives notice of the assign- ment to the buyer as provided in this section and within 15 days of the mailing of notice receives no written notice of the facts giving rise to the claim or defense of the buyer. A notice of assignment shall be in writing addressed to the buyer at the address shown on the contract and shall identify the contract and inform the buyer that he must, within 1'5 days of the date of mailing of the notice, notify the assignee in writing of any facts giving rise to a claim or defense which he may have. The notice of assignment shall state the name of the seller and buyer, a description of the motor vehicle, the contract balance and the number and amount of the installments. Nothing contained in this section shall be construed as modifying or restricting rights, equities or defenses afforded under Section 1459 of this code or Section 368 of the Code of Civil Procedure with respect to transactions regulated by this chapter. (Added Stats. 1961, c. 1626, p. 3539, § 4, as amended Stats. 1965, c. 327, p. 1436, § 1.) § 2984. Correction of contract to comply with chapter Any failure to comply with any provision of this chapter (commencing with Section 2981) may be corrected by the holder, provided, however, that a willful violation may not be corrected unless it is a violation appearing on the face of the contract and is corrected within 30 days of the execution of the contract or within 20 days of its sale, assignment or pledge, whichever is later, provided that the 20-day period shall commence with the initial sale, assignment or pledge of the contract, and provided that any other violation appearing on the face of the contract may be corrected only within such time periods. A correction which will increase the amount of the contract balance or the amount of any installment as such amounts appear on the conditional sale contract shall not be effective unless the buyer concurs in writing to the correction. If notified in writing by the buyer of such a failure to comply with any provision of this chapter, the cor- rection shall be made within 10 days of notice. Where any provision of a con- ditional sale contract fails to comply with any provision of this chapter, the correction shall be made by mailing or delivering a corrected copy of the contract to the buyer. Any amount improperly collected by the holder from the buyer shall be credited against the indebtedness evidenced by the contract or returned to the `buyer. A violation corrected as provided in this section shall not be the basis of any recovery by the buyer or affect the enforceability of the contract by the holder and shall no't be deemed to be a substantive change in the agree- ment of the parties. (Added Stats. 1961, c. 1626, p. 3539, § 4, as amended Stats. 1963,0. 838, p. 2037, § 1.) § 2984.1 Contract provision regarding insurance coverage After July 1, 1966, every conditional sale contract shall contain a statement in contrasting red print in at least eight-point bold type if the contract is printed, which statement shall satisfy the requirements of Section 5604 of the Vehicle Code, as follows: "Warning-Unless a charge is included in this agreement for public liability or property damage insurance, payment for such coverage is not provided by this agreement." PAGENO="0416" 998 CO~~JMER CREDIT~ ?ROT1~CTION ACT After October 1, 1965, no person shall print for use as a conditional sale eontradt form, any form which does not comply with this section. (Added Stats. 1961, c. 1626, p. 3540, § 4, as amended Stats. 1965, c. 666, p. 2042, § 1.) § 2984.2 Enforceability of provision for inclusion of title to or lien on other property No agreement in connection with a conditional sale of a motor vehicle for the inclusion of title to or a lien upon any personal or real property, ~ther than the motor vehicle which is the subject matter of the conditional sale, or accessories therefor `or special and auxiliary equipment used in connection therewith, or in substitution, in whole or in part, for any therefor, as security for payment of the contract balance, shall be enforceable. (Added Stats. 1961, c. 1626, p. 3540, § 4, effective Jan. 1, 1962.) § 2984.3 Buyer's acknowledgment of delivery of copy of contract; preswm~ption8 Any acknowledgment by the buyer of delivery of a copy of a conditional sale contract shall be printed or written in a size equal to at least 10~point `bold type and, if contained in the contract, shall appear directly above the space reserved for the buyer's signature. The buyer's written ac,knowledgment, conforming to the requirements of this section, of delivery of a completely filled-in copy of the contract, shall be a rebuttable presumption of delivery in any action or proceeding by or against a third party without knowledge to the contrary when be acquired his interest in the contract. If either a copy of the contract or a notice containing items 1 to 8 of subdivision (a) of Section 2982 `of this code is furnished the buyer, and the buyer fails to notify the holder of the contract in writing within 30 days that he was not furnished a copy of the contract as required by this cliapter, it shall be conclusively presumed in favor of such a third party that a copy was furnished as required by this chapter. (Added Stats. 1961, c. 1626, p. ~540, § 4, effective Jan. 1, 1962.) CHAPTER 2c. REAL PROPERTY SALES CONTRACTS [Nnw] Sec. 2985. Definition. 2985.1 Transferability. 2985.2 Encumbering realty sold under unrecorded sales contract in amount due under contract without consent; misdemeanor. 2985.3 Appropriation by seller of payment by buyer when payment by seller on obligation secured by encumbrance on realty due; misdemeanor. 2985.4 Holding pro rata payments for insurance and taxes in trust; applicability of section. 2985.5 Required contents of sales contracts; number of years required to complete payments; basis for tax estimate [New]. Chapter 2c added by Btats. 1961, c. 886, p. 23~3, § 30. § 2985. Definition A real property sales contract is an agreement wherein one party agrees to convey title to real property to another party upon the satisfaction of specified conditions set forth in the contract and which does not require conveyance of title within one year from the date of formation of the contract. (Added S'tat~. 1961, c. 886, p. 2343, § 30, as amended Stats. 1963, c. 560, p. 1442,, § 6.) § 2985.1 Transferability A real property sales contract may not be transferred by the fee owner of the real property unless accompanied `by a `transfer of the real `property which is the subject of the contr~tct, and real property may not be transferred by the fee owner thereof unless accompanied by an assignment of the contract. CALIFORNIA Conu or CIvIL PROORDURE Exemption's-Section 690, et seq. Sections 690.11 690.26 § 690.9 Ecoemptions; poultry Poultry not excee~14ng in value seventy-five dollars. (Added Stats. 1935 c. 723 p.1968,~9.) PAGENO="0417" CONSUMER CREDIT PROTECTION ACT 999 CROSS REFERENCES Poultry, definition of, see Agricultural Code § 379.1. Property of value greater than exempted under this section, creditor's eounter~ affidavit, see § 690.26, subd. (4). § 690.10 Exemptions; wages and earnings of seamen, seagoing fishermen and sealers; exceptions The wages and earnings of all seamen, seagoing fishermen and sealers, not exceeding three hundred dollars, regardless of where or when earned, and in addition to all other exemptions otherwise provided by any law; but. where debts are incurred by any such person, or his wife or family for the common necessaries of life, or Incurred for personal services rendered by any employee, or former employee, or if at the time of the attachment or execution the debtor has no family residing in this State supported in whole or in part by his labor, one-half of such earnings about mentioned is neverthelesis subject to execntion, garnishment or attachment to satisfy debts so incurred. (Added States. 1935, c. 723, p. 1968, § 10.) CROSS REFERENCES Attachment or arrestment of wages, see 46 U.S.C.A. § 601. Seamen defined, see Harbors and Navigation Code § 861. Wages, definition of, See Government Code § 18539, Labor Code § 200 et seq. Waiver of wages not allowed, see Harbors and Navigation Code § 864. § 690.11 Exemptions; earnings; restrictions; affidavit One-half of the earnings of the defendant or judgment debtor received for his personal services rendered at any time within 30 days next preceding the levy of attachment or execution shall be exempt from execution or attachment without filling a claim for exemption as provided in Section 690.26. All of such earnings, if necessary for the use of the debtor's family, residing in this State, and supported in whole or in part by such debtor unless the debts are: (a) incurred by such debtor, his wife or family, for the common necessaries of life; or, (b) incurred for personal services rendered by any employee, or former employee, of such debtor. Prior to causing any levy of attachment on earnings of the defendant received for his personal services, the plaintiff shall file with the levying officer an affidavit that the defendant whose earnings are to be attached has been served with a copy of the summons and of the complaint or that the defendant has been given notice pursuant to Chapter 5 (commencing with Section 1010) of Title 14 of Part 2 of this code that a writ of attachment on his earnings will issue after eight days from the date of such notice. Such notice shall only be required on the first writ of attachment on earnings. (Added Stats. 1935, c. 723, p. 1968, § 11. As amended Stats. 1937, c. 578, p. 1623, § 1; Stats. 1945, c. 822, p. 1515, § 1; Stats. 1955, c. 793, p. 1393, § 3; Stats. 1963, c. 1540, p. 3124, § 1.) CROSS REFERENCES Affidavit for attachment of earnings in action to collect a debt for common necessaries of life, see § 538. Husband and wife, liability for debts, see Civil Code § 168 et seq. Immediate release of half of earnings, see § 69026. Wages, definition of, see Government Code § 18539; Labor Code § 200 et seq. § 690.12 Repealed. Stats. 1965, c. 1363, c. 8~55, § 1 § 600.13 Exemptions; nautical instruments and wearing apparel of master, of- ficer, or seaman All the nautical instruments and wearing apparel of any master, officer, or sea- man of any steamer or other vessel. (Added Stats..1935, c. 723, p. 1969, § 13.) CROSS REFERENCES Seamen, definition of, see Harbors and Navigation Code § 861. Steam vessel, definition of, see Harbors and Navigation Code § 22. § 690.14 Exemptions; fire company equipment, etc. All fire engines, hooks and ladders, with the carts, trucks and carriages, hose buckets, implements, and apparatus thereunto appertaining, and all furniture 83-340-67-pt. 2-27 PAGENO="0418" 1000 CONSUMER CREDIT PROTECTION ACT and uniforms of any fire company or department organized under the laws of this State. (Added Stats. 1935, c. 723, p. 1969, § 14.) § 690.15 E~semptions; arms, uniforms and accouterments; one gun All arms, uniforms, and accounterments required by law to be kept by any per- son, and also one gun, to be selected by the debtor. (Added Stats. 1935, c. 723, p. 1969, § 15.) § 690.235 E~vemptions; funds of persons confined in prison or other correctional facility; amount The funds of any person confined in any prison or facility under the jurisdic- tion of the Department of Corrections oi~ the Youth Authority or confined in any county or city jail, road camp, industrial farm, or other local correctional facility, held in trust for him, or to his credit, in an inmate's trust account or similar account by the State, county, or city, or any agency thereof, not to exceed the sum of forty dollars ($40), shall be exempt from attachment or execution with- out filing a claim for exemption as provided in Section 690.26. (Added Stats. 1959. e. 339, p. 2265, § 1.) § 690.24 E~vemptions; motor vehicle; house trailer One motor vehicle of a value not exceeding three hundred fifty dollars ($350).. One house trailer actually occupied by debtor and his family of a value not cx- ceeding two thousand five hundred dollars ($2,500). (Added Stats. 1935, c. 723, p. 1971, § 24. As amended Stats. 1949, c. 628, p. 1124, § 1; Stats. 1951, c. 1094, p. 2833, § 1; Stats. 1959, c. 1474, p. 3771, § 1.) CROSS REFERENCES Motor vehicle defined, see Vehicle Code § 415. Property of value greater than exempted under this section, creditor's counter- affidavit, see § 690.26, subd. (4). § 690.25 Evemptions; fraternal organization funds for sick or unemployment benefits All moneys belonging to a fraternal organization not exceeding the sum of five hundred dollars, and which moneys are used exclusively in the payment of sick or unemployment benefits to bona fide members of such fraternal organiza- tions, are exempt from execution or attachment. (Added Stats. 1939, c. 728, p.. 2257, § 1.) CROSS REFERENCES Fraternal Benefit Societies, see Insurance Code § 10970 et seq. § 690.26 Ewemptions; affidavits and count er-atfidavits; release; hearing; custody~ and disposition of property; appeal (1) Affidavit of earemption. If the property mentioned in Sections 690.1 to 690.25, inclusive, shall be levied upon under writ of attachment or execution, the defendant or judgment debtor (herein referred to as "the debtor"), in order to avail himself of his exemption rights as to such property, shall deliver to the levy- ing officer an affidavit of himself or his agent, together with a copy thereof, alleg- ing that the property levied upon, identifying it, is exempt, specifying the section or sections of this code on which he relies for his claim to exemption, and all facts necessary to support his claim, and also stating therein his address within this State for the purpose of permitting service by mail upon him of the counter- affidavit and any notice of the motion herein provided. (2) Creditor, service of affidavit and noticc. Forthwith upon receiving the affidavit of exemption the levying officer shall serve upon the plaintiff or the per- son in whose favor the writ runs (herein referred to as "the creditor"), either per- sonally or by mail, a copy of the affidavit of exemption, together with a writing, signed by the levying officer, stating that the claim to exemption has been re- ceived and that the officer will release the property unless he receives from the creditor a counteraffidavit within five days after service of such writing. (3) Counter-affidavit. If the creditor desires tQ contest the claim to exemption, he shall within such period of five days, file with the levying officer a counter- PAGENO="0419" CONSUMER CREDIT PROTECTION ACT 1001 affidavit alleging that the property is not exempt within the meaning of the sec- tion or sections relied upon, or if the claim to exemption be based on Sections 690.1, 690.3, 690.6, 690.8, 690.9, 690.12, 690.17, 690.18, 690.21, 690.24, alleging that the value of the property claimed to be exempt is in excess of the value stated in the applicable section or sections, together with proof of service of a copy of such counteraffidavit upon the debtor. (4) Counter-affidavit, release for failure to file. If no such counteraffidavit, with such proof of service, is so filed with the levying officer within the time al- lowed, the officer shall forthwith release the property. (5) Hearing, right, motion, time, notice. If such counteraffidavit, with such proof of service, is so filed, either the creditor or the debtor shall be entitled to a hearing in the court in which the action is pending or from which the writ issued for the purpose of detremining the claim to exemption, or the value of the prop- erty claimed to be exempt. Such hearing must be granted by the court upon mo- tion of either party made within five days after the counteraffidavit is filed with the levying officer, and such hearing must be had within 15 days from the date of the making of such motion unless continued by the court for good cause. The party making the motion for hearing must give not less than five days' notice in writing of such hearing to the levying officer and to the other party and specify therein that the hearing is for the purpose of determining the claim to exemption. The notice may be of motion or of hearing and upon the filing of the notice with the clerk of court, the motion is deemed made. (6) Hearing, release for failure to request. If neither party makes such mo- tion within the time allowed, or if the levying officer shall not have been served with a copy of the notice of hearing within 10 days after the filing of the counter- affidavit, the levying officer shall f9rthwith release the property to' the debtor. (7) Orders pending hearing, sale of perishable property. At any time while the proceedings are pending, upon motion of either party or upon its own motion, the court may (a) order the sale of any perishable property held by such officer and direct disposition of the proceeds of such sale; and (b) make such other orders as may be proper under the particular circumstances of the case. Any orders so made may be modified or vacated by the court or judge granting the same, or by the court in which the proceedings are pending, at any time during the pendency of the proceedings, upon such terms as may be just. (8) Possession pending hearing. The levying officer in all cases shall retain physical possession of the property levied upon if it be capable of physical pos- session, or in the case of property not capable of physical possession, the levy shall remain in full force and effect, pending the final determination of the claim to exemption; provided, however, that no sale under execution shall be had prior to such final determination unless an order of the court hearing the claim for exemption shall so provide. (9) Procedure, pleadings, evidence and judgment. At such hearing, the party claiming the exemption shall have the burden of proof. The affidavits and counter- affidavits shall be filed by the levying officer with the court and shall constitute the pleadings, subject to the power of the court to permit an amendment in the interests of justice. The affidavit of exemption shall be deemed controverted by the counter-affidavit and both shall be received in evidence. Nothing herein con- tained shall be construed to deprive anybody of the right to a jury trial in any ease where by the Constitution such right is given, but a jury trial shall be waived in any such case in like manner as in the trial of an action. No findings shall be required in a proceeding under this section. When the hearing is before the court sitting without a jury, and no evidence other than the affidavit and counter- affidavit is offered, the court if satisfied that sufficient facts are shown thereby, may make its determination thereon; otherwise, it shall order the hearing con- tinued for the production of other evidence, oral or documentary, or the filing of other affidavits and counteraffidavits. At the copclusion of the hearing, the court shall give judgment determining whether the claim to exemption shall be allowed or not, in whole or in part, which judgment shall be determinative as to the right of the creditor to have the property taken and held by the officer or to subject the property to payment or other satisfaction of his judgment. In such judgment the court shall make all proper orders for the disposition of such prop- erty or the proceeds thereof. PAGENO="0420" 1002 CON~1JMER CREDIT PROThcTION A~T (10) JlLdgrnent, transmittal to `levying `officer, effect. A copy of any judgment entered in the trial court shall be forthwith `transmitted~by the clerk to the levying officer in order to permit such officer to either release the property attached or to continue to hold It or sell it. in accordance with the provisions of the writ pre- viously delivered to him. Such officer, unless an appeal from the judgment be waived, or the judgment has otherwise become final, shall continue to hold such property under attachment or execution, continuing the sale of any property held under execution until such judgment becomes fimil; provided, however, that if a claim to exemption under Section 690.11 be ~fltiWed by such judgment, the debter ~ball be entitled to a `release of the earnings `so~tempted at the expiration of three days, unless `otherwise ordered b~r the court or unless the levying officer shall have been served with a copy'of a notice of appeal from the judgment. (11) Service ~l1y `~na%l When any documents required hereunder are served by mail, the pro'visiolis of this code relating to service by mail shall be applicable thereto. (12) NotiCe of eirtension of time. Whenever the time allowed for an act to be done hereunder is e~t~nded by the court, written notice thereof shall be given promptly to the opposing party, unless such notice be waived, and to the levying officer. (13) Appeals. An appeal lies from any judgment under this section; such ap- peal to be taken in the manner provided for appeals in the court in which the proceeding is had. (Added Stats. 1945 c. 714, p. 1394, § 2. As amended Stats. 1949, c. 369, p.646, § 2; Stats. 1951, c. 1094, p. 2833, § 2; Stats. 1953, c. 840, p. 2161, § 1; Stats. 19~5, c. 793, p. 1393, § 4; Stats. 1955, c. 1376, p. 2468, § 1; Stats. 1957, c. 496, p. 1529, § 2.) CROSS REFERENCES Affidavit defined, see § 2003. Amehdment of pleadings, see § 472 et seq. Claim of exemption, see §`~ 690-690.25. Levy by officers, see §~ 682, 688, 691. Motion, notice and service of, see §~ 1005, 1010, 1011. Pleadings gene~Pally, see ~ 420 et seq. Sale of perishable property, see ~692. Verification, use of affidavit for, see § 2009. CALIFORNIA CIvIL ConE Credit Sales-Section 1801 et seq. Sections 1801.1 1803.1 1803.4 1803.4 1803.5 1803.6 1803.7 1804.1 1805.4 1810.5 1810.6 1810.7 1812.4 1812.5 CIVIL CODE TITLE 2. CREDIT SALES [NEWI Chapter Section 1. Retail Installment Sales 1801 Title 2. a&led by Stats. 1959, c. 201, p. 2092, § 1, operative Jan. 1, 1960 Provisions of this title as not affecting validity of any agreement made prior to effective date of act, see note under § 1801, PAGENO="0421" CONSUMER CREDIT PROTECTION ACT 1003 ChAPTER 1. RETAIL INSTALLMENT SALES Article Section 1. General provisions 1801 2. Definitions 1802 3. Provisions of Retail Installment Contracts 1803. 1 4. Restriet1on~ on Retail Installment Contracts 1804. 1 5. Service Charge Limitation 1805. 1 6. Payments 1806. 1 7. Refinancing and Consolidation 1807. 1 8. Add-on Sales. 1808.1 9. Terms of Purchase by Financing Agency 1809. 1 10. Retail Installment Accounts 1810. 1 11. Attorney's Fees and Court Costs 1811. 1 12. Attachment 1812. 1 12.1 Repossession and Resale 1812. 2 12.2 Penalties 1812. E1 12.3 Action [New] 1812.10 Chapter 1 added, by Stats. 1959, c. 201, p. 2092, § 1, operative Jan. 1, 1960 ARTICLE 1. GENERAL PROVISIONS Sec. 1801. Citation. 1801.1 Waiver of provisions. 1801.2 Partial invalidity. 1801.3 Applicability of provisions. Article 1 added by Stats. 1959, c. 201, p. 2092, § 1, operative Jan. 1, 1960 § 1801. Citation This chapter may be cited as the "Unruh Act." (Added Stats. 1959, c. 201, p. 2092, § 1.) Section 2 of Stats. 1959, c. 201, p. 2108, which made the act operative J~anuary 1, 1960, also provided that Title 2 of Part 4, Division 3, added by the act, should not affect the validity of any agreement made prior to the effective date of the act. § 1801.1 Waiver of provisions Any waiver by the buyer of the provisions of this chapter shall be deemed contrary to public policy and shall be unenforceable and void. (Added Stats. 1959, c. 201, p. 2092, § 1, as amended Stats. 1963, c. 1603, P. 3181, § 1.) § 1802.13 Holder "Holder" means the retail seller who acquires a retail installment contract or installment account executed, incurred or entered into by a retail buyer, or if the contract or installment account is purchased by a financing agency or other assignee, the financing agency or other assignee. The term does npt include the pledgee of or the holder of a security interest in an aggregate nwriber of such contracts or installment accounts to secure a bona fide loan tl~ereon. (Added Stats. 1959, c. 201, p. 2094, § 1.) § 1802.14 Official fees "Official fees" means the fees required by law and actually to be paid to the appropriate public officer to perfect a lien or other security interest, on or in goods, retained oi~ taken by a seller under a retail installment contract or install- ment account. (Added Stats. 1959, c. 201, p. 2094, § 1.) § 1802.15 Person "Person" means an individual, partnership, corporntion, association or other group, however organized. (Added Stats. 1959, c. 201, P. 2094, § 1.) § 1802.16 Financing agency "Financing agency" means a person engaged in this State in whole or in part in the business of purchasing retail installment eontracts~ or installment ac- counts from one or more retail sellers. The term includes but is not limited to a bank, trust company, private banker, or investment company, if so engaged. (Added Stats. 1959, c. 201, p. 2094, § 1.) PAGENO="0422" 1004 CONSUMER CREDIT PROTECTION ACT ARTICLE 3. PROVISIONS OF RETAIL INSTALLMENT CONTRACTS Sec. 1803.1 Date; writing; size of type. 1803.2 Single document; contents. 1803.3 Contract; contents. 1803.4 Obtaining signature of buyer to contract containing blank spaces. 1803.5 Cost of insurance included in contract and separate charge made by buyer. 1803.6 Delinquency charges; costs of collection. 1803.7 Delivery of copy of completed contract to buyer; acknowledgment of de- livery; conclusive presumption. 1803.8 Negotiation of sales by mail or telephone. 1803.9 Cash sale of $50 or less [New]. Article 3 added by Stats. 1959, c. 201, p. 209k, § 1, operative Jan. 1, 1960 §1803.1 Date; writing; size of type A retail installment contract shall be dated and in writing; the printed portion thereof shall be in at least eight-point type. (Added Stats.1959. c. 201, p. 2094, § 1.) § 1803.2 Single document; contents Except as provided in Sections 1803.9 and 1808.3, every retail installment contract shall be contained in a single document which shall contain: (a) The entire agreement of the parties with respect to the cost and terms of payment for the goods and services, including any promissory notes or any other evidences of indebtedness between the parties relating to the transaction, and including any promise, whether made in writing or orally, by the seller, made as an inducement to the buyer to become a party to the contract or which is part of the contract or which is made incidental to negotiations between the seller and he buyer with respect to the sale of the goods or services that are the subject of the contract that the seller will compensate the buyer for referring customers or prospective customers to the seller for goods or services which the seller has for sale or for referring the seller to such customers or prospective customers. In any case in which, pursuant to the preceding provisions, the con- tract contains a promise to compensate the buyer for referring customers or pros- pective customers to the seller or the seller to such customers, the contract must contain a provision to the effect that the amount otherwise owing under the contract at any time is reduced by the amount of compensation owing pursuant to such promise. (b) Either at the top of the contract or directly above the space reserved for the signature of the buyer, the words "Security Agreement" or "Lien Con- tract," as the case may be, shall appear in at least 10-point bold type where a security interest in the goods is retained or a lien on other goods or realty is obtained by the seller as security for the goods or services purchased. Either at the top of the contract or directly above the space reserved for the signature of the buyer, the words "Retail Installment Contract" shall appear in at least 10-point bold type where security is not obtained by the seller for the goods or services purchased. (c) A notice in at least eight-point bold type reading as follows: "Notice to the buyer: (1) Do not sign this agreement before ~OU lead it or if it contains any blank space. (2) You are entitled to a completely filled-in copy of this agree- ment. (3) Under the law, you have the right to pay off in advance the full amount due and under certain conditions to obtain a partial refund of the service charge." (Added Stats. 1959, c. 201, p. 2094, § 1, as amended Stats. 1961, c. 1214, p. 2949, § 2; Stats. 1963, c. 810, p. 1998, § 7, effective Jan. 1, 1965; Stats. 1963, c. 1603, p. 3181, § 3.) Stats. 1963, c. 819, p. 1849, amending this section, enacted the Uniform Com- mercial Code to become effective January 1, 1905, except as to certain contracts validly entered into before the effective date of the act and to the rights, duties and interests flowing therefrom (Commercial Code §~ 10101, 10102). The amendmertt by Stats. 1963, c. 1603, p. 3181, § 3, added the reference to rity agreement" for "conditional sale contract," and deleted former final sentence from subd. (b) which read: "The requirements of this subdivision shall be in addition to any applicable designation required of a chattel mortgage by Civil Code Sections 2956 and 2957." The amendment by Stats. 1963, c. 1603, p. 3181, § 3, added the reference to Section 1803.9 to the exception in the introductory clause, and incorporated the changes made by Stats. 1963, c. 819, p. 1998, § 7. PAGENO="0423" CONSUMER CREDIT PROTECTION ACT 1005 ~ 1803.3 Contract; contents Except as provided in Article 8 of this chapter, a contract shall contain the following: (a) The names of the seller and the buyer, the place of business of the seller, the residence or place of business of the buyer as specified by the buyer and a description of the goods or services sufficient to identify them. Services or mul- tiple items of goods may be described in general terms and may be described in detail sufficient to identify them in a separate writing. (b) The cash sale price of the goods, services and accessories which are the subject matter of the retail installment sale. (c) The amount of the buyer's down payment, itemizing the amounts paid in money and in goods and containing a brief description of the goods, if any, traded in. (d) The difference between item (b) and item (c). (e) The amount, if any, included for insurance, specifying the coverages and the cost of each type of coverage. (f) The amount, if any, of official fees. ~g) The unpaid balance, which is the sum of items (d), (e), and (f). (h) The amount of the service charge, if any. (i) The time balance, which is the sum of items (g) and (h), payable by the buyer to the seller, the number of installments required, the amount of each installment expressed in dollars and the due date or period thereof. (j) The time sale price. The items need not be stated in the sequence or order set forth above; addi- tional items may be included to explain the computations made in determining the amount to be paid by the buyer. (Added Stats. 1959, c. 201, p. 2095, § 1.) ~ 1803.4 Obtaining signature of buyer to contract containing blank spaces The seller shall not obtain the signature of the buyer to a contract when it con- tains blank spaces to be filled in after it has been signed (Added Stats. 1959, c. 201, p. 2096, § 1.) ~ 1803.5 Cost of insurance included in contract and separate charges made to buyer If the cost of any insurance is included in the contract and a separate charge is made to the buyer for such insurance: (a) The contract shall state whether the insurance is to be procured by the buyer or the seller. (b) The amount, included for such insurance, shall not exceed the premiums chargeable in accordance with rate fixed for such insurance by the insurer. (c) If the insurance Is to be procured by the seller or holder, he shall within 45 days after delivery of the good or furnishing of the services under the contract, deliver, mail or cause to be mailed to the buyer, at his address as' specified in the contract, a notice thereof or a copy of the policy or policies of insurance or a certificate or certificates of the insurance so procured. (d) The provisions of Insurance Code Section 1668 shall apply to any violation of this section. (Added Stats. 1959, c. 201, p. 2096, § 1.) § 1803.6 Delinquency charges; costs of collection A contract may provide for the payment by the buyer of a delinquency charge on each installment in default for a period of not less than 10 days in an amount not in excess of 5 percent of such installment or five dollars ($5), whichever is less, but a minimum charge of one dollar ($1) may be made. Only one such de- linquency charge may be collected on any such installment regardless of the period during which it remains in default. The contract may also provide for payment of any actual and reasonable costs of collection occasioned by removal of the goods from the State without written permission of the holder, or by the failure of the buyer to notify the holder of any change of residence, or by the failure of the buyer to communicate with the holder for a period of 45 days after any default in making payments due under the contract. (Added Stats. 1959, c. 201, p. 2096, § 1.) § 1803.'t Delivery of copy of completed contract to buyer; acknowledgm~ent of delivery; conclusive presumption The seller shall deliver to the buyer, or mail to him, at his address shown on the contract, a legible copy thereof completed in accordance with the provisions of this chapter. Until the seller does so, the buyer shall be obligated to pay only PAGENO="0424" 1006 CONSUMER CREDIT PROTECTION ACT the cash sale price. Any acknowledgment by the buyer of delivery of a copy of the contract shall be printed or written in a size equal to at least 10-point bold type and, if contained in the contract shall also appear directly above the space resei~ved for the buyer's signature. The buyer's written acknowledgment, con- forming. to the requirements of this section of delivery of a copy of a contr'act shall be a rebuttable presumption of such delivery and of compliance with this section and Section 1~8O3.4, in any action or proceeding by or against an assignee of the contract without knowledge to the contrary when be purcbase~ the con- tract. If the holder furnishes the buyer a copy of the contract, or a notice con- taining the items required by Section 180&3 an4statiiag that the buyer should notify the holder in writing within 30 days if he was not furnished a copy of the contract, and no such notification is given~ it shall be conclusively presumed in favor of the third party that a copy was furnished as required by Sections 1803.4 `and 1803.7. (Added Stats. 1959, c. 201, p. 2090, § 1, as amended St'ats~ 1961, C. 1214, p. 2950, § 3.) § 1803.8 Negotiation of sales by mail or telephone Retail installment `sale's negotiated an'd entered into by mail or telephone without personal solicitation by a salesman or other representative of the seller, where the seller's ca4~h and deferred payment prices and other term's are clearly set forth in a catalog~ o'r other printed solicitation of'busine~s' which is generally available to the public, may be made as hereinafter provided. All of the provi- sions of this `chapter shall apply to `sudh sales except that the `seller `shall not be required to `deliver a `copy of t1~e `contract to the bayer as provided in Section 1803.7, and if, w~hen the proposed retail installment `sale contract is received `by the seller from the buyer, there are blank `Space's to be filled in, the seller may h~sert in the a'p'prop'i~la'te blank `spaces the amounts of money and other terms which are set forth in the seller's catalog which is then in effect. In lieu of the copy of the contract provided for in Section 1803.7 the seller shall, within 15 days from the `date of sbipmen4 of good's, furnish to the buyer a wri'tten state- ment of the items inserted in such blank spaces. (Add Stats. 1959, c. 201. p.2097, § 1.) § 1803.9 Cash sale of $50 Or less If a `retail installment `sale is a sale of goods or `~ervi'ces fo'r a cash sale price of fifty dollars (`50) or less, `then the `retail installment `contract need not be contained in a `single doeun~ent. If the contract is `contained in more than one document, one such document shall be an original document signed by the retail buyer, `stated to be applicable to purchases of goods or services to `be made by the retail buyer from' time to time. In s'uch case `such document, together with the sales `slip, account book or other written statement relating to ea'ch purchase, shall set forth all of the information required by Section 1803.3 and shall con- stitute a separate retail installment contract for each purchase. On each succeed- ing `purchase `pursuant to `such original document, the `sales `slip, account book o'r other written statement may at the op'tion of the seller constitute the memo- randnm required `by `Section 1808.3. (Added Stats~ 1903, c. 1003, p. 3182~ § 4.) ARTICLE 4. RESTRICTIONS ON RETAIL INSTALLMENT CONTRACTS Sec. 1804.1 ~Pro'hthited provision's. 15042 A'ssigri'ment of `contract. 1804~3 Lien on goods fully paid for or not sold by selha~. 1804.4 Invalidity of prohibited provision's; effect upon contract. Article 4 added by Stat$. 1959, c. 201, p. 2097, § 1, operative Jan. 1, 1960 § 1804.1 Prohibited provisions No contract or obligation `shall `contain an'y provision by which: (a) The buyer agrees not to assert against a seller a claim or defense arising out of the `sale or agree's not to aSsert against an assignee such a claim or defense other than as provided in `Section 1804.2. (b) In the absence of the `buyer's `default in the performance of any of his obligation's, the holder may accelerate the maturity of any part or all of the amount owing Ithereunder. PAGENO="0425" CONSUMER CREDIT PROTECTION ACT 1007 (c) A power of attorney Is given to confess judgment in this state, or an assign- ment of wages is given; provided, that nothing herein contained shall prohibit the giving of an assignment of wages contained in a separate instrument, exe- cuted pursuant to Section 300 of the Labor Code. (d) The seller or holder of the contract or other person acting on his' behalf is given authority to enter upon the buyer's premises unlawfully or to commit any breadh of like peace in the repossestsion of goods. (e) The buyer waives any right of action against the seller or holder of the contract or other person acting on his behalf, for any illegal act committed in the collection of payments under the contract or in the repossession of goods. (f) The buyer executes a power of attorney appointing the seller or holder of the contract, or other person acting on his behalf, as the buyer's agent in collec- tion of payments under the contract or in the repossession of goods. (g) The buyer relieves the seller from liability for any legal remedies which the buyer may have against the seller under the contract or any separate instru- ment executed in connection `therewith. (h) The buyer agrees to the payment of any charge by reason of the exercise of his right to rescind or void the contract. (i) The seller or holder of the contract is given the right to commence an action on a contract under the provisions of this chapter in a county other than the county in which the contract was in fact signed by the buyer, the county in which the buyer resides at the commencement of the action, the county in which the buyer resided at the time That the contract was entered into, or in `the county in which the goods purchased pursuant to such contract have been so affixed to real property as to becomea part of such real property. (Added Stats. 1959, c. 201, p. 2097, § 1, as amended Stats. 1961, c. 1214, p. 2950, § 4; Stats. 1963, c. `1310, p. 2833, § 1; Stats. 1965, c. 776, p. 2361, § 1.) § 1804.2 Assignment of contract No right of action or defense arising out of a retail installment sale which the buyer has against the seller, other `than as provided in Section 1812.7, and which would be cut off by assignment, shall be cut off by `assignment of the contract to any third party whether or not he acquires the contract in good faith and for value unless the assignee gives notice of the assignment to the buyer as provided in this section, and within 15 days of the mailing of such notice receives no writ- ten notice of the facts giving rise to the claim or defense of the buyer. A notice of assignment shallbe in writing addressed to the buyer at the address ~hown on the contract and shall: identify the contract; state the name of the seller and buyer; describe the goods ~i'nd/or services; state the time balance and the number and amounts of the installmenth. The nOtice of assignment shall contain the following warning to the buyer. You have 15 days within Which to notify us Of any claims or defenses which you may have against the seller. If you have any complaints or objections to make, you should notify us at this time. Nothing contained in this section shall be construed as modifying or restricting rights, equities or defenses afforded under Section 1459 of this code or Section 368 of the Code of Civil Procedure with re~pect to transactions regulate4 by this chapter. (Added Stats. 1959, c. 201, p. 2098, §1, as amended Stats. 1961, c. 1214, p. 2951, § 5; Stats. 1963, c. 1602, p. 3180, § 1.) Section 11 of Stats. j961, c. 1214, p. ~2953, provided: "Notwithstanding the amendment of Section 1804.2 enacted at the 1961 Regular Session of the L~gisla-, ture, a notice of assignment made in the form and manner provided by the sec- tion prior to the amendment shall be valid and effective until Ju'y 1, 1962." § 1805.4 Inclusive c'ha~ge The service charge shall be inclusive of all charges incident to investigating and making the contract and for the extension of the credit proVided for in the contract, and no fee, expense or other charge whatsoever shall be taken, received, reserved or contracted Thr except as otherWise provided in this ~bapter. (Added Stats. 1959,, c. 201, p. 2098, § 1.) § 1805.5 `Splitting or dividing sales transactions No seller' shall induce or permit any buyer to split up or divide any sales trans~ action for the purpose of contracting for or receiving a higher rate of time PAGENO="0426" 1008 CONSUMER CREDIT PROTECTION ACT price differential than would otherwise be permitted by this article or to obtain the exemption permitted by Section 1801.3 of this chapter. (Added Stats. 1959, c. 201, p. 2099, § 1.) ARTICLE 6. PAYMENTS Sec. 1800.1 Payment to last known holder of contract or installment account; dis- charge of obligation. 1806.2 Statement of unpaid balance. 1806.3 Payment before maturity; refund credit. 1806.4 Acknowledgement of payments; release of security. Article 6 added by Stats. 1599, c. 201, p. 2099, § 1, operative Jan. 1, 1960 § 1806.1 Payment to last known holder of Contract or inste~llment accownt; dis- charge of obligation Unless the buyer has notice or actual or intended assignment of a contract or installment account, payment thereunder made by the buyer to the last known holder of such contract or installment account, shall to the extent of the payment, discharge the buyer's obligation. (Added Stats. 1959, c. 201, P. 2099, § 1.) § 1806.2 Statement of unpaid balance At any time after its execution, but not later than one year after the last payment thereunder, the holder of a contract shall, upon written request of the buyer made in good faith, promptly give or forward to the buyer a detailed written statement which will state with accuracy the total amount, if any, unpaid thereunder. Such a statement shall be supplied by the holder once each year without charge; if any additional statement is requested by the buyer, the holder shall supply such statement to the buyer at a charge not exceeding one dollar ($1) for each additional statement supplied to the buyer. The pro- visions of this sectiOn shall not apply to those transactions wherein, instead of periodic statements of account, the buyer is provided with a passbook or payment book in which all payments, credits, charges and the unpaid balance is entered. (Added Stats. 1959, c. 201, p. 2099, § 1.) § 1806.3 Pa4jment before maturity; refund credit Notwithstanding the provisions of any contract to the contrary, any buyer may pay the Oontract in full at any time before maturity and in so pay- * * * (d) The service charge may be computed on a schedule of fix&l amounts if as so computed it is applied to all amounts of outstanding balances equal to the fixed amount minus a differential of not more than five dollars ($5), provided that it is also applied to all amounts of outstanding balances equal to the fixet amount plus at least the same differential. (Added Stats. 1959, c. 201, p. 2104,. § 1.) § 1810.5 Monthly sta4ement; ex~ntents The seller or holder of a retail installment account shall promptly provide the buyer with a statement as of the end of each monthly period (which need not be a calendar mon.th) setting forth the following: (a) The balance due to the seller or holder from the buyer at the beginning of the monthly period. (b) The dollar amount of each purchase `by the buyer during the monthly period and, (unless `a sales slip or memorandum of each purchase has previously been furnished the buyer or is attached to the statement) the purchase or posting date, a brief description and the cash price of each purchase. (c) The payments made by the buyer to the seller or holder and any other credits to the `buyer `during the monthly period. (d) The amount of the service charge. (e) The total `balance in `the account at the end of the monthly period. (f) A legend to the effect that the buyer may `at any time pay his total ba1ance~ The items need not be stated in the sequence or order set forth above; addi- tional items may be included to explain the computations made in determining the amount to be p'aid by the buyer. (A'dded Stats. 1959, c. 201, p. 2104, § 1.) PAGENO="0427" CONSUMER CREDIT PROTECTION ACT 1009 ~ 1810.6 Service charge as inclusive of all incidental charges; agreement for pay- ment of attorney's fee's and costs The service charge shall include all charges incident to investigating and mak- ing the retail installment account. No fee, expense, delinquency, collection or other charge whatsoever shall be taken, received, reserved or contracted by the seller or holder `of a retail installment account except as provided in this section. A seller may, however, in an agreement which is signed `by the buyer and of which a copy is given or furnished to the `buyer provide for the payment of attorney's fees and costs in conformity with Article 11 of this chapter. (Added Stats. 1959, c.201,p.2105, §1.) § 1810.7 Cost of insurance separately charged to buyer; agreement If the cost of any insurance is to `be separately charged to the buyer, there shall be an agreement to this effect, signed by both the buyer and the seller, a copy of which shall be given or furnished to the buyer. Such agreement shall state whether the insurance is to be procured `by the `buyer or the seller or holder. If the insurance is to be procured by the seller or holder, the seller or holder shall comply with the provisions of Section 1803.5. (Added `Stats. 1959, c. 201, p. 2105, § 1.) * * * * * * * also be liable to him for all damages suffered `because of such failure. (Added S'tats. 1959, c. 201, p. 2106, § 1, as amended Stats. 1961, c. 1214, p. 2951, § 7; Stats. 1963, c. 1952, p. 4017, § 1.) § 1812.3 Notice; contents; service The notice provided for in Section 1812.2 shall be given to the buyer and any other person liable by causing it to `be delivered `personally or to be deposited in the United States mail addressed to the buyer or to such other person at his last known address and `shall advise the `buyer or such other person of his right to redeem as provided for in `Section 1812.2. If the holder determines to sell the goods at public sale he shall give notice of the time and place of sale at least 10 days before the date of sale by delivering a copy of the notice personally to the buyer or other person liable or `depositing the same in the United States mail addressed to the buyer or such other person at his last known address. (Added Stats. 19'59, c. 201, p. 2106, § 1, as amended `Stats. 1961, c. 1214, p. 2952, § 8.) § 1812.4 Application of proceeds of resale The proceeds of a resale shall `be applied (1) to the payment of the expenses thereof. (2) to the payment o'f any expenses of retaking, including reasonable attorney's fees actually incurred, and of any expenses of keeping, storing, repair- ing, reconditioning or preparing the good's for sale to which the holder may be entitled, (3) to the satisfaction of the balance due under the contract. Any sum remaining after the satisfaction of such claims shall be paid to the `buyer. (Added `Stats. 1959, c. 201, p. 2107, § 1.) § 1812.5 Recovery of deficiency prohibited If the proceeds of the sale are not sufficient to cover items (1), (2) and (3) of Section 1812.4, the holder may not recover the deficiency from the buyer or from anyone who has succeeded to the obligations of the buyer. (Added Stats. 1959, c. 201, p. 2107, § 1, as amended `Stats. 1963, c. 1952, p. 4018, § 2.) ARTICLE 12.2. PENALTIES Sec. 1812.6 Violation; misdemeanor. 1812.7 Nonconipliance with provisions as barring right of recovery; remedy of buyer. 1812.8 Correction of failure to comply with provisions. 1812.9 Willful violations; triple damages. Ar¾cle 12.2 added by Stats. 1959, c. 201, p. 2107; §1, operative Jan. 1, 1960 § 18i2.6 Violation; misdemeanor Any person who shall willfully violate aiiy provision of this chapter shall be guilty of a misdemeanor. (Added Stats. 1959, c. 201, p. 2107, § 1.) PAGENO="0428" 1010 CONStMER CREDIT PROTECTION ACT CALIFORNIA LABOR CODE CHAPTEB 2. ASSIGNMENT OF WAGES See. 300. Conditions of validity. 301-304. Repealed. § 300. Conditions of validity. No assignment of, or order for wages or salary, earned or to be earned, shall be valid unless: (a) Separate written instrument. Such assignment is contained In a separate written instrument, signed by the person by whom the said wages or salary have been earned or are to be earned, and Identifying specifically the transaction to which the assignment relates; and (b) Signature of spov,se. Where such assignment of, or order for wages or salary is made by ~ married person, the written consent of the husband or wife of the person making such assignment or order is attached to such assignment or order; and (c) 2ignat~sre of parent or guardian. Where such assignment or order for wages or salary is made by a minor, the written consent of a parent or guardian of such minor is attached to such order or assignment; and (d) Statement of facts. Where such assignment of or order for wages or salary is ma~1e by a person who is unmarried or who is an adult or who is both unmarried and adult, a written statement by the person making such assign- men't or order, setting forth such facts, is attached to or included in such assignment or order; (e) Statement of age and marital status. No other assignment or order exists in conneetior~ with the same transaction or series of transactions and a written statement by the person making such assignment or order to that effect, is attached thereto or included therein; and (f) Filing with employer. A copy of such an assignment or order and of the written atat~ment provided for in subdivision (d) hereof, authenticated by a notary public, shall have been filed with `the employer, accompanied by an itemized statement of `the amount then due to the assignee; provided, that at such time no other assignment or order for the payment of any wages or salary is subject to payment, and no attachment or levy on execution against said wages or salary is in force. Any valid assignment, when filed in accordance with the provisions contained herein, shall have priority with respect to any subse- quently file& assignment or order or subsequent `attachment or levy on execution. Any power of attorney to assign or collect wages or salary shall be revocable at any time by, the maker thereo1~. Earned `wages; maaimum portion subject to assignment. No assignment of, or order for wages or salat~y shall be Valid unless at the time of the making thereof, such wages or salary have been earned, except for the necessities of life and then only to the person or persons furnishing such necessities of life directly and then only for the amount needed to furnish such necessities. Under any assignment of, or o'rder for wages or salary to be earned, a sum not to exceed 50 p~r centum of the assignor's wages or salary, `and not to exceed 25 per centum of the assignor's wages o'r salary, upon the showing that such wages or salary are necesSary for the Support of his mother, father, spouse, children or other members `of his family, residing In this State and supported In whole or in part by his labor, shall be collectible from the assignor's employer at the time of each payment of such wages or salary. Reliance of employer on statements. The employer shall be entitled to rely upon the statements of fact in the written statement provided for in subdivisions (d) and (e) hereof, without the necessity of inquiring into the truth thereof, and the employer shall incur no liability whatsoever by reason of any payments made by hi~n to an assignee under any assignment or order, in reliance upon the facts so stated. Wages under plan for central place of payment. No assignment of or order for wages or salary earned or to be earned shall be valid under any circumstances, if the wages or salary earned or to be earned are paid under a plan for payment at a central place `or places established under the provisiOns of Section 204a o'f this code. Authorized deductions. This section shall not apply to deductions which the omployer may be requested by the employee to make for the payment `of life, retirement, disability or unemployment insurance premiums, for the payment of PAGENO="0429" CONSITh!ER CREDIT PROTECTION ACT 1011 taxes owing from the employee, for contribution to funds, plans or systems pro~ viding for death, retirmeut, disability, unemployment, or other bene~ts, for the payment for goods or services furuished by the employer to the employee or his family at the request of the employee, or for charitable, educational, patriotic or similar purposes. (Stats.1937, c. 90, P. 202, § 300, as amended Sta'ts.1941, c. 529, p. 1851, § 5; Stats.1943, c. 1048, p. 2988, § 1.) AMENDED IN A5SEMBLY JUNE 5, 1967 CALIFORNIA LEGI5LATURE-1967 REGULAR SEssION-AsSEMBLY Bui~ No. 457 Introduced by Assemblymen Brathwaite, Bill Greene, Burton, Ralph, Elliott, MacDonald, McMillan, Moretti, Roberti, Shoemaker, Bagley, and McGee, Feb- ruary 8, 1967-Referred to Committee on Finance and Insurance An act to amend Sections 538, 540, 542, and 690.11 of the Code of Civil Procedure, relating to attachment of ectrnings The people of the State of California do enact as follows: SECTION 1. Section 538 of the Code of Civil Procedure is amended to read: 538. The clerk of the court, or the justice, where there is no clerk, must issue the writ of attachment upon receiving an affidavit by or on behalf of the plaintiff showing: LEGISLATIVE COUNSEL'S DIGEST AB 457, as amended, Brathwaite (Fin. & Ins.). Attachment of earnings. Amends Sees. 538, 540, 542, and 690.11, C.CP. Exempts' from attachment all of defendant's earnings for personal services, whereas at present only one-half of earnings for personal services rendered within 30 days preceding levy of attachment is automatically exempt, and other half is exempt if necessary for use of debtor's family, residing in this state, subject to prescribed exceptions. Provides that one-half ~net e~ i~gen or the first ~4~00 $70 per week of personal service earnings, whichever is greater, t~hM~ is received for services rendered dur- ing 30 days preceding execution, is exempt from eneh execution without filing claim of exemption, rather than exempting just one-half of £ i~g&u earning& for such services rendered within 30 days preceding execution. Defines ~net eings~ Modifies exemption from execution of all of earnings for personal services ren- dered within such 30 days, when necessary for use of debtor's family, by deleting requirement that family reside in this state nnd Isy delefing enee$ien fee deine ~neurrcd by de4&15ee es fe~nil~ fee neeesseeies~ Vote-Majority; Appropriation-No; State Expense-No. 1. The facts specified in Section 537 which entitle him to the writ; 2. The amount of the indebtedness claimed, over and above all legal setoffs or counterclaims, or the amount claimed as damages; and 3. That the attachment is not sought, and the action is not prosecuted, to hinder, delay, or defraud any creditor of the defendant. Provided, however, that no attachment may be issued under this chapter in any action in which the sum claimed, exclusive of interest and attorney's fees,, is less than one hundred twenty-five dollars ($125). SEC. 2. Section 540 of the Code of Civil Procedure is amended to read: 540. The writ must be directed to the sheriff, or a constable, or marshal of any county in which property of such defendant may be, and must require 1dm to attach and safely keep all the property of such defendant within his county not exempt from execution, specifically excluding the earnings of such defendant, or so much of the property of such defendant as may be sufficient to satisfy the plaintiff's demand against such defendant, the amount of which must be stated in conformity with the complaint, unless such defendant give him security by the undertaking of at least two sufficient sureties, which must first be approved by a judge of the court issuing the writ, or if said writ of attachment j~ issued to another county then by a judge of a court, having jurisdiction in cases involving the amount specified in the writ, in the county where the levy shall have been, or is about to be, made, or deposit a sum of money with the sheriff, constable, or marshal in an amount sufficient to satisfy such demand against such defendant, PAGENO="0430" 1012 CONSUMER CREDIT PROTECTION ACT besides costs, or in an amount equal to the value of the property of such de~ fendant which has been or is about to be attached, in which case to take such undertaking or sum of money in lieu of the property which has been or is about to be attached. In the event that the action is against more than one defendant, any defendant whose property has been or is about to be attached in the action may give the sheriff, constable or marshal such undertaking which must first be `approved by the judge as hereinabove provided, or deposit such sum of money, and the sheriff, constable, or marshal shall take the same in lieu of such property. Such under- taking, or the deposit of such sum of money, shall not subject such defendant to, or make him answerable for, any demand against any other defendant, nor shall the sheriff, constable, or marshal thereby be prevented from attaching or be obliged to release from attachment, any property of any other defendant; pro- vided, however, that such `defendant, at `the time of giving such undertaking to, or depositing such sum of money with the sheriff, constable, or marshal shall file with the sheriff, constable, or marshal a statement, duly verified by his oath, wherein such defendant shall state the character of his title to the attached property and the manner in which he acquired such title, and aver and declare that the other defendant or defendants, in the action in which said undertaking was given or such sum of money was deposited, has or have not any interest or claim of any nature whatsoever in or to said property. Several wrjts may be issued upon `the same affidavit and undertaking s'imul- taneously or from time to time within 60 days' `after the filing of the affidavit and undertaking, to the sheriffs, constables, or marshals of any county or counties, whether or not any writ previously issued has been returned. Sac. 3. Section 542 of the Code of Oivil Procedure is amended to read: 542. The sheriff, constable, or marshal, to whom the writ is directed and dc- livered, must ~upon receipt of instructions in writing, signed by the plaintiff or his attorney Of record, and containing a description of the property, `and in the case of real property or growing crops `the name of the record owner of the real property to b~ attached, or upon which the crops are growing, execute the same without delay, and if the undertaking mentioned in Section 540 of this code be not given, as follows: 1. Real property, standing upon the records of the co'unty in the name off the defendant, must be attached, by recording wit'h the `recorder of the county a copy of the writ, `together with a `description of the property attached, and a notice that it is attached, and by serving an occupant of the property, if there is one upon the property at the time `service i's attem'pted, with a `similar co'py of the writ, de's~ription and notice, o'r if there is no occupant then on the property, then, `by posting `the same in a conispicuons place on the property attached. Service `upoil the occupant may be made by leaving said copy of the writ, description and no'tice with t'he occupant personally, or, in his absence, with any person, o'f `suitable age and `discretion, found u'pon the property at the time `serv- ice `thereof is attempted and who is' either an employee or agent of such occupant or a member of hi's family o'r household. Where the pro'perty `des,cribed in the notice `consists o'f more than one distinct lot, parcel or governmental subdivision an'd any of such lots, parcel's, or governmental subdivisions lie with relation to any of the others so an to form one or more `continuous, unbroken tracts, ope service or `posting nted `be made as to each such eontinnou's, unbroken tract. in. Growing crop~s (whix~h, until `severed, `shall be deemed per'sonal property not capaible of manual delivery), growing upon real property standing `upon the record's of t'he county in the name of the defendant, must be attadhed by record- ing with the tecorder of t'he county a co'py of the writ, together `with a description of the `growi~ig crops' `to he attached, and of the real property upon which the same are .grèwtn'g, and a notice that such growing crops' ave attached in pur- suance of tht writ, and by serving an occupant of the real property, if there i's one `upon the real p'roperty at `the time service is attempted, with a `similar copy of the writ, des'cription and notice, or if there is no oc'cupant then on the real property, then, by posting the same in a conspicuous place on `the veal property. Service upon the o'ceu'pant may be made b'y leaving said co'py o'f the writ, description a~id notice with the occupant personally, or, in his absence, with any person, of suitable age and discretion, found `upon the real `property at tJh~ time `service thereof is attempted and who is either an employee or agent o'f such occupant o'r a member of his fa,mily or household. Where the real property de- scribed in the notice corihist~s of more than one distin'ct lot, parcel or govern- PAGENO="0431" CONSUMER CREDIT PROTECTION ACT 1013 mental `subdivision, and any of such lots, parc~ls or governmental subdivisionls lie with relation to any of the others so ais to form one or more continuous' un- bro1~en tracts, one `service or posting need be made as to each such continuous unbroken tract. Whenever growing `cro'p~s have been attached uuder the provisions of this sub- division, which will greatly deteriorate in value, unless properly cultivated, cared for, harvested, packed or sold, the court issuing such writ, upon applica- tion of the person in whose favor the writ runs, and after due notice to the owner of said `property, may direct the sheriff to ta1~e possession of `said property and to cultivate, care for and preserve the `same and, when necessary, harvest, pack and sell such property. Any sale of such property shall be made in the same manner that property is sold on execution and the proceeds must be retained by the sheriff to be applied to the satisfaction of any judgment which may be recovered in the action in w'hiclh `said writ i's issued. The court shall order said applicant to pay such expenses in advance if the court may deem it proper, or may `direct that `the whole or any part of `such ex'pen'ses' be paid from the proceeds of any sale of `such property. 2. Real `property, or any interest therein, belonging to the defendant, and held by any other `person, o'r standing on the records of the co'unty in the name of any other person, must he/attached in the same manner a's us real property standing upon the records of the county in the name of the defendant by th~ provision's of subdivision 1 of this `section and the notice o'f atta'ctment shall sta'te that the `real pro'pe'rty therein described, and any inte'rest of the `det1~exidan't therein held by o'r standing on the recordis o'f the county ip the name of su'ch other person (naming him), are attached. In addition, a similar copy of the writ, description and notice shall be dOliver'ed to such other person, or hi's agent, if known and within the county, or left at the residence of either, if within the county. The `recorder must in'dex such attachment when reco,rcled, in the names, both of `the defendant and of the `person `by whom the property is held o'r in whose name it stands of record. 2a. Growing crops (which, until severance, shall be deemed personal property not capable of manual delivery), or any interest therein, belonging to the de- fendant, and growing upon real property held by any other person or standing upon the records of the county in the name of any other person, must be at- tached in the same manner as growing crops growing upon real property standing upon the records of the county in the name of the defendant are attached by the provisions of subdivision la of this section, and the notice of attachment shall state that the crops therein described or any interest of the defendant therein, held by, or standing upon the records of the county in the name of, such other person (naming him), are `attached in pursuance of the writ. In addition, a similar copy of the writ, description and notice shall be delivered to such other person, or his agent, if known and within the county, or left at the residence of either, if known and within the county. The recorder must index such attach- ment when recorded, in the names of both the defendant and of the person by whom the real property is held, or in whose name it stands on the record. Whenever growing crops have been `attached under the provisons of this sub- division, which will greatly deteriorate in value unless properly cultivated, cared for, harvested, packed or sold, the court issuing such write, upon application of the person in whose favor the writ runs, and with or without notice as the court directs to the owner of said property, may direct the sheriff to take po's'sesision of said property and to cultivate, c'are for and preserve the same and, when neces~ sary, harvest, pack and sell such property. Any sale of such property shall be made in the same manner that property is sold under execution and the proceeds must be retained by the sheriff to be applied to the satisfaction of any judgment which may be recovered in the action in which said writ is issued. The court shall order said applicant to pay such expenses in advance if the court may deem it proper, or may direct that the whole or any part of such expenses be paid from the proceeds o'f any sale of such property. 3. Personal property, capable of manual delivery, in the possession of the de- fendant, must be attached by taking it into custody. When the personal property is used as dwelling, such as a house trailer, mo'bilehome, or boat, the same is to be attached by placing a keeper in charge of the property, at plaintiff's expense, for at least two (2) days. At the expiration of said period the officer shall remove its occupants, and t'ake the property into his immediate custody, unless other dis~ position is made by the court or the parties to the action. Whenever `a levy under attachment or executiofl shall be made on personal property, other than money, or PAGENO="0432" 1014 CONSUMER CREDIT PROTECTION ACT a vehicle reqt~red to be registered under the Vehicle Code belonging to a going concern, then the officer making the leviy must, if the defendant consents, place a keeper in charge of said~ property levied ppoa at plaintiff's expense; for at least two days, and said keeper's fees must be prepaid by the levying creditor. During said period defendant may continue to operate in the ordinary course of business at his own expense provided all sales are for cash arid the full proceeds are given to the keeper for the purposes of the levy unless otherwise authorized by the creditor. After the expiration of said two da~s the slteriff~ constable; or marshal shall take said property into his immediate possession unless other disf~osition is made by the court or the parties to the action. 4* In cases Where the sheriff, constable; or marshal is instructed to take into possession persenai property capable of manual delivery, whether the same is to be placed in a warehouse or in custody of a keeper, the sheriff, constable or mar- shal shall req~ire, aa a prerequisite to the taking of such property, that in addi- tion to wrftte~i instructions the plaintiff or his attorney of record deposit with the shertif, conttable or marshal, a sum of mo~ey sufficient to pay the expenses of taking and keeping safely said property for a period not' to exceed 1~ days. In the event that a further detention of said property is required, the sheriff, constable or marshal must, from time to time, make written demand upon the plaintiff or his attorney for further deposits to cov~er estimated expenses for periods not to exceed five days each. Such demand must be served as provided in Section lOll ~f this code, or by `depositing such notice in the post office in a sealed envelope, as first-class registered mail, postage prepaid, addressed to the person on whom it is served at his laSt known office or place of residence. In the event that the money so demanded is not paid, the sheriff, constable or marshal shall' release the property to the person or persons from whom the same was taken. There s~iall be no liability upon the part of the sheriff, constable or marshal to take or hoI~1 personal property unless the pro~isiions of this section shall have been fully co'i4'plied with. There shall be no liability upon the part of the sheriff, constable or marshal, either to the plaintiff or the defendant for loss by fire, theft, injury or damage of any kind to personal property capable of maunal delivery while in the possession of the sheriff, constable or marshal either In a warehouse or in the custody of a keeper or en route to' or from, a warehouse unless the'sherlff, co~table or marshal shall be negligent Ia his care or handling of the property. 5. lYebts and credits and other personal property not capable of manual delivery must be attached by leaving with the persons' owing such debts', or hav- ing in his possession, or under his control, such credits and other personal property, or with his agent or, in the case `of a corporation, with the president of the corporation, vice president, secretary, assistant siecretary, cashier, or man- aging agent thereof, a copy of the writ, and, if the demand as stated in the writ does not exce~ed three hundred dollars ($80G) exclusive of interest, attorney's fees and costs~ a copy of the complaint in the action from which the writ issued, and, in every t~ase, a notice that the debts owing by him to' the defendants, or the credits end other personal property in his possession, or under his control, belonging to the defendant, are attached In puesuanee of suc'h writ; provided, however, that debts owing to the defend~nt by any of the following financial institutions: (a) banks; (b) savings and loan associations; (c) title insurance companies or underwritten title companies (`as defined in Section 12402 of the Insurance Code); (d) ludristrial loan eomp5nies (as defined in Settion 18003 of the Financial Code), maintaining branch offices, or credits or other personal property whether or not the same is ciapab'le of manual delivery, belonging to the defendant and in the possession of or under the control of such financial institu- tion must be ~ttacbed by leaving a copy of the writ `and the n'otice, together with a copy of the complaint if required hereunder, with the manager or other officer of such financial institution at the offic'e or branch thereof at which the account evidencing sUch indebtedness' of the defendant Is' carried, o'r at which such financial institution has credits or other personal property belonging to the de- fendant in its possession o'r under its control; and no attachment shall be effee- tive `as to any debt o~wing by such firianei'al institution if' the account evidencing such indebtedness is carried at an office or branch there not so' served, or as to any credits or other personal property In its possession or under its control at any office or branch thereof not so served. 6. When ebecks, drafts, money orders and other orders for the withdrawal of money from 4 banking corporation or association, the United States, any state PAGENO="0433" CONSUMER CREDIT PROTECTION ACT 1015 or public entity within any state, payable to the defendant or judgment debtor on demand, come into~ the possession of a levying officer under a writ of attach- ment or execution, the sheriff, constable, or marshal, to whom. the writ is directed and deltvered, shall promptly thereafter endorse tire so~me and present, or cause the same to be presented, for payment. The sheriff, constable, or marshal shall endorse such check, draft, money order or other order~ for the withdrawal of' money by writing the name of the defendant or judgment debtor thereoii and the name and official title of the officer making the levy with the statement that such endorsement is made pursuant to levy of writ of attachment or execution and giving, the title of court and cause in which snch writ was issued, and such en- dorsement shall be sufficient endorsement and no banking corporation or associ- ation or public entity on which said check, draft, money order or other order for the withdrawal of money is drawn shall incur any liability to any person, firm or corporation by reason of p'a~ing to such officer such check, draft, money order or other order for withdrawal of money by reason of such endorsement, nor shall the officer making the levy incur any liability by reason of his endorsing and pre- senting for and obtaining payment of such check, draft, money order or other order for the payment of money; provided, however, that the funds or credit resulting from the payment of such check, draft, money order or other order for' withdrawal of money shall be held by said officer subject to the levy of said writ of attachment or execution. If it appears from the face of such check, draft, money order or other order for' the withdrawal of money that the same has been tendered to the defendant or judgment debtor in satisfaction of a claim or demand and that endorsement thereof shall be considered a release and satisfaction by defendant or judgment debtor of such claim or demand, then, in such event, the officer making the levy shall not endorse said check, draft, money order or other order for the withdrawal of money unless the defendant or judgment debtor shall first endorse the same to the officer making the levy; provided, however, that if said defendant shall not endorse said check, draft, money order or other order for withdrawal of money to the officer making the levy, said officer may thereafter hold such check, draft, money order or other order for the withdrawal of money subject to such levy and shall incur no liability to the defendant or judgment debtor or to any other person, firm or corporation for delay in presentment of the same for payment. Suc. 4. Section 690.11 of the Code of Civil Procedure i's amended to read: 690.11. All of the earnings of the defendant received for his personal services shall be exempt from attachment without filing a claim for exemption as provided for in Section 690.26. One-half of the net earnings of the judgment debtor, or the first e~e h~ad~ed debase ~ seventy dollars ($70) per week, whichever sum is greater, received for his personal services rendered at any time within 30 days next preceding the levy of execution shall' be exempt from execution without filing a claim for exemption as provided in Section 690.26. All of such earnings shall be exempt from execution~ if necessary for the use of the debtor's family~ asel supported in whole or in part by such debtor, unless the debts are; (a) incurred by such debtor, hi~ wife or family, for the common neces- saries of life; or (b) incurred for personal services rendered by any employee, or former employee, of such debtor. ~Net e caiegs" as eeed ie this past eaas444sstes the al~easaia~s ef the ~4g- ~eM debtes less dedeetieas se~i+ised by law as his eseplayes- saab as bre&Fae taa~ aaesepleysaeM iasasaaee- as setisemeat~ bat .`seleatasy dedk+etieas diseeted by the ~adgawat debtes te be dedaeted fsess hi~ saIasy~ sash as ~ Sateags &arda~ health pleas as ehasitable' esateibaheas- shell eat be dederste4 Isase tetal easeiegs ie eleieg £ta&~ ~ ASSEMBLY CALIFORNIA LEGISLATURE (By Yvonne W. Bratbwaite, Member of the Asse~ubl~ Sixty-T1rir~~ Dlstrtet,, Los Angeles) To the Members ~f the Senate Insneaace and ~laao(ial Institutions Ceiumittee: Re AB 457. This bill in its present form was the result of a spbcial subcommittee report on garnishment of the Assembly Judiciary Committee. The bill makes two changes in the law of garnishment. First: It eliminates garnishment of wages before~ 83-34O----67----~pt. 2-28 PAGENO="0434" 1016 CONSUMER CREDIT PROTECTION ACT Court Judgme~it. second: It adds to the present 50% exemption after the jucig- meat to provide 50% or $70 whichever is greater. The reason for the proposed changes and exhibits that dramatize the problems are as follows: I. No Attachment of Wages Before Jadginent: This aspect of AB 457 attemp1~s to ease some of the problems that have caused Oalifornia1 to be the Bankruptcy Capitol of the World. California in 1965 had 25,580 employee bankruptcies close to twice as many as the next highest state. The correlation between harsh garnishment laws and bankruptcy results from the reaction the employer must have to volumes of garnishment. Many employers follow a rule of discharging an employee after one, two or three garnishments. The processin~g of the garnishment can cost the employer as much as $7.~O to process. The threat of discharge from e~nployment in the case of wage garnishment has caused ma~iy collection agencies to use the threat of garnishment to extract payment of debts whether owed or not or whether there may be a valid defense. Attached are examples of letters2 used to coherce payment. Employees of State, County, Cit3r or governmental entities already enjoy this protection and their ability to obtain credit has not been hampered. A summary of the disposition of 480 cases in Los Angeles Municipal Oourt shows 98% were contract actions3 and 57% were accompanied by Writsi of At- tachment for wages. II. The second aspect of this bill is to provide $70 per week for a family ex- empt from garnishment without the necessity of going through a complex ex- emption procedure. Attached is a table4 to show how much a person earning $100 per week has exempt under various laws. This $rtion of the bill allows a minimum amount for use by the l~amily of the debtor. This bill is supported by: Benedcial Management Corp., State Bar of Cali- fornia, Attorney General, UAW, Calif. Tbamstersi Legislative Counsel, United Steelworkers of America and Fireside Thrift. BANKRUPTCY BILL BATTLE-WAGE GARNISHMENT CURB URGED To EASE HARDSHIP (By Leonard Greenwood) California legislators today are scheduled to consider a bill designed to take some of the pressure off persons on ~he verge of bankruptcy. The bill wotild bar garnishment of a worker's earnings until the creditor had obtained a cofurt judgment. And even then, the worker would be allowed to keep at least tl~e first $70 earned a week. At present, 50% of a person's ~alary, with no minimum limit, may be gar- nished before a court judgment simply by obtaining a writ of attachment from the clerk of the Municipal or Superior Court. Sponsors believe the bill would ease cases of extreme hardship and cut the bankruptcy rate in California . . . known as the bankruptcy capital of the world. But it faces tough opposition as a result of intensive lobbying by some business~- men, loan firms and collection agencies. ONE-VOTE MARGIN IN ASSEMBLY The bill, sponsored by Yvonne Brathwaite, Democratic Assemblywoman for the 63rd District (Southwest Los Angeles), scraped through the Assembly June 13 by one vote~ Today it is scheduled to go before the Senate Oommittee on Finance and Insurance. The bill would amend four sections of the Code of Civil Procedure relating to the attachment of earnings. 1 U.S. Department of Labor, Bureau of Labor Standards fact sheet of wage garnishment, p. 3. 2 National FiSance, Arc Loan Northern Calif. Division Office. ~ Summary of Actions filed. `Table. PAGENO="0435" CONSUMER CREDIT PROTECTION ACT 1017 Already, it has been watered down by compromise: The original draft would have provided that half, or the first $100 a week of salary, (whichever was the greater amount), be exempt from attachment. OFTEN CAUSES EXTREME HARDSHIP The present law, allowing up to 50% of a salary to be garnished, often causes extreme hardship for low-income families. A worker with less than $100 a week wages is left with less than $50 a week to care for his family, unless he goes through a lengthy exemption procedure. "This would be only a small improvement (the proposed bill). But it would be where relief is most urgently needed," said Mrs. Brathwalte. "Seventy dollars a week is nothing like enough. It's a compromise. But it's a beginning. A man might be able to feed his family on $70 a week. . Some Californians already are protected to some extent from garnishment before a court judgment. No creditor may obtain a garnishment against the earnings of a state employe without a judgment. "This bill," said Mrs. Brathwaite, "would give other residents of California the same protection already enjoyed by state workers." FACTOR IN SOARING RATE Bankruptcy referees, social workers, lawyers and many businessmen agree the severity of the state's present garnishment laws is one of the main factors in California'~ soaring bankruptcy rate. Last year, the number of bankruptcies in Southern California rose to a high of 26,203. The year before, it was 24,732, and in 1964, it was 21,000. Ninety percent of them are not business failures, but ordinary people working for a wage or salary, who have spent more than they can afford. Garnishments are so simple to obtain in California, they have put a heavy financial and staff burden on employers. Most employers now fire `a worker after two, or at most three, garnishments. Social workers and business operators estimate it costs between $5 and $10 to make each garnishment. "For a firm with thousands of employees, this becomes big money," said Mrs. Brathwaite. "Sometimes, notices are delivered to big firms in bundles." The result is that workers close to the financial borderline are often pushed into bankruptcy by garnishments. For many workers, bankruptcy is the only way of saving their job. And some firms advise their employees to go bankrupt to ease the pressure on the firm's accounting department. Mrs. Brathwaite, Whose constituency contains ~ high proportion of lower in- come workers, plans to keep up her work toward relief from this pressure. "California has one of the highest bankruptcy rates in the country," she said. "There must be some reason for it. I feel wage garnishments have a big effect on the number of bankruptcies." A state-by-state comparison of garnishment laws and bankruptcy rates seems to bear this out. WIDE VARIANCE IN RATES In California, 50% of a worker's salary may be garnished, and the bankruptcy rate is 153 for every 100,000 of population. In New York, only 10% of a worker's salary may be garnished, and the bankruptcy rate is 28 per 100,000. In Texas, no wage garnishment is allowed, and the bankruptcy rate is 3 per 100,000. Mrs. Brathwaite knows it will be a tough battle to get the bill through the Senate Committee. "I've had strong support from employe organizations, labor unions, credit unions and, generally, finance companies and business. "But there's very strong opposition from some sections of the business com- munity, especially . . . firms that sell largely on credit. FOUGHT COLLECTION AGENCIES "The toughest competition comes from the collection agencies. As a practicing attorney, I've had a lot of opportunity to see what happens in these cases," she said. PAGENO="0436" 1018 CONSUMER CR~DIT PROTECTION ACT "Someone buys too much on credit and gets into difficulty. The creditor puts on the pressure for payment. If h~ gets no results, be hands over the case to the collection agency and they pull no punches "The collection agencies will push people all the way. They get a percentage of whatever they recover, so they're out to get as much as they can. "They'lL pressure and harass a debtor with telephone calls, demands, threats and warnings about wage garnishments. "Often they push so hard the debtor has no alternative but to go bankrupt. But the collection agencies don't care. They have no financial investment. If the man pays, they get their cut. If be goes bankrupt, they lose nothing and move on to the next case~ flISPt~ThS FIRMS' STATEMENT "The small ct~mpanies which oppose the bill say they will stop sales to the low- income worker if this bill goes through. But I know this Isn't true, because they sell now to the welfare recipient and there is nothing they can attach there. "I believe that if this bill is passed the bankruptcy rate will drop. There are~ always some people who try to get out of paying their bills, but most people are honest. They want to pay their debts to keep a good credit rating, because when you have a low wage, this is the only way you can live, on your credit. "If you give a person who is hard pressed a chance to work out his problems, and he doesn't have the immediate pressure of losing half his wage, or even his job through toQ many garnishments, he mav not be forced into bankruptcy. "Sometimes, I wonder why people can't see the simple truth. If a man can keep his head above water, he cant keep on paying his debts. If you push hint beyond his endurance, be goes uhder, into bankruptcy. Then his debts are canceled out. "I can't see that anybody gains from that." WAGE GARNISRM]~NT Wage garnishment is `a collection method used by creditors to' force payments on an employee's debts by requiring the employer to' deduct payments from the employee's earnings before he receives his paycheck. Garnishment is a danger- ous prospect fpr the wage earner because it reduces his available income for' other day-to-day expenses', and because of the possibility he may lose his job, due to the employe~'s unwillingness to become involved in the garnishment process. (New York thIs year became the first State to' prohibit discharging an employee solely because ~iis pay is garnished~) Garnishment laws include some protection for the debtor by exempting a portion of his' earnings from the g~rnisbment proceedings, to' enable him to con- tinue to support himself and his family. The portion of wages that may be gar-. nished is limited to some extent in 48 States, the District of Columbia, and Puerto Rico'; in a few of these State's' it is very strictly limited. Wages' are not subject to' garnishment in Texas' and Pennsylvania. The exemptions, and the circumstances under which they m,ay be claimed, vary greatly fi~om State to State. Some jurisdictions exempt a percentage of the worker's' earnings, while others exempt a specified amount. Sometimes the exemp- tion is allowed only to a head of family or only to residents of the particular State. Under sØme laws, it is still possible to garnish a worker's wages for two o~ more debts at the sam'e time. Thus some States give more protection to a debtor than others. For instance, the California law exempts 50 percent of the worker's wages in all cases, and up to 100 percent if necessary for the use of the debtor's family, except for debts for necessaries. In actual fact, however, a very small minority of those garnished obtain an exemption of over 50 percent due to the complexities of the law. In Maine the exemption is $30 for the pre- ceding month. On the other hand, Hawaii exempts from garnIshment 95 percent of the first $100 per month, 90 percent of the next $100, and 80 percent of the balance. , Sometimes tlie debtor must specifically claim the exemption himself or mu'st prove to the court that the family needs his earnings'. The person living in poverty and ignorance is not likely to be aware of his rights, and in some cases his entire pay~heck may be garnished. There seems1tO be a direct connection between the number of garnishments and ,the number of personal bankruptCies. Studies have shown that States which bave~ PAGENO="0437" CONSUMER CREDIT PROTECflON ACT 1019 harsh garnishment laws and poor credit regulation have the highest number of personal bankruptcies proportionate to their population. States with less harsh laws, such as New York which exempts 90 percent of the debtor's pay, have a much lower rate of personal bankruptcies than do States with inadequate exemp- tion provisions. In 1965 the number of personal bankruptcies filed in Federal courts increased for the 13th straight year. Over 180,000 bankruptcies were filed, of which 163,400 (over 90 percent) were personal or "consumer" bankruptcies. A survey of referees in bankruptcies, conducted early in 1965 by the Administrative Q~1ce of the United States Courts, stated "The harsh garnishment laws of California, Minnesota, Ohio, Tennessee, Virginia, and Michigan were given as a major cause, of insolvency. Loose credit was frequently blamed. ~lras'ping practices, harsh col- lection laws', inadequate exemptions, unregulated finance charges' on retail credit sales and unrealistic deficiency claim judgments were blamed along with reck- less buying and cognovit notes." 1 The report indicated that when a collection agency goes after a debtor's wage's, facing his emptoyer'~ policy Qf nongarpish- ment, he flies bankruptcy in order to save his jab. Other States also cited as "bankruptcy c'apitals" are Alabama, Colorado, and Oregon. In the States mentioned above, the following number of vo'lunt~ry bank- ruptcies were filed by employees in 1965: Alabama 9,522 Ohio 14,850 ~California - 25,580 Oregon 3,080 Colorado - 3,203 Tennessee 8,602 Michigan 5, 877 VIrginia 4,049 Minnesota 2,567 These figures can be compared with the numbe~ of employee voluntary bank- ruptcies in States that prohibit or strictly limit garnishment of wages: Alaska 76 So'uth Carolina 140 Florida 507 South fla.kota. ~44 Pennsylvania 512 Texas A law allowing only limited garnishment would be a deterrent to easy credit, because the businessman would be less inclined to use the courts as his collec- tion agency, `as is often the case now. SAN DIEGO STATE COLLEGE, San Diego, Calif., Jwne 27, 1967. Hon. RICHARD J. DoLwm, The State Senate, ~Sacramento, Calif. Duan SENATOR D0LwIG: On the 13th of June the Senate gave first reading and referred to the Committee on Insurance and Financial in~titution's, AB457. We would hope that you will ac'cept the following written testimony, which is amply justified on the basis of the attached study. As no bill has been introduced which would, as other states have done, simply remove the power of wage attachments, thereby forcing creditors to ration credit more carefully in their own and society's best interest, we must in our testirnolly support AB457. In AB457 some provision is made whereby, unless the eniployee has been proven a debtor, his wages are exempt from attachment. In view of the severe consequences for the employee, of a wage attachment, this is a step in the yight direction. The delineation of the "common necessities of life" distinction is also preferah'le. We have sent similar letters and copies of the report to Sep~tors James Mills, Jack Schrade, and Alfred Song. Although Senators Song and ~ills are not on the Committee, we understand they support its passage. 1 A cognovit note, or confession of judgment, Is a prior written adnilsslon of liability for a debt given by a debtor as security for the debt. Its effect Is to simplify latet legal procedures for the creditor to collect on the debt and, conversely, to make more difficult the debtor's efforts to contest It. PAGENO="0438" 1020 CONSUMER CR~DIT PROTECTION ACT We would afpreciate your giving this report consideration before reaching a decision on A]3457. Cordially, MARJORIE S. TURNER, Chairman, Department of Economics. RAYMOND A. FLOREN, Jr. Research Assistant, Department of Economics. The consumer bankruptcy problem, which in California accounts for about 90% of aJl bankrupticy, is believed by 4iost students to be closely related to wage attachment law and employer personnel practices.' While neither the law nor employer practices are held to cause the problems leading to bankruptcy, Robert 0. Herrmann concludes that- "The use of bankruptcy to avoid wage garnishments, for example, could be reduced if the financially distressed had less reason to fear wage garnish- ment. This fear, at present is probably due more to threats of firing by un- sympathetic employers than to concern over a temporarily reduced pay- check."2 Likewise, a California Assembly Interim Commitee Report cites as an argu- ment for increased debtor's exemptions that "attachment (of wages' frequently leads to discharge of employment." The study here reported was dir~cted toward this specific question: Do wage attachments im fact lead to discipli~ie and discharge? Thus our survey solicited both the estabiished or informal j~ractices of employers who must ultimately withhold the attached wages. Unk~n practices were also studied since presum- ably a union ba~s an interest in the 4iember who may be the target of attachments or who may be disciplined or discharged by the employer because of wage attachments. Findings The employer survey was a random sample of those employers, private and public, listed in the San Diego Chamber of Commerce publication Manufacturers and Major Eni~pZoyers of Ban Diego County, 1965. The analysis is made accord- ing to public and private employer, size of firms, and industry. Appendix A gives additional information on the nature of the sample, the number of returns, and~ the industrial coding. ~Table 1 pre~en'ts private employ~r practices relating to wage a.tthebments.. TABLE 1.-PRIVATE EMPLOYER PRACTICES OR REGULAR EMPLOYEES WHOSE WAGES ARE ATTACHED [W-warning; D-disciplinary action; F-firedl Attachment Standard industry code Number -~- No dis- report- 1st 2d 3d 4th ing a - --------- policy W D F W D F W D F Fired 5th - ciplinary action Fired Contract construction 2 2 - - - - 1 - - 1 - - - - 1 Manufacturing Transportation and coñ~munication Wholesale and retail 21 21 -- - - 19 5 5 -- -- 4 - 15 15 -- -- 11 1 1 - 1 1 3 8 - - 12 4 2 -- 2 4 -- 8 1 1 3~ 1 3 Finance, insurance, and real estate Services 12 11 -- 1 7 4 17 17 -- -- 15 -- 2 4 -- 6 -- 3 2 9 3 2 3. Total 72 71 -- 1 57 2 12 24 -- 35 10 1 13 Seventy-one of the 72 firms with a policy, or 98.~l% of firms reporting on this question, gave a warning on the first wage attachment. On the second attach- ment, those willing to rely on a warning dropped to 80.3%, and twelve firms or abt~ut 17% fired the~employeç. Fo~ ~ th ~attechment, thirty-five additional firms reported they would fire the employee, which means that cumulative % of employees would fire an employee with as many as three wage attachments, In PAGENO="0439" CONSUMER CREDIT PROTECTION ACT 1021 addition, another 10 employers reported they would fire employees on the fourth attachment and another 1 for .the fifth. Of the 72 companies reporting on this question of firing only 13 or 18% did not fire employees for wage attachment. Of these thirteen employers 9 reported wage atfiacitreents were not a problem. This data must be interpreted in the light of wage attachment law. As it is possible for one creditor to attach 50% of an employee's wages both in multiple levies and in several separate but successive pay periods,4 one bad debt may be the cause of the debtor's losing his job. This data fully supports the contention that wage attachment precipitates the firing of regular employees. In the case of probationary employee, 14 of the 72 or 19.5% of private employers reporteft a policy of firing on first garnishment. Six companies that normally gave 2 warn- ings to regular employees, gave only one to probationary employees. Most of the companies responding on this question (72%), however, treated all employees as regular employees. Government employers were more inclined toward the use of disciplinary lay-offs than were private employers, but government units also considered firing as an appropriate answer to repeated garnishment. Table 2 summarizes governmental unit policy from the returns from two city agencies, five state agencies and 27 county agencies. WAGE EXEMPTION IN 10 LARGEST STATES FOR MARRIED PERSONS EARNING $100 PER WEEK I State Before After judgment judgment State Before After judgment judgment Florida $100 $100 Pennsylvania 100 100 Texas 100 100 Massachusetts 100 50 Michigan 100 50 New Jersey $90 $90 New York 90 90 Illinois 85 85 Ohio 75 75 California 50 50 I 53 C.L.R. 1223. CALIFORNIA LAW Raviaw APPENDIX A Amount of Wages Ewempted From Garnishment, by states Alabama 75%' Alaska $350 (earned within 30 days) if married; $200 if single Arizona 50% (30 days)° Arkansas 100% (60 days)4 California 50% (30 days) ; 100% where debt not for neces- saries and needed to support debtor's ~ Colorado 70% for heads of families; 35% for single per- sons Connecticut 100% from attachment; post-judgment exemp- tion set by court (minimum $25 per week)7 Delaware 90% (New Castle County); 60% (Kent and Sus- sex Counties)8 `ALA. CODE tOt. 7, § 680 (1960). 2ALASEA STAT. §09.35.080 (1962). 5Aasz. Raw. STAT. ANN. §~ 12-1594, 38-1126 (1956). If the wages plus personal property owned do not exceed $500 for married residents or heads of families or $200 for single residents. ARE. CONET. art. 9, § § 1-2; Aan. STAT. § 30.207 (1962). ~ CAL. CODE Cxv. Paoc. § 690.11. CoLo. Raw. STAT. § 77-2-4 (1963). CONN. GEN. STAT. REv. § 52-361 (Supp. 1964). 8 DJcL. CODE ANN. tOt. 10, § § 4913 (b), (c) (1953). In New Cestle County, wages im excess of 90% can only be reached for nece~saries. See text at note 36 .nupra. PAGENO="0440" 1022 CONSIIMER CREDIT PROTECTION ACT District of Columbia 90% of first $200 per month, 80% of next $300, 50% of balance9 Florida 100% 10 Georgia $3 per day plus 50% of excess11 ~Hawaii 95% of first $100 per month, 90% of next $100, 80% of balance 12 Idaho 50%; 75% where debt not for necessaries and needed to support debtor's family (P30 day$); maximum exemption $100 per month `~ Illinois 85% or $45 per week, whichever is more; maxi- mum $200 per week `~ Indiana $15 per week plus 90% of excess ~ Iowa $35 per week for head Of family plus $3 for each dependent child under 18 I~ansas 90% (3 months); 100% from garnishment by col- lection agencies17 Kentucky 90% df first $75 per month; maximum $67.50 `~ Louisiana 80%; minimum $100 per month ~° Maine $30 (one mouth); minimum $10~~ Maryland 75% in some counties; $100 in others2' Massachusetts 100% prkr -to judgment; $50 per week after judg- ment22 Michigan 100% prior to judgment; 23 after judgment 60% for householders having a family, 40% for others, with certain minima and maxima24 Minnesota 50%; 100% (30 days) where necessary for use of family 22 Mississippi $100 for heads of families; $50 for single persons26 Missouri 90% for heads of families 27 Montana 50% (45 days'); 100% where debt not for neces- saries and needed for use of debtor's family28 9D.C. CODE ANN. § 16-572 (Supp. 1965). 10 Limited to resident heads of families. Fn.&. STAT. § 222.11 (1963). A number of states limit the exemption to residents or to heads of fanillies or to cases where there is a show- ing that the portion claimed exempt is necessary for the support of the debtor's family or to combinations of these factors. E.g., Iowa and Kansas, notes 193, 194 in/rG. Such limi- tations will not generally be noted. 11 GA. CODE A1~jN. § 46-208 (Supp. 1963). 12 HAWAII R~vL LAWS § 237-1 (Supp. 1963). 181DAE0 CODE ANN. § 11-205(7) (1947). ~ Inn. Ray. STAT. § 62-73 (1963). For garnishment procedure see, ILL. REV. SuAT. § 11-21 (1963) ~ liED. ANN. S~rAT. § 2-3501 (1946). But of. INn. ANN. STAT. § 3-505 (1946) ; see Fomeroy v. Beach, 149 md. 511, 49 N.E. 370 (1898). ~ IowA CODE § 627.10 (1958). No creditor may garnish for more than $150 plus costs. 17 Kan. Gen. Stat. Ann. § 60-2,310 (1964). 18 Ky. Rev. Stat. §5427.010 (2),, (3) (1962). 19 La. ReV. Stat tit. 13, § .3881 (1964). 20 Me. Rev. Stat. tit. 14, oh. 501 § 2602(6) (Sppp, 1965). II Md. Ann. Cqd.e art. 9, 55 31, 3ilA, 3,1B: art. 83, § 8 (Supp. 1965). 22Mass. Gen. Laws oh. 246, § § 28, 82 Eighth (Supp. 1964). S 2'Mich. Stat. Ann. § 27A.4011 (8) (1962). But see note 55 supra. 24 The Michcgan wage exemption is the most complex of any State: S Householders Others Percent Dollars Percent Dollars exempt exempt Maximum Minimum Maximum Minimum 1st garnishment; . S Wages for 1 week or less . ~60 . $50 $30 40 $50 ~20 Wages for more than 1 week 60 90 60 40 50 20 Subsequent garnishments: Wages for 1 week or less 60 30 12 30 20 10 Wagesforlweekto 16 days 60 60 24 30 20 10 Wagesformorethan 16 days 60 60 30 30 20 . 10 See Mich. Stat. Ann. §5 27A.7511 (2), (3), 27A.4031 (1962). Higher amounts may be exempted by the court where the defendant is making support payments. Mich. Stat. Ann. 27A.7511(4) (1962). 29 Mmii. Stat. Ann. §5 550.37(13), 575.05 (Supp. 19.64). ~ Miss Code 4nn. § 307 (Tenth) (Supp. 1964). 27 Mo. Rev. Stat. § 525.030 (1949). ~ Mont. Rev. Codes Ann. § 93-5816 (1964). PAGENO="0441" CONSUMER CREDIT PROTECTION ACT 1023 Nebraska 90% for heads of families29 Nevada 50% (30 days); 100% where debt not for neces- saries and needed for use of debtor's family ~ New Hampshire $20 per week3' New Jersey 90% ; minimum $iS per week32 New Mexico 75% for heads of families 3" New York 90% `~ North Carolina 100% (60 days) where needed for use of debtor's family3' North Dakota $35 per week or, if head of family, $50 plus $5 for each dependent, but no more than $25, per week3' Ohio 80% of first $300 per month and 60% of balance fbr heads of families (minimum $150); $100 (30 days) for others31 Oklahoma 75% (90 days); 100% where needed to support family3' Oregon $175 (30 days)39 Pennsylvania 100% 3' Rhode Island $303' South Carolina 100% (60 days) where needed for use of debtor's family 42 South Dakota 100% (60 days) where needed for Use o1~ debtor's family Tennessee $17 per week for head of family plus $2.50 per week for each dependent under 16; $12 per week for other 3' Texas 100% 3' Utah 50% (30 days); minimum $50 if married or head of family ~ Vermont 50% or $25, whichever is less 3' Virginia 75%; minimum $100 per month, maximum $150. for heads of families; for others 50% of the above48 Washington $35 per week and $5 for each dependent; max!- mum $50 per week, for persons who have fam- ilies dependent on them; $25 per week for others 3' "Nab. Rev. Stat. §25-1558 (1964). `°Nev. Rev. Stat. § 21.090(h) (19:63). 31 N.E. Rev. Stat. Ann. § 512 :21 II (Supp. 1963). 32 N.J. REv. STAT. §~ 2A: 17-56, 17-50 (1951). Where the debtor's annual income ex- ceeds $2,500 the exemption may be reduced. N.J. REV. STAT. § 2A: 17-56 (1951). 3' 80% if the earnings for the past 30 days are less than $100. N.M. STAT. ANN. § 26-2-27' (1965). 3' No income execution is permitted if the debtor's income is $30 a week or less. N.Y. Civ. PRAC. LAWS & RULES § 5231 (e), 6202. See Morris Plan Industrial Bank v. Gunning,. 295 N.Y. 324, 67 N.E.2d 510 (1946). 3'N.C. GEN STAT. § 1-362 (1953). 3' N.D. Laws 1965, ch. 231, § 1, at 449. ~~O~io REV. CODE ANN. §~ 2329.66 (F), 2329.62 (C), 2329.69 (Supp. 19641. 38ORLA. STAT. ANN. tit. 31, §~ 1 (16) (Supp. 1964), 4 (Fifth) (1955) ; tit. 12, §~ 850, 851 (1960). 3' "[E}xcept that when the debt is incurred for family expenses 50 per cent of such earnings shall be subject to such execution or other process." ORE. REV. STAT. § 23.180 (1961). 48 42 PA. STAT. tit. 42, § 886 (1930) ; see Lowe v. Jones, 414 Pa. 466, 200 A.2d 88& (1964) ; Right Lumber Co. v. Kretchmar, 200 Pa. Super. 335, 189 A.2d 302 (1963). 41 RI. GEN. LAWS ANN. § 9-26-4 (12c) (1956). 3' S.C. CODE § 10-1731 (1962). But see text at note 37 supra. 3' S.D. CODE § 33.2404 (Supp. 1960). Total exemption is apparently limited to $1,500. 3'TENN. CODE ANN. §~ 26-207, 208, 209 (Supp. 1965). 3' Tax. CONST. art. 16, 28. 3' UTAH CODa ANN. § 78-23-1 (7) (1953) ; Utah Rev. Cu. Proc. rule Mc (a) (1953). 47Vr. STAT. ANN. tit. 12, § 3020(5) (1958). 48 VA. CODE ANN. § 34-29 (Supp. 1964). The section adjusts the maxima and minima according to whether the debtor is paid weekly, biweekly, semimonthly or monthly. The section also makes it clear the 25% which may be garnished is 25% of the wages between the minimum and the maximum; therefore, the exemption is more accurately stated as $100 per month plus 75% of the next $50. The Virginia provision illustrates the problems that arise when dollar figures are used in exemption statutes. The section Was amended in 1952, 1954 1958. and 1960 in an effort to update th~ minima, and maxima; it is still woefully out of date. 49'WASII. REV. CODE § 7.32.280 (1964). PAGENO="0442" CONSUMER CREDIT PROTECTION ACT 1024 West Virginia 80%; minimum $20 per week 50 Wisconsin 60% (30 days) with certain minima and maxi- ma Wyoming 50% (60 days) 60 W. VA. CODE § 3834(3) (1961). West Virginia uses the term "suggest execution" for post-judgment wage levies. W. VA. CODE § 3834(1) (1961). ~`Wss STAT. ANN. § 272.18 (15) (1958). 62 Wvo. STAT. ANN. § 1-422 (1957). APPENDIX B TYPE AND FREQUENCY OF ATTACHMENT AND EXECUTION LEVIES IN 100 MUNIOIPAL COURT CASES Thirty~one of the cases resulted in levies of writs of attachment or execution; there were attachments in 17, execution in 21. (The total exceeds 31 because in several cases there were both attachments and executions.) Altogether these cases produced a total of 68 levies, at least 47 of them wage garnishments (with respect to some levies the file did not disclose whether it was a levy on wages or other property.) The types and frequency of levies may be summarized as follows: Attachment Execu - tion' ~ Total levies Type of property levied on -~__------ Numberof Numberof cases levies Numberof cases Numberof levies Wages - Bank accounts, Cars ortrucks Other personal property and debts `Real property Unknown 7 8 ~" 1 1 1 2 1 1 3 3 13 ~ 1 0 1 2 39 ~ 2 0 1 2 47 ~ 3 2 2 5 Total 17 19 *22 49 68 1 Includes wage levies pursuant to California Code of Civil Procedure, sec. 710, which provides a procedure similar to `execution for reachi~rg the pay of employees of the State arid its political subdivisions. *15 1 case there r/ere both wage levies and a levy on realty. Hence this total exceeds by 1 the figure previously given. In five cases both writs of attachment and execution were used for wage levies. `Thus, the total number of cases in which wage levies pursuant to either type of writ were `made is 15. The above figures are conservative since the files do' not always fully reflect all writs issued and levied. BENEFICIAL MANAGEMENT CORP. or AMERICA, Morristown, N.J., June 30, 1967. Hon. RICHARD J. DOLWIG, ~Thairman, Insurance and Financial Institutions Committee, Btate S'enate, $acramento, Calif. DEAR SENATOR D0LwIG: This statement is intended to convey to' you and the members of the Committee on Insurance and Financial Institutions the posi- tion of Beneficial Management Corporation of America on AB 457, which bill is presently before your Committee. Beneficial Management Corporation, whom I represent, operates the Bene- ficial Finance System, Western Auto Supply and Spiegel Mail Order House. Beneficial Management's experience and the available data convinces us that there exists a high correlation between the personal bankruptcy rate and Oali- fornia's harsh wage garnishment law. We feel that the time has come for positive legislative action to help stem the rising tide of personal bankruptcy. We believe that AB 457 is a fair compromise toward that end. AB 457 effects the following reform: 1. Wage garnishment prior to judgment, i.e. through writs of attachment, is not permitted. We believe that wage garnishment prior to judgment is unfair in that how much a defendant owes, indeed whether be owes anything, is PAGENO="0443" CONSUMER CREDIT PROTECTION ACT 1025 ~undetermined until judgment is entered. Furthermore, the procedure of attach- ment before judgment lends itself to use as an instrument of coercion, albeit, extortion, to secure the payment of unfounded claims. To the extent that the law permits of such abuse, the entire credit community is injured and, therefore, we strongly support the provision of AB 457 which ends the provision of writs of attachment on wages prior to judgment. 2. After judgment AB 457 provides for $70 a week exemption. This bill as originally introduced called for $100 a week exemption; and the present figure represents a compromise and reflects the need to recognize that, even a judgment debtor, must be left after execution with a sufficient portion of his earnings to feed his dependents and to continue the incentive to work. Under the present law, a man with a family earning $100 a week may have $50 executed upon and go home to his family and his landlord with $50. Under the proposed revision, the same man would take $70 home. We feel that the $20 may well make the dif- ference between the debtor's salvaging his situation or succumbing to the temptation of bankruptcy; as such we consider it more wise than generous to concur in this compromise. AB 457 is primarily a business bill in that it will benefit: 1. Business, by reducing losses through bankruptcy; 2. Employers, by reducing the number of garnishments they may be asked to process at a cost of $5.00 to $10.00 each; as well as increasing employee job per- formance as a result of reduced collection pressure; and 3. Retail credit grantors, the Consumer finance industry, and collection agencies whose public image can use the shot in the arm that would ensue by passage of AB 457. AB 457 does not remove needed effective collection tools. It merely makes them more equitable for all parties concerned. I should further like to take this opportunity to call to the attention of the members of the Committee the Presidential directive to Attorney General Clark to make a comprehensive study of the problems arising from the operation of state garnishment laws. We feel this presages a possible further incursion of the Federal Government into areas of State concern and suggest that appropriate State action might deter such a possibility. A favorable report by your Com- mittee would constitute such appropriate State action. Should you wish further amplification of our position or reasons why we take the approach we do, please feel free to call. Thank you for your courtesy and consideration. Very truly yours, GEORGE D. NICKEL, Regional Public Relations Director. NATIONAL FINANCE Co., SAN FRANCISCO, CALIF. Marie Turk, 45 Hillcrest Dr., San Rafael, Calif.: Date Mar. 10, 1967 $tore Korbette Legal fee 00 Collection expense 17. 00 Court cost 6. 00 Balance of account 16. 59 Total 74. 59 Re: Copy of Assignment to be served in due process attached. Please advise this office of the approximate time you arrive home each evening. Phi~ information is needed to permit the "Sheriffs' Office" to serve you with the usual "Writ and Summons" to cover the "Judgment" against "Wages and Personal Property." If we do not hear from you at once the "Sheriffs' Office" will have no alterna- tive but to serve you on the job at a time of their own choosing. Once a judgment is obtained all Court Cases, Attorney fees, collection ex- pense, etc. will become a part of your obligation. PAGENO="0444" 1026 CONSUMER CREDIT PROTECTION ACT CENTRAL FINANCE & AJUSTMENT Co.,WATS0NvILLE, CALIF~ Re Various accounts vs. Rjvas. Date 5-29-67. Amount $358.71 Evarado Riv~s, 140 Grove St., Watsonville, Calif. WAGE ATTACHM~NT- OUR INVESTIGATION DEPARTMENT H~&S INFOWMED US THAT YOU ARE EMPLOYR~ BY JENSEN BROS. DON'T FORCE US TO LEVY ON YOUR WAERS, WE ARE AWARE OF T1~E FACT TEAT YOU CAN CHANGE JOBS BUP WE WILL RELOCATE YOU WhEN AND WHERE YOU RR~EMPLOY ReMIT AT ONCE OR. . . CONTACT Us ItM~MEDIATsLY NOETuanN CALIrORNIA Divisiox OF~rIcE, OAKLAND~ CALIF. Metropolitan Schools v. Enrique Mercado Legal Notice, as required by law, please be advised of the following "Declaration for Attachment ofEarniugs": You are herewith given notice pursuant to Section 690.11 Cbap~er 5, of Title 14 of Part 2 of the Code of Civil Procedure of the State of California that a writ of attachlnent on your. salary will be issued eight. (8) days from the date of this notice by our attorney and served on your employer by the local sberiWs or marshal's office, Balance owing $417.95. Executed this 10th, day of Pebruary1967. I declare under penalty of perjury that the foregoing, is true and correct. Signed K G. BATIIKE, Mgr. Metropolitan &~hools. (ATTENTION In addition to the above, it has been our experience that when we attaCh a debtor's wages, hi~ employer is inclinedto discharge saidi em- ployee Since attachment causes the employer additional expense in keeping: special records for the sheriff's or marshal's office regarding your wages. It is not our desire to cause undue hardship, so please be guided accordingly.) COOPERATION (IOSTS LEES THAN LEGAL ACTION! YOU ALONE CONTROL NERT MOVE Ano LOAN Co3, Anc DISCOUNT Co., ARC INVESTMENT Co., February 28, 1967. Re Arc Investment Co. #15-32818. Past due Feb. 15. RICHARD MONTOYA, 3469 Westcott Ave., Baldwin Park, Calif. DEAR Sin: Unless we receive a payment within five days, your employer will receive a den~and notice of $979.11 the balance due on your account. If you do not wish your employer to be a party to any further litigation, it is: now necessary for you to advise us immediately as to your intentions in this. matter. The demand notice leaves our office on the above stated time, unless we receive your remittatice. Every employer values the honest, upright individual with a good reputation for paying their hills, prom~t1y. We have saId nothing to your employer about this account, but we cannOt allow this matter to drag any longer. Bring or se~d this notice with your payment. Very truly yours, L. GOLD~ To: Mr. Geo~,ge 1~. Nickel. From: lAtin K. Twinem, Esq. Date: June 29th, 1967. Subject: California A.B. 457. 1. In connection with the above bill which has been amended to provide for the exemption of $70 per week from a writ of attachment (garnishment), it PAGENO="0445" CONSUMER CR~EDIT PROtECTION ACT 1027 occurred tO me that you might be able to make a helpful comparison with similar bills in two other states: a. In Itlhmi's ~ bill ha's been pass~d by the Senate which provides for theexemp- tion of the wages of the head of `a family of $65 a week and $50 for a single person. (The current exemption is $45 for everyone.) h. In Tennessee a bill `to allow an exem~tion £ rem garnishment for heads of families of `$50 or 50 percent of their `weekly pay was given final passage and sent to the Governor. For person's `Other than heads Of `families, `the `exemption would be $40 or 40per~eent Of the weekly pay, whichever is greater. INS1~ALLRIENT CREDiT PROBLEMS AMONG PUBLIC WELFARE RECIPIENTS (By Milton J. Huber*) One chapter in the economic' life of the poor that has received little attention is the installment credit problems of public welfare recipients, particularly ivithin the con'text of welfare department policy on the use of welfare funds. Milwaukee is no exception. A Milwaukee family, to receive assistance, commits itself not to use "any of the money granted me by the Department of Public Welfare fo'r any item not included in the relief budget." There are no provisions in relief grants for repayment of old debts. This policy raises some interesting questions for client, creditor, and agency: `Since installment credit is essentially a contractual relationship between a debtor and a creditor, what happens when the borrower subsequently commits himself to another "contract" with the Welfare Department, which in et~ect "tables" his commitment to the creditor? Since a corresponding commitment not to expect payment is not solicited from the creditor, how does the latter react to the welfare client's new commitment? Does the creditor accept the situation and wait passively in the wings until the welfare client's case is closed? If not, how does the client respond to requests for payment, caught between two con- flicting obligations? What happens in terms of penalties for late payment and accumulating interest to the unpaid balance of a debt while the family is on welfare? If the client is on welfare for any length of time, does the Increased obligation resulting from added interest and penalties awaiting him upon the close of his case jeopardize his post-welfare adjustment? Flow soon after dis- charge from welfare does the creditor exaet payment? Does the garnishment of wages from his new employer jeopardize his job and reduce his income to such a low level that additional supplementary welfare funds are required to provide the family with a minimal level of subsistence? To what extent are welfare workers alert to these aspects of a case, trained to handle them, and solicited by the clients to help resolve them? Summarily, do welfare departments have more of a stake in the credit problems of their clients than their presentprogram and policies would suggest? PROCEDURE In search of tentative answers to some of the~e questions, the writer worked with five second-year graduate social work students at the TJWM School of Social Welfare to study the problem as a group thesis in partial' fulfillment of the requirements for graduation.1 An interview survey was undertaken of general relief recipients who had been garnisheed by retailers or consumer finance com- panies upon obtaining jobs and leaving welfare during the `two mOnths of Octo- ber, 19~4 and May, 1965. These particular months were selected because agency case-closings were not influenced by seasonal variations, such as unemployment, holidays, and seasonal production. Also, these months provided a sufficient period of time between case-closings and the interviewing period for sample families to encounter credit difficulties. Of the 634 general relief families whose cases were closed in Milwaukee County during the two months under study, 148, or 23.3 per cent, had bad their wages (*Mjlton 3. Huber is associate professor, Center for Consumer Affairs, University I3lxten- sion, Milwaukee, Wisconsin.) 1 Gerald Ht~kman, William Rob~'rtsoO. Edwin Sybeidon, Dennis Vinson, and James Wallus, An Erploratory ~5urvey of the Installment Debt Problems of Fifty Milwaukee Families With PSblie Welfare lUstory. Unpublished masters thesis. School of Social Wel- fare, University of Wisconsin-Milwaukee, Milwaukee, Wisconsin. May, 1066. PAGENO="0446" 1028 CONSUMER CREDIT PROTECTION ACT garnisheed by the time of our inquiry, January and February, 1966. Since the primary interest of the study was in installment credit indebtedness, the sample was further limited to families who had been garnisheed by retail merchants or consumer finance companies. This narrowed the sampling to 69 families. A highly mobile group, living in deteriorating neighborhoods subject to land clearance for expressways and urban renewal projects, the 69 families proved to be an elush~e quarry. All the known techniques of "skip tracing" by collection agencies were employed to locate and interview 50 families. What follows is a brief summation of the major findings which have implications for public welfare programming. NUMBER OF CHILDREN IN SAMPLE FAM1LIES 8 or more _________ _______ 7 6 ___ __ 3 ______ 2 0 0 1 2 3 4 5 6 7 8 9 ~0 11; 12: ~3 14 Number of Families Fxcusz 1. Distribution of 50 sample families by number of children. FINDING5 As might be expected, the incomes of the 50 families in our sample were con- siderably below those of Milwaukee families as a whole, the median for all Mil- waukee being $6,6~i4 in 1960.* Eighty per cent of the sample families were earning $5,000 or less at the time of our interviews, 54 percent earned less than $4,000. Fourteen percent of the sample reported current incomes of $6,000 or more; the comparable fig~ure for Milwaukee, in 1960, was 59.9 per cent. In addition, incomes in Milwaukee have increased since 1960. These income figures take on more meaning, in terms of standards of living, when viewed iti the context of family size. Family size as a noteworthy factor in explaining finitncial problems among American families is suggested again here as in other studies.2 The distribution of families by number of children is shown in Fig. 1; the median number of children among our families was 7.1. The average number was 4.96, compared to an estimated 1.3 in 1965 for Milwaukee.3 Moreover, 79 per cent of the 248 children among our families were under 12 years of age.. The more expensive years of child rearing are still before them, a disturbing pros- pect for marginal families under any circumstances. INDEBTEDNESS Our familie~ reported carrying an average debt load of $1,520.50 into their welfare experience, a sizeable sum for families whose loss or lack of income necessitated w~rlfare assistance. More than $1600 of short-term debt was reported *Edltor's Note: Income is used here in a general way to refer to money inflow, not necessarily currently earned Income. Obviously, money inflow of welfare recipient coming from welfare sources is an income transfer. 2 For example, A ~S'tudy of PinanciaZly Over-Ea'tended Families, The Merrill-Palmer Insti- tute, 71 East Ferry Ave., Detroit, Mich., 1965. Milwaukee Bureau of Vital Statistics, The Yellow Book, 1965, page 3. PAGENO="0447" CONSUMER CREDIT PROTECTION ACT 1029 by 32 per cent of the families. On the other hand, 34 per cent of the group owed $400 or less. Three out of four of the families reported that creditors had tried to collect payments while they were on welfare. In almost half of these cases ignorance of the families' welfare status could not be used as an excuse by creditors for at- tempting collections. The creditors had been informed by the families that they were on welfare. As a matter of fact, more than one in five of the families reported merchants or lenders offering them additional credit even though they knew the families were on welfare. One family insisted that one "easy credit" furniture store specializes in extending credit up to $500 to welfare families. There was some indication of families being lured into making credit purchases while on welfare, only to have the creditors, aware of the client's "no-credit pledge," threaten afterwards to expose the family to welfare authorities unless they used welfare funds to repay them. Over a third of the families admitted that they made full or partial payment to creditors while on welfare to "get them off their back's." and a third of the group made payments of $8 per week. The average payment was slightly less than $21 per month. The average welfare grant in Milwaukee at the time of our survey was $115.57 a month. Asked if their welfare worker had been of any assistance with their debt prob- loins, 45 of our families replied in the negative, four in the affirmative, and one refused to answer. Fifteen of the families had asked for help. On the positive side, one worker interceded to get the harassing creditor to leave the family alone. On the other extreme, and more typical, another worker's response to a request for help was that they should "eat more beans and rice while you're having troubles." A number of families reported that welfare workers offered "eat more beans" as a solution to their deJt problems. Of the majority of families who did not solicit help from their workers, 15 did not because they assumed from past experience none would be forthcoming, 12 felt their credit problems would be of no concern `to welfare workers, and the balance felt it would be foolish to ask for help in view of the departmental policy on debt payments. Almost a quarter of the families were garnisheed by creditors within two to four weeks after leaving welfare and returning to work. Another quarter were garnisheed within 90 days. In slightly more than half of these eases, the plain- tiffs were "easy credit" merchants within the ghetto and the balance were con- sumer finance companies. For the 50 families, garnisheed wages appeared to be closely associated with their welfare status. For some, garnishments proved to be the final straws that broke the backs of their marginal subsistence and put them on welfare again. either through loss of job or loss of incentive to continue working. In the words of one family, "The money left in the paycheck after garnishment wasn't enough for food money for a family our size." For other families, garnisheed wages to pay creditors reduced their paychecks to the point where they qualified for supplementary aid from welfare. "If I feel any strain I go down to welfare and they make up the difference," was the way one father expressed it. Among civil service workers particularly, there appeared to be a possible pattern: wage deductions are made to pay creditors under wage assignments; then the workers are sent to welfare for supplemental aid to make up for the creditor's "take." By the time of our interviews, one of seven of our families had gone through bankruptcy since leaving welfare. Since bankruptcy, over half of these families were already experiencing new debt difficulties and the balance were making pày* ments on old debts which they had subsequently reaffirmed with their creditors, even though these debts had been dismissed by the filing of bankruptcy. In all probability these families had reaffirmed these discharged debts to retrain or regain furniture and appliances subject to repossession under bankruptcy pro- ceedings. Repossession of merchandise was experienced by about a fourth of the families while on welfare. In two-thirds of the cases the repossessions cleared the ac- counts. Unfortunately, no information was obtained on the amount of payment already made for the various items by the time of their repossession. It would not be unusual to discover in such cases that payments made exceeded the original value of the merchandise repossessed. The other third of the families experiencing repossession of goods while on welfare were less fortunate. They were hit with ~deficiency judgments and their wages garnisheed shortly after PAGENO="0448" 1030 CONSUMER CREDIT PROTECTION ACT they obtained new employment. One family reported being garnisheed for a $700 balance due on ~t TV set after it had been repossessed. Intermeshed in all their repossession experiences was another credit dIfficulty; namely, the co4signing of loans for other people. Roughly a third of our sample had served as co-makers of a loan for another, thinking they were vouching for the charactOr of a friend or relative. Three out of four of this group had been garnisheed at least once for the defaulted debts for which they bad co~sigried. Almost half of our families felt that the balances they owed their creditors at the time they went on welfare were higher by the time they went off welfare. A little over 10 per cent of the sample found their debt balance to be about what they had expected. One family reported a balance of $600 due on a small loan of ~300 contracted before their welfare experience. Apparently, the rest of the sam- ple lacked sufficient knowledge of their situations on which to base an opinion on the matter. There is every reason to believe that interest on the debts left un- paid continued to accrue during the welfare experiences of our sample families. Given the avei~age amount of indebtedness among our families ($1520.50) when they went on welfare, the customary annual interest rates of 18 per cent on revolving credit accounts and some 24 per cent on small loans could increase the debt problems of our sample families sizably over a period of a year or more. Not surprisingly, the interviews among our sample families revealed little knowledge of interest charges involved in their credit behavior. Nor as a group did they appear to have records of their credit contracts or payments. While there would seem to be grounds for suspecting fraud on the part of creditors in some of the cases, there was not one attempt in the 168 garnishments admitted by our families to contest the legal actiozIs taken against them. Moreover, there appeared to be a pattern among a number of the families to continue doing business with the same creditors who had been garnisheeing their wages. Asked about this, one husband replied, "I didn't know I could go anywhere else without money." Another repli4~d, "Where else can we make the same payment each week and pick up a neW item every time the old bill's about paid up without any change in payments?" With deep resignation one woman sighed, "The only way out of this ~ living for people like us is to send us back South." ~ husband summed up the situation for our sample families with the challenge: "If you were broke most of the time and wanted things for your kids like everybody else, and you kept getting these letters saying, `We have money waiting for you to pay for your purchase on time,' what would you do ?" coNcLusIoNs Sociologists proclaim that the first step in solving a social problem is creating an awareness that a problem exists. The foregoing comments represent a few of the more pertinent findings of a modest interview survey which suggest that the debt problems of public welfare families constitute another in the mounting list of neglected cpnsumer problems of low-income families needing the attention of consumer speeialists. A few tentative conclusions from this exploratory s1urvey would seem apparent. They might serve as propositions for more sophisticated research efforts. First, debt problems appear to be an integral part of the money problems of a number of welfare families. Second, budgets devised for individual welfare families which ignore installment credit obligations are doomed to failure. Third, de- partmental policies voiding use of welfare funds to repay creditors are non- functional as long as the creditor, the piore power party to the credit contract, Is not a party to the non-payment commitment. Fourth, welfare money is beIng used both directly and indirectly to pay off a sma~ll number Of "easy credit" merchants azid consumer finance companies. Fifth, a small number of "easy credit" merchants and consumer ~1nanc~ companies are b4ith soliciting and harass- ing welfare clients and jeopardizing their financial rehabilitation. Sixth, garnish- ments shortl3~ following a return to work are a constant threat toformer welfare recipients and in 1'art are ~a COnse4~Ue11Ce of departmental policy not to deal realistically With the installment credit problems of its clients. Obviously, since the determining Of public welfare policy Is a local reopens!- bility, a survey of policies and, programs on the repayment of debts and within public welfare departments across the nation would be a helpful project In itself. Even though conditIons and practices in a given locality might differ, it may be helpful to enuineeate some questions suggested by the Milwaukee situ- PAGENO="0449" CONSUMER CR1it~IT PROTECTION ACT 1031 ation f~or consumer-oriented professionals to ponder in anticipation of offering their local welfare departments assistance in this area: 1. If the debt problems of clients are nOt being given proper attention presently, what is involved by way of retraining the staff to deal with them adequately? One of the frustrations here is the high turnover of casework stafi~ among welfare departments generally. "One-shot" training programs of staff have little lasting value under such circumstances. 2. What is required to encourage welfare families to solicit the help of de- partmental workers with their credit problems? Unquestionably, policies requiring clientele to abstain from any involve. mont in the Buy-Now-Pay-Later world in which they live reinforces sus- picious feelings among recipients that welfare workers represent the "enemy." The turnover of caseworkers on an individual case over a short period of time decimates chanc~s of a worker establishing a relationship conducive to encouraging recipients to confide in them. 3. If local welfare policy prohibiting debt repayment is inoperative, along what lines might one be drawn which would be more functional and effective? A minimum requirement would be for the department to solicit agree- ments from creditors to "freeze" both payments and the accumulation of interest while a family is on welfare. 4. What can be done to discourage the limited number of "easy credit" mer- chants and small loan companies from preying upon welfare clients? In Milwaukee five credit clothiers and furniture stores and five consumer finance companies were responsible for almost all of the problems the welfare families in our sample experienced. The assignment of a staff person to review the legitimacy and accuracy of debts claimed by these operators might curtail their abusive tactics considerably. 5. What role might the welfare department play in protecting clients from excessive legal actions following the closing of their cases? Public revelations by welfare departments of th? amount of tax revenue in the form of welfare funds being drained off directly or indirectly to satisfy a small group of unscrupulo~us creditors ñiight provide the "education" needed to move the general public to humanize state garnishment laws. It is gratifying that public awareness of the problem of indebtedness among public welfare clientele apparently has already resulted in measures to cope with it in some areas. Minnesota, for example, boasts the only state garnishment law that prohibits the garnisheeing of public welfare recipients within six months of the closing of their cases. The California State Department of Social Welfare professes a seven-stop program to deal with the indebtedness problems of its recipients: (1) help and advice with budget planning, (2) consultation with creditors, (3) referral to appropriate community agencies, (4) debt adjustment services, (5) group counseling, (6) money payments to clients at one or two week intervals, and (7) modified payments to creditors periodically reviewed.4 Equally apparent is the need for more attention to this problem on a general basis by consumer specialists and welfare departments across the country. SELECTED REFERENCES Black, Hillel. Buy Now, Pay Later. New York, William Morrow and Company, 1961. Caplovitz, David. The Poc~ Pay More. Glencoe, IllinOis, Free Press of Glencoe, Division of the Macmillan Company, 866 Third Avenue, New York, New York lQO~2, 1963. Council of Economic Advisors. Economic Report of the President 1964. Washing- ton, D.C., U.S. Government Printing Office, 1964. Epstein, Leno. Some Effects of Low Income on Uhiidren and Their Families. Social Security Bulletin. VoL 24, No. 2, February 1961. Washington, D.C., U.S. Government Printing Office. Harrington, Michael. The Other America, Poverty in tl~e United States. New York, Macmillan Company, 1962. Hickman, Robertson, and others. An Ecep~orat Ory Surveij of the Installment Debt Problems- of Fifty Milwaukee Families with Public Welfare )1istories~ M.S.W. Thesis, University of Wisconsin-Milwaukee School of Social Welfare, 1966. 4 See Ruth M. W11mD, "Strengthening Services Through Money Management Counseling," in Public Welfare, Volume 20, Number 6, April, 1962, page 96. 83-340-67-pt. 2-29 PAGENO="0450" 1032 CONSUMER CREDIT PROTECTION ACT Huber, Milton J. A Study of Financially Over-Ecetended Families. Detroit, The Merrill-Paln~er institute, 1965. Maclntyre, Di~ncan M. Public Assistance, Too Much~ or Too Little? Ithaca, New York, New York State School of Industrial and Labor Relations, Cornell Un!- vërsity, 1964~. Milwaukee Bifreau of Vital Statistics. The Yellow Book: 196~5. U.S. Bureau of the Census. 1960 Population Census. U.S. Bureau of the Census. U.S. Census Of POpulation and Housing: 1960, Final Report. U.S. Department of Health, Education, and Welfare. Growing Up Poor~ Welfare Administration Publication No~ 13, Washington, D.C., U.S. Government Print- ing Office. Working Wit1~ Low Income Families. Proceeding from the National Workshop of March 1965, Washington, D.C., American I~ome Economics Association, 1965. SEI'TE~IBER 9, 1966. Mr. Josr~ru 1~lALDWIN, Director, M~l4,vaukce County Department of Public Welfare, Milwaukee, Wis. DISAR Ma. BALDWIN: I am writing to express the appreciation of our Center for Consumer Affairs for the ëooperation of your department in making pos- sible the recent exploratory survey of the installment credit problems of fifty Milwaukee families with public welfare histories. The five second-year graduate students at the UWM School of Social Welfare, who undertook this project under my supervision to meet their thesis requirement for graduation, also appre- ciate the genuine cooperation of your personnel in making the necessary data available. As you are proba~6y aware, a copy of their group-thesis is on file in your department. Because tt~is project has been a pioneering one, probably the first of its kind among welfare clientele, I thought you might appreciate some summary com- ments on om~ findings. We trust they might be helpful in reviewing present de- partmental jj~o1icy in an area of life among low-income families that until recently has been largely overlooked. Traditionally it has J~een assumed that, because of their low incomes and the seemingly high risks involved, installment credit is not available to poor families and accordingly is not one of their major problems. This notion is no longer tenable. Certainly a lot of credit for this change of insight nationally should go to David Caplovltz for the revelations in his book, The Poor Pwy More. The problem of installment dejt among low-income families today is a frequent topic of the daily press. Undoubtedly, revelations emerging from the ghetto r~ots in a number of cities as well as insights gained in the course of a number of~ anti-poverty projects have been responsible for the increasing atten- tion the problem is receiving. For example, as recently as August 16, 1966, the Wail Street Journal gave page-one, column-one ~i1ling to the subject. Its story on "ghetto rtterchants" covered more than two columns. Today, then, it is com- mon knowledge that installment credit plays a vital role in the life of low-income families. It was this awareness that initially aroused my curiosity about present depart- mental policy requiring welfare clients to sign a formal statement which, in effect, prohibits them from using welfare payments for the repayment of install- ment purchases. I am referring to the commitment not~o have "used any of the money granted me by the Department of Public Welfare for any item not included in the relief budget." As a taxpayer, I can appreciate the intent of this policy. Pragmatically, I became interested in the consequences of this policy for the clients, the welfare department, and taxpayers as well. Some of the questions raised by this policy, and in turn pursued in our pilot study, were along these lines: Since installment credit is essentially a contrac- tual relatiopsbip between a debtor and a creditor, what happens when the fOrmer subsequently commits himself to another "contract" with the Welfare Depart- ment, which ip effect tables his commitment to this creditor? Since a correspond- ing commitment not to expect payment is not solicited from the creditor, how does the latter react to the welfare client's commitment? Does the creditor accept the situativn and wait passively in the wings until the welfare client's case is closed? If not, how does the client respond to his requests for payment, caught between two conflicting obligations? What hflp~~ens in terms of penalties for late payment aZid accumulating interest to the unpaid balance of the debt while the family is o~i welfare? If the client is on welfare for any length of time, does the Increased obligation resulting from added interest and penalties awaiting him PAGENO="0451" CONSUMER CREDIT PROTECTION ACT 1O3~ upon close of his case jeopardize his post-welfare adjustment? How soon after discharge from welfare does the creditor exact payment? Does the garnishment of wages from his employer jeopardize his job or reduce his income to such a low level that additional sipple~er~ta,iy welfare funds are required to provide the family with a minimal level of subsistence? Staff-wise, to what extent are wel- fare workers alert to these aspects of a case, trained to handle them, and solicited by the clients to help resolve them? Summarily, does the department have more of a vested Interest in the credit problems of its clients than its present program and policies would suggest? Given the scope of time and effort that could be applied to this project, we decided to interview only those general relief recipients who had been garnisheed by merchants or small loan companies since leaving welfare for reason of. obtaining jobs during the months of October, 1964 or May, 1965. This approach enabled us to get directly to the hard-core families experiencing the type of prob~ lems about which we were concerned. Almost one in four of the 634 families whose cases were closed in Milwaukee County during these months had been in- volved in garnishments or principle actions by the time of Our survey. Limiting ourselves to plaintiffs who were merchants or small loan companies, we came up with 50 families who could be located and interviewed. Our families reported an average debt-load of $1,520.50 while on welfare, an astronomical amount for families whose loss or lack of income necessitated welfare aid. Compounding their problems, and probably a significant factor in explaining their indebtedness, was the large size of their families. The median number of children per family was 7.1. The average number was 4.90, compared with 1.3 for Milwaukee as a whole. Moreover, 79 per cent of the 248 children among our families were under 12 years of age, which means that the more ex- pensive years of child care are still before them, a disturbing prospect for mar- ginal families under any circumstances. Three out of four of our families reported that creditors had tried to collect payments while they were on welfare. For almost half of these families, ignor- ance of the welfare status could not be used as an excuse for attempting collec- tions since their creditors had been informed previously that they were on wel- fare. As a matter of fact, more than one in five of the families reported mer- chants or lenders offering them additional credit while they were knowingly on welfare. One family was emphatic in insisting that one "easy credit" furniture store specializes in extending credit up to $500 to ADC families. There was some indication of families being lured into making credit purchases while on welfare, only to have the creditors, aware of the client's no-credit pledge, threaten after- ward to expose the family to welfare authorities unless they used welfare funds to repay them. Over a third of the families admitted that they made full or partial payment to creditors while on welfare to "get them off their backs," and a third of this group made payments of $8 per week. The average payment was slightly less than .$21 per month. Asked if their welfare worker had. been of any assistance with their debt prob- lems, 45 of our families replied in the negative, four in the affirmative, and one refused to answer. FIfteen of the famflie~ had asked for help. On the positive side, one worker interceded to get the harassing creditor to leave the family alone. On the other hand, another worker's response to a request for help was that they should "eat more beanis and rice while you're having troubles." Of the majority of families who did not solicit help from their workers, 15 did not be- cause they assumed from past expe'r:ienc:e none would be forthcoming, 12 felt their credit problems would be of no concern, to welfare, and the balance felt it would be foolish to ask for help in view o~ the departmental policy on credit payments. Almost a quarter of the families were `garnisheed by credItor's within two to four weeks after leaving the welfare rofl~ kud returning to work. Another quar- ter was garntisl~ed within 90 days. In slightly, more than half of these cases, the plaintiffs were "easy credit" merchants withiff the ghetto and the balance, with one exception, were small loan ~ompanies. For our fifty families, garnisheed wages appeared to `be intimately associated with their welfare status. For some, garnishmen~s proved to he the final strnwn that broke the backs of their economic indepen~ence and put them on welfare~ either through losis of job or loss of any incentive to continue working. In the words of one family, "The money left in the paycheck after garnishme~~ wasn't enough for foç~d money for a family our size." For other families garnIsheed wages to pay creditors reduced their paycheck to the point where they qualified PAGENO="0452" 1~O84k CONSUMER CREDIT PROTECTrON A~~T for supplemeh1t~try aid from welfare. "If I feel any strain I go down to Welfare and they make up the difference," was the way one father expressed it. Among civil ser~ice workera particularly, there appeared to be a possible pattern: wage dëdbgtioila are made to pOy creditors under wage assigilments and the workers are sent to welfare for supplemental aid to meet their family's basic nerds to make up tile creditor'a"take.° This use of public funds one step removed to satiSfy creditors is a problem that certainly des(erves further attention. By the time of our interviews, one of seven of our families! had gone through bankruptcy since leaving welfare. Since bankruptcy, over half of thes families weSe already experiencing new debt dtfllculties and the balances were making payments on~ old debts covered iTh tile bankruptcy that bad been reaffirmed. In all probability these families had gotten themselyes into new difficulty to retain or regain furniture and appliances that would have been sitbçject to repossession under bankrl~ptOy proceedings. Repossession of mer~handise was experienced by about a fourth of the families while on welfare. In two-thirds of the cases the repossession cleared the account. Unfortunately, no informnfion was obtained on the amount of money already paid for the various items by the time of their repossession. It would not be un- usual to discover in such cases that payments made exceeded the initial value of the inerchandisie repossessed. The other third of the families exiperiencing re- possession of goods while on welfare were less fortunate. They were hit with defidency j~dgments and their wages garnisheed shortly after they obtained new employment One family reported being garnisheed for a $700 balance due on a TV after it bad been repossessed. Intertwined in all their reposSession and bank- ruptcy enperietice ~as another credit difficulty; namely, the go~signing of a loan for another party. Roughly a third of our sample had served as co-maker of a loan for anofher, most likely thinking they were vouching for the character of a friend or relatiVe, and three out of four of this group bad been garnisheed at least OfliCO for the defaulted debts for which they had co-aigned~ Almost half of our families felt that the balances they owed their creditors at the time they went on welfare were higher by the time they went off welfare. A little over 10 per cent of the sample found their debt-balance to he about what they had e~çpected. One family reported a balance of $600 due on a small loan of $300 contracted before their welfare experience. Apparently, the rest of the sample had insufficient knowledge of their situations upon which to base an opinion on the matter. There is every reason to believe that interest on the debts left unpaid continued to accrue during the welfare experiences of our sample families. Given the average amount of indebtedness among our families ($1,520.- 50) while they were on welfare, the customary annual interest rates of 18 per cent on revolving credit accounts and some 24 per cent on small loans could in- crease the debt problems of our sample families sizeably over a period of a year or more. Not surprisingly, our interviews among our sample families revealed little awareness of interest charges Involved in their credit purchasing or borrowing behavior. Nor as a group did they appear to have records of their credit contracts or payments. While there would seem to be grounds for suspecting fraud on the part of creditors in some of the cases, there was not one attempt in the 168 garnishments admitted by our families to contest the legal actions taken against them. Moreover, there appeared to be a pattern among a number of the families to continue doing business with the same creditors who had been garnishing their wages. Asked about this, one husband replied, "I didn't knOw I could go anywhere else withoUt money." Another replied; "Where else can we make the same pay- ment each week and pick up a neW item every time the old bill's about paid up without anly change in payments?" With deep resignation one woman sighed, "The only way out of this doIla~tThwu-and-tWo-dollar5-a-week living for people of my race is to send us back South." A husband summed up the situation for our sample families with the Challenge: "If you were broke most of the time and wanted things for your kidS like everybody else and you kept getting these letters saying, `We have money waiting for you to pay for your purchase on time,' what would you do?" While the foregoing comments represent only a few gleanings from a modest survey of `~0 families, it would appear reasonable to come to a number of tenta- tive conclusions upon which a framework for developing a more comprehensive welfare program to cope with the problem discussed: 1. Debt problems are an integral part of the money problems of a number of welfare falnilies and require the assistance of their workers in resolving them. PAGENO="0453" CONSITMER CREDIT PROTECTION ACT 1~O3~5 2. Phere is some suggestion that the present policy's iixiplications for debt pay- ments are in part responsible for the fact that ninety per cent of the fifty families have not shared their debt problems with their workers. 3. In spite of the present policy, welfare funds are being used both directly and indirectly to pay off a small number of easy credit merchants and small loan companies, particularly in the inner city. 4. Present welfare policy `voiding debt repayment is inoperative as long as the creditor, the more powerful member of the credit contract, is not a party of the non-payment comu~ltment. 5. There is considerable evidence that a relatively small number of "easy credit" merchants and small loan companies are both harassing and soliciting welfare clients and thereby jeopardizing the department's program for these clients' sufficiently to warrant the special attention of the department. 6. Garnishments, shortly following the close of welfare cases, resulting from overdue debts are undoing the work welfare has done fOr the families involved. Once you have bad an opportunity to digest this report, we at the Center for Consumer Affairs would be happy to meet with you to consider ways by which we might be of assistance in helping your office develop a more compre- hensive program on client debt problems. The following questions might suggest some areas for discussion: 1. If debt problems are to be given more attention by th~ department, what is involved by way of retraining of staff to deal with them? 2. If the present policy on debt repayment is inoperative, along what lines might one be drawn which would be more functional and effective? 3. What can be done to discourage the small number of easy credit merchants and small loan companies from preying upon welfare clients? 4. What is required to encourage welfare clients to solicit the help of depart- mental workers with their creçlit problems? 5. What role might the department play in protecting clients from excessive legal actions followir~g the closing of thejr cases? Sincerely yours, MILTON J. RUSEL Associate Prof esror, Center for Conswmer Affairs. ANALYSIS OF CIvIL Count FILINGS or Los ANqELES Mu~ioIPAL Ooun~ L INTRODUCTION Attachments by way of wage garnishments represent a large percentage of the problems brought to the offices of those assisting the indigent, This and obviously related problems motivated a group to run a search of the Civil Court files of the Los Angeles Municipal Court (one of twenty-six Municipal Court Divisions in Los Angeles County) in relation to the nature of suits filed. There was no preconceived idea as to what such a search might reveal; but, in part, it was thought that such a search would confirm in most respects the findings of a study by George Brunn, "Wage Garnishment in California: A study and Recommendations", December 1965 California Law Review, Vol. 53, No. 5, and would assist this Committee in consideration of AB 457. IL COMPILATION OF CIVIL FII~INQ$ Oases filed in the `Los Angeles Municipal Court (fiscal year July 1 to June 30) were: Total eases Parcent 1963-64 1964-65 1965-66 95, 577 102,163 107,616 1 82 185 134 `T~pse p~rcen~g~s of cases were contractual ia nature; tire balance covers auto accidents,convession of properties, u$aw~tçil,Øptainer~ mec~qi~ Upes, ~and ,ralafed "wroags.'~ Source: Los Ange'es muui~(pa1 court public reports. PAGENO="0454" 1036 C~NSVMER CI~EDIT ?~tOTECTION ACT Thuring the ç~orrcapoading p~i4od of time, the Los Angeles County Marshal's Office made attempts to levy on debtors, or persons holding debtor's fupds as follows: 1963-64 10~, 201 times. 1964-05 114, 972 times. 1965-66 127, 762 times. These figur~s are taaintained by the Marshal's Office, but whether such at- tempt to reach the debtor's fund were successful is not recorded for percentage determination. III. RANDO1~t SAMPLING O~' CIVIL FILE The cases f~1ed in the Los Angeles Municipal Court during the first quarter of 1965 indic4ted: Cases Percent Contract action 21, 786 80. 5 Torts (auto accident) 3, 031 ii. 2 Unlawful detainer 1, 266 4. 5 Other 3. 8 Total cases filed - - 27, 080 100. 0 Source: Los Angeles municipal court public records. A. The rai~dom sampling of this quarter1 indicated that 84% of the eases reviewed we~e based on contractual obligations; and, of these, 78% were filed by assignees. This would indicate that of 21,786 eases flied, 17,050 were filed by assignees,° or 63% of the "total" actions filed. B. The ratidom sampling as t~ the ttmouat involved in the lawsuit indicated that, in those actions based on contract, 36.5% were for less than $200.00 (Small Olaims jurisdictional amount) ; therefore, 7,915 cases filed in this period were for less thati $200.00 (approximately 30% of the "total" cases filed in the Municipal Court). IV. DISPOSITION oE 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 in only 8% (or 1,743) of the eases. 2~ In 50.5% of the cases (or 11,002), judgment against the defendant was en- tered by default, entry being made by the Clerk of Court. 3. Of 21% of the writs that indicated a return on the levy of attachment or execution: 57% were on wages 21% were on bank accounts 18% were on personal property However, It is difficult to reconcile this small number in relation to the total handled by the Marshal's Department. V. RELEASE OF ATTACHMENT While a portion of the Code relative to the rele~se of an attachment by the posting of ~ bond or other security is a possibility, no such release is recently a matter of record. Also, claims f~r exemptions from attachment are very infrequent. VI. CONCLU5IONS A.Fiight~to 85% of the actions filed in the Municipal Court are of a contractual nature. 1 The random sample was taken for the months of February, March, April, 1965; based on a random numbers table. This particular period was taken because the grouping was convenient in 1o-atlon to wnvkiri~ space. Two persons worked inrienendently. One exam- hned 215 ca~es the othen~ 2435 ci~'ies : suit whep these twC ~tndleC were eompar~. th'~ ~~if- ference in results was minimal. From this, it was conclude~I thWt the samplings. wére~rei~re- sentative of the whole. even though less than 2% of ci~es illed w~r~ reviewed. Further, a brief corresponding check of the same period for 1966 IndIcated that the results were in accord with what might result from a more extended study. 2 Assignees for the most part are collection agencies. PAGENO="0455" `CONSUMER CREDIT PROTECTION ACT 1037 B. Of these contractual eases, 75% are filed by what is commonly known as col- lection agencies (%rds of the total eases filed) 1. That In over one-half of these case judgment was entered by default. `2. That in only 8% were `the defendants able or willing to file an answer. C. That 30% of the cases filed in the Los Angles Municipal Court would be filed in the Small Claims Court, except that an aSsignee cannot sue in such court, nor will a writ of attachment be issued. P. It is a fair conclusion that the results of the examination covered herein substantiates the article referred to by George Brunu for the San Francisco area. (Mr. Elmore Whitehurst submitted the following articles for the record:) [Journal of the National Conference of Referees in Bankruptcy, July 1966] SCHLOCKMEISTER'S JUBILEE: BANKEUPTCY FOR THE Poon By Ralph C. Brendes and Lawrence H. Schwartz Editor's Note: Mr. Brendes and Mr. Schwartz are third year students at the Tjniver ty of Chicago Law School. Mr. Brendes is President of the Edwin F. Mandel Legal Aid Association and was a member of the Student Advisory Committee for the Law School's Conference on Consumer Credit and the Poor, November 14 and 15, 1965. A resident of Alton, New York, Mr. Brerides has a B.A. degree from Colgate University. Mr. Schwartz was Chairman of the Conference on Consumer Credit and the Poor. He is a resident of Chicago, Illinois and did his under- graduate work at the University of Michigan. This paper was orijjinally written for a seminar on Legal Prob- lems of the Poor and then presented at the Law School's Consumer Credit Conference. The authors state: "The term `Schlockmeister' defies precise trans- lation. The authors are prone to refer to it as `an old French word emanating from pre-Carolingian days'. In fact, the word has Yiddish origins and is best defined as `Shoddy nierchant', `Shady operator', et cetera." "At the end of every seven years you shall grant a release. And this is the manner of `the release. Every creditor shall release what he has lent to his neighbor, he shall not exact it of his neighbor, his brother, because the Lord's release has been proclaimed."-Peuteronomy 15: 1-2 Every seventh year in ]31,blical times was called a "Jubilee Year." Today, those who are unable to budget their debt payments can find `their "Jubilee" in the Bankruptcy Act. The Supreme Court has said that the purpose of bankruptcy is to relieve "the honest debtor from the weight of oppressive indebtedness and [to] permit him to start anew free from obligations and responsihilitie's consequent upon business misfortune." As applied to the poor, however, bankruptcy does not seem to offer a bright prospect for effective relief. Two circumstances tend to restrict its effectiveness, particularly for the poor; one involves the reaffirm- ation of discharged `debts by `the bankrupt and the other relates to creditors' attempts to collect discharged debts on technical grounds. The poor ~ankrupt attempting to `survive the high cost of urban exi'stence is sometimes forced back into debt shortly `after going through bankruptcy; often he is peculiarly susceptible to the so-called "voluntary" affirmatiop. The unscru- pulous loan company or furniture dealer whose debt supposedly was discharged in bankruptcy will approach the bankrupt and urge him to reaffirm hi's' old debts in return for a renewal of credit or because it was not its credit practiee~ which precipitated his bankruptcy. In no time t'he creditor has the bankrupt, back in debt with the additional advantage of'having a six year period in which to collect.2 Another side of the reaffirmation problem is the `debtor who inadvisedly went through bankruptcy. The result here is the same `as discussed above, in that little is accomplished beyond the loss to the bankrupt of the right'to another bankruptcy for a period of six years.3 In a typical situation `a "schlock" merchant will convince a debtor to go through bankruptcy, often reeommdnding ,a shady lawyer 1 Williams v. United ~5tates Fidelity and Guarantee Co., 286 U.S. 54i~, 554-5 (1915). 211 U.S.C. 35(c) (1964). We do not mean to imply that all reaffirmations are done involuntarily by the debtor. Some debtors for their own reasons do desire to reaffirm certain debts. (See p. 77.) 8 Ibid. PAGENO="0456" 1fl~8 CONSJJ~IE~ qREJMT PROTEC~UON ACT who is aetu~11y tied in with ~the ~j~ei~tion ; t~e debtor is p~r~uaded tbnt lie will be able *to bttythe desired (hilt prob~bly shoddy) merçha~d~~e a~n~I toftee ~liin~se1f of all his other debts at the same time. In other 5itu~1t~on5, a del?tor will in~one way or another find his way to one o1~ the ~o~cafled "wholesale" ban~kruptey lawyers who specialize in vqlurne ba~kri~ptcy. The ~awyer, ~f cour~e, esrns hi if a fee (ranging an~rWhere from $150 to $40~) which is secured ~y a wage assignment and reaffirmed after bankruptcy. In many eases, a scrupukn~s ~ttorpey or debt cpw~- sellor might have worked so thing out with the creditors without wastin~ the debtor's right to a discharge in bankruptcy.4 With post-discharge actions, creditors may be able to force bankrupts to pay discharged debts which have not been reaffirmed by the bankrupt. Much of this is dx~e to th~ n?~ture &f the bankçuptcy decree. The federal court determines the debtor's rig1~t to a discharge, but the state court has jurisdiction to determine what debts *ere discharged.5 A creditor whose d~1~t w~ scheduled ip the ip~nkruptcy petition in the federal court may go into the state `court and sue on the debt, allegiiig that the debt was not discharged under the Bankruptcy Act. Such suits are frequently brought on the ground that `a lpan was obtained uude~, false pretenses for want of full disclosure of other outstanding debts. In other cases, a creditor may go into the state court alie~in~ that t1~ie ~ebt was the result of ,a "wilful and wanton" tort judgment.6 ~f the creditor wip~, his debt is exempt frQm discharge. `Since the discho~ge ~e~ce i~ an ~ffirn~tivc ~efens~ which ~s waived l~ not pleaded in the state aciQn,nnsc~up~1~ons,cre4itQr$ean, `and have been lqiowp to, take advantage of state implementation qf t~e l~an~ruptcy decree by prQ~ecuting action's in state courts on debts they know to have `been validly discharged. The creditor often wins anywa~y since: (1) the `bankrupt, for one reaaon or another, may never receive the ~gimons and therefore not appear; (2) the bankrupt, duly notified of the post-~isehar)ge proceeding in the state c'ourt~, may fail to appear because of his misunderstanding of the na~ure apd effect of his d'isc~arge in bankruptcy; (3) the bankrupt's l~wy,er may have indicated tq the client that he will take care of any post~-discharge action, but after a series of continuances, the lawyer withdraws from the case with no notice to the bankrupt.7 In any event, these creditors haVe nothing to 1950 but ~l~e state ~lbig fee, because it is highly unlikely that the ~a~,rupt will institute a suit for malicious prosecution or a related action. In most cases, the problem is pot the default juqgnient, but rather the leverage which the post-discharge procedure gives the creditor in collecting old debts. Rather than incur the trouble and expense of defending in the s'tate court, or risk lo~ing l~is job because of w'age gajrnishment, the bankrupt will often settle `We do not mean to imply that all bankruptcy lawyers are a fortiori unscrupulous per- sons uninterested in the wO!Lfare of the indiOidual debtor. The attitude of some of these 1~wyers is important to undej~stnnd. `Some sincerely believe tba,t what they are doing Is In the best interest of the deI~tor. l~{apy attorneys l~elleye that because the ~tate gives so many tools of harassment to the eteditor while not efrectively allowing the debtor to assert the defenses of unfairness or failure of warranty, the debtor should have no qualms about utilizing bankruptcy wben~ver possible. These lawyers have a philosophy about their work above and beyond simply "banJ~ruptcy as a buck." 5 fllIe,arejla V. Salituri, 153 II'. 2d 343 (2ed Cir., 1946) ; In re SiegeZ, 164 F. Supp. 709 (D.C,N.Y. 1958). 611 U.S.C. ~ 35 (19~4) (a) A dischprge in ban~eruptcy ~ball release a ~ankrupt froip all of his provable debts, whether allowable In full or in part, except such as (1) are clue as a tax levied by the United States, or any State. county, ttbtrlet, or municipality; (2) are liabilities for obtain- ing money or property by fa~se preten~es or false repr5~entations, qr for obtaining money or property o~a credit ~r obtaining gn enten~ion ot renewal of credit in reliance upon a mate~aUy false statement in writing respectz~g his ftne~cial conditson made or pi,rbtished or caused to ~e made Or published irs a s~sanrse~ whatsoever with intent to deceive, or for willful and ma l~çious iIsj~rrie~ to t~se person py propgrty of another, or for alimony due or to beconue ~lue for ~naint~pa~cp or ~us~po~t pf wire or cblld, pr for s~di~tiop of an unma~r1ed female, or for breach of promise of tharriage ~sccomp~tnied by seductio~i, or ±o~ criminal cbn~ersat1ons; (3) have not duly schedtiled in time `for proof and allowitnee, with the u3duue of the cyeditor If kpowp to p~e bankrupt, uple~s such creditor bad notice or actual Iqio~~edge of `t1leprove~dipgv 1~u ban~crpptey; (4) were cyeated by bi~ 4at~, embezzlement, Misappm~opriat1on or defalcation while acting vs an officer Or In any lithuciary capacity; (5) a~e~fir wdgds which have been earhed withhl three flioAths before the date of commence- Ipent pf ~ ` euftngs in m~uptvy4up to Vorkinep, servants, clerks, or travehirs~ or city salesman, on ~aiary pr cornmpIs~op ~ iyhuolp oi~ p~rt time, ~1mthar ~ iiat ~l1lz~g excli~siveli' for the bankrtm~pt; or (p6) are clue fos~ ~nppeys of an ~fnployee CeceIv~d ~ rO- th1n~d by his employei, to Cedu~é the faithful jierformanee b~ such employee of the terms of ~ contract qt ez~plo~n~eut. iEnsphasii Is qurs). 7~oan corn~any ~ttorney~, if they tee~ a pgs~4i~charge ac~p~ ~ppt tQ ,~efau~t pp4ncept due to an ovetsight by the bankrhpt's attorney~ will off5n leopen the case at the 4ttoi~pfy's request and g~ve tl~p bankrupt Jii~ ~ay Ip c?urt. PAGENO="0457" CONSiTh~tER CI~flDIT 1~ROTECTIO~1 ACT 1O3~ with t~editors on debts already discharged in bankruptcy. Because all his other debt's have been discharged, the bankrupt is more amenable to settling with "just this one" creditor. A caveat is in order before proceeding further, This paper will not consider the moral, social or economic implications of bankruptcy as a remedy for the debtor. This paper proceeds 011 the assumption that, as long as bankruptcy has been designed to give relief `to an overburdened debtor, it should be made as effective as possible, regardless of the intelligence or economic class of the debtor. Others may question the advisability of bankruptcy as a means of debtor relief; we proceed on the assumption that given bankruptcy as a remedy, how can it be made more effective. EXISTING LEGAL REMEDIES What legal theories and strategies are available to limit bars to the effective use of ordinary bankruptcy by the poor man? Is it possible in the federal courts to have the Referee in Bankruptcy list the debts indicating which are dis- ch'arged, and which are not? In a few cases this has been done; but, in the cases as they are now argued, this approach has been limited. Indicative of the very few cases where thi's method has been used i's Harrison v. Donnelly,8 and In re Tamburo,9 where the fOderal courts exercised equitable jurisdiction under § 2 (15) `of the Bankruptcy Act 10 to implement the bank- ruptey discharge by exempting certain debts in what is called a partial dis- charge. Section 15 of Chapter 2 provides that the court may "make such orders, Issue such process, and enter such judgments, in addition to those specifically provided for, as may be n'eces'sary for the enforcement of the provisions o'f this Act . . .".`~ The partial discharge in these cases was granted at the behest of a creditor, `and specifically listed only those debts which had not b'een discharged. In these cases, the debt was a tort judgment which was easily demonstrated to have been "Wilful and wanton" by the `trial record. The courts reasoned that the bankrupt had already had his day in court on the judgment in question and that nothing would be gained by forcing the creditor to relitigate the matter in the Bankruptcy Court. We have found no cases where this approach has been taken in the absence of either the creditor's request or a final determination of the matter in some other court. This same equitable argument could be made for the debtor; however, the two cases seem to be distinguishable. There is less justification for the exercise of equitable jurisdiction to determine, in the d'ischarge, that a given tort wa's not wilful and wanton. The bankrupt need not be the moving party in the state cOurt t achieve his end, no post-discharge action on a debt. Therefore, the equity power of the court is `arguably more justifiably exercised when one party must incur additional expenses to receive something which he already has a right to, as ifl the credito'r"s case. In any event, this theory probably has' no application in limiting post-discharge actions in the numerous and flagrant "false pretenses" suits. Final adjudication on the false pretense is'sue is not possible before bankruptcy; indeed, the ques- tion is not now even raised until the state pos't-discharge proceedings'. The federal court cannot rely on a co'urt record, but woul'd be forced to conduct a hearing on the question befo,re handing down the decree. Although Something like a hearing is conducted for a temporary restraining order under § 11(a) of `the Act,12 there is no precedent for a federal court binding a state court and exercising its equitable powers in this way. The foregoing reflects the present view of bankruptcy procedures. An argument is possible, however, under existing law, which would `insur'e that the final decree of `the court could no't be attacked by post discharge actions. Under' 11 U.s.C. § 11(a) (15) (1964) 13 the bankruptcy court could be asked to stay final approval of'the bankruptcy discharge for sitt~~ days. Any scheduled ci~editor claiming that 8153 F. 2d 588 (1946). ~82 F. Supp. 995 (1949). 1011 U.S.C. § 11(a)(15) (1964). 11Ibid. 1~Sec. ha (ii U.S.C. § 29(a) (1964) A suit which is fou~n~e~ upon, a c1a~ip fro~n ~wb~th `a ¶liscbarg~ wo~iid be a release, and *M~OI 1~ ~bd1ilg a~'âInit a p~rsoh at the time of the flung of 81 petition by or against him, shaji be stayed until the adjudication or d~i~mi~sa1 ç$ the petition . . 1~ See hotes 10 and 11, 8upra, and aecoñipttiiyin~ tèit. PAGENO="0458" 1040 CONSUMER CREDIT PROTECTION ACT his debt was exempted from discharge under 11 U.S.C. ~ 35 (1q64) ,`~ would have to file suit in the state courts during this period. After the sixty days, a perina- nent injunction would be Issued under ii U.S.C. § 11(a) (15) (1964) enjoining scheduled creditors who had not yet filed suit from ever suing the debtor on these scheduled debts. When all the state actions reached final adjudication, the referee would then have complete trial records before him and could hand down a partial discharge. The partial discharge would list all debts discharged, and all debts exempted. The bankrupt `wo~ild then know with certainty which debts were specifically exempt from the bankruptcy discharge. The accompanying injunction could be used to prevent any future suit on debts listed as discharged in the bankruptcy decree. The *bankr~iptcy court possesses the requisite equitable power to implement such partial discharge.15 The court must be convinced to take notice of post- discharge crdditor abuses and must be shown that this type of bankruptcy pro- ceeding would be implementing the purpose of the Bankruptcy Act. In addition, creditors would not be deprived of their rights under the Act. It is just as easy for a creditor to determine whether he has a false pretense action at the time the bankruptcy petition is filed as it is for him to make this determination after the decree has been entered. In either case, all be usually does is compare the1 bankruptcy schedule with the debts listed on the loan application filled in by the debtor, in order to see if tb~ debtor had listed all his outstanding debts. If the creditor decides that he has a cause of action for false pretenses, be has sixty days to file si~it. If he does not file, the debt is discharged and be is enjoined from eter suing the debtor on that debt. Giving a creditor more than sixty days to file suit is unnec~essary; it only enables the unscrupulous creditor to "sandbag" and file suit several years later hoping for a default judgment. There is c'early no precedent permitting this use of partial discharge under 11 U.S.C. § 11(a) (15). There is, however, no case precedent against it. Assuming a bankruptcy court would be amendable to this argument, the credi- tors could le~itimately contend that such an order is beyond the extent of the bankruptcy court's equitable power. 11 U.S.C. § 11 (a) (15) talks about en- forcing "the provisions of tMs act." 16 "This act," the Bankruptcy Act, does not control state post-discharge actions. Therefore, it could be argued that an in- junction against post-discharge actions issued after creditors were given 60 days to file suit is invalid. The power of the bankruptcy court to enjoin state post- discharge actions appears, under present case law, to be limited.17 Legislation may be the rbost feasible method to deal with these problems." A more fruitful use of `federal court jurisdiction is for the post-discharge injunction. 4 bankrupt, pursued in the state court by a creditor whose debt was discharged i~ bankruptcy, petitions the federal court to restrain the suit or to prevent execution ~t' a post-discharge judgment. To the extent that it is avail- able, this approach is not necessarily the most productive way to defend post- discharge action's, because many lawyers are quite successful defending these suits in the state courts. The federal forum, however, is arguably more receptive to the correct implementation of the bankruptcy discharge. The federal court is the expert on bankruptcy law, while the state court, not having expertise in this area, may misinterpret the effect of a bankruptcy decree. In addition, the federal referee Is already familiar with `the facts of a ease; he may have con- sIdered the circumstances surrounding a given debt in issuing a temporary re- straining order at the time the bankruptcy was filed. To achieve uniformity in the administration of bankruptcy, post-discharge actions seen~ logically to belong in~ the federal courts. As the discharge is a federal decree, it is only sensible to let the federal courts interpret it. There is no connt~vailing state `interest at stake here, particularly since the federal courts are required under the doctrine of Erie v. Tompkins to apply the state law anyway on questions to whiCh it is applicable. Continued federal jurisdic- tion `will deter the creditor from picking his forum in the state and maintaining post-dischar~e actions of a dubious nature. In this way the policy of the Bankruptcy Act could be more effectively realized. 14 See note 6, supra. 1511 U.S.C. § 11(a) (15) (1964). 16 Emphasis ours. 11LoCaZ Loan (Jo. v. Hunt, 292 U.S. 234 (1934), see notes 23-25 infra, and accompanying text. 18 For a nu~nber of years, Congressman Celler of New york has introduced a bill, last introduced as HR. 1742, 87th Cong., 1st Sess. (1961), giving the bankruptcy courts exclusive juri~diction over the discbargeability of debts. PAGENO="0459" CONSUMER CREE'IT PROTECTION ACT 1041 The arguments against such an expansion of the federal jurisdiction must n~t be overlooked. An injunctive determination in the federal court would probably deny the parties a right to a jury trial which they now can have in the state courts. Secondly, the so-called expertise of the federal courts is `a straw argument, because for the most part the post-discharge actions require factual determinations under state law of cases involving allegations of "false pretenses" and "wilful and wanton" torts. Because these kinds of cases are governed by state law, the federal courts would be forced to interpret state law-and if anything state courts should be the primary interpreters of state law. Thirdly, other critics have said that the use of equitable federal remedies is unnecessary, because these same remedies and more are available in the state court~s.'9 Some states allow tort actions and damages for abuse of process and injury to credit from wrongful attachment.'° Other states permit the state courts to enjOin improper prosecution in the form of repeated actions or threats of suit on an unfounded claim by what i's known as a "bill of peace." The problem with the various tort actions is that they are difficult to prove and rarely if ever are employed as a remedy against post-discharge harassment. The use of equitable state remedies i's always a possibility but is apparently used in only a few states, with the bankrupt having to prove repeated harass- ment in many of them in order to obtain equitable relief.2' The annotation in 54 A.L.R. 451 states that in~ many jurisdictions the ag- grieved bankrupt must show malice to establish `a case for damages. It is hard to imagine a poo'r wage-earning bankrupt incurring the expense involved to initiate one of these tort suits against an offending creditor, unless be could get attorney's fees' if he established his case. Such harassment by creditors is reprehensibile and should be discouraged. Awarding attorney's fees on a punitive damages theory might provide the necessary incentive.~ A fourth practical objection to' expanded federal jurisdiction may yet be the hardest to overcome. The psychological effect on the referee who would hear the post-discharge actions may tend to vitiate any inherent commitment the federal courts have to the goals of the Bankruptcy Act. Referees' handling million-dollar corporate bankruptcies might look at wage-earner bankruptcies as "small p'otatoes," no matter how large the b'ankrup'tcy. What is the legal justification for federal injunctive power in post-discharge state proceedings'? T'he federal courts have the discretion to enjoin po'st-discharge proceedings in state courts. In Seaboard Small Loan Corp. v. Ottinger,'3 the court held that the federal court had equity power under § 2(15) of the Bank- ruptcy Act ~ to prevent the circumvention of a discharge decree and prevent creditor harassment of discharged bankrupts in state courts. The Supreme Court in Local Loan Co. v IIv~nt,2' clarified the existence of this ancillary equity jurisdiction in the federal co'urts saying that jurisdiction should be exerci'sed only under "unusual circumstances." Tue "unusual circumstances" in Local Loafs were that the bankrupt would otherwise have had to pursue a long and expensive course of litigation in the `state courts of Illinois, through successive appeals, in order to challenge the Illinois' `state court interpretation of wage assignment liens as non~dischargea'ble debts. The remedy of appeal through the state courts before coming to the federal courts was entirely inadequate, because o'f the wholly disproportionate trouble, embarrassment, expense, and possible loss of employment involved.26 Equitable jurisdiction was necessary to imple- ment the clear and unmistakable policy of the Bankrpptcy Act.27 Local Loan is the last pronouncement of the Supreme Cour't on the equitable jurisdiction of the federal courts in post-discharge bankruptcy proceedings. As one might imagine, the history of the Local Loan doctrine ha's' been a circuit by circuit, district by district, interpretation of the "unusual circumstances" rule. For the most part, this hisito'ry is best characterized as an emasculation of Local `°Cf. 30 Va. L. Rev. 531, 541-2 (1944). 20 Ibid. 2iId. at 542, note 53. 22 Philip Moore, "Individual Affirmative Actions," a student workshop paper pre- sented at the Conference on Consumer Credit and the Poor, University of Chicago Law School, Nov. l965~ 2~ 50 F. 2d 856 (4th Cir., 1931). ~11 U.S.C. §11(a)(15) (1964). 26292 U.S. 234 (1934). 261d at 241-2. ~Id. at 244. PAGENO="0460" 1t~42 i CONSUMER CREDIT PROPECPION ACT Loan by restrictive interpretations of "unusual circumstances." In light of this observation, the question becomes': when should one go to the federal court and what allegations must be made to convince the court to invoke Local Loan? Federal courts have exercised equitable jurisdiction at all paints in the state post-discharge proceedings. "The safest procedure is for the debtor to seek injunctive relief while the creditor's suit is still being prosecuted again'st him, but he may also be successful in barring an execution on a default judgment. In at least four instances, how- ever, injuctiotis have been issued against the enforcement of the creditor's state court judgment even after the bankrupt had appeared in the state suit to assert his bankruptcy as a defense. In spite of strong opinion on the contrary, therefore, the principle of res judicata can be turned aside in the face of special circum- stances dictating that the bankrupt be relieved from a state court order mistak- enly ruling a debt non-dischargeable." 28 The key to understanding the use m&cle `of Local Loan is to appreciate the significance of judicial attitude. Will the individual judge look at the substance of the bankrupt's situation and correct a misinterpretation or miscarriage of justice in the state court, or will he say, as most of them do, that the bankrupt has an adequate remedy-even if this remedy is as a practical matter not available? 29 * The contrast between the majority and the dissent in Helms v. Holmes ~° is a good example of the form versus substance approach which characterizes these cases. The bankrupt in question sought to enjoin the execution of a default judg- ment on a debt which was clearly discharged in bankruptcy. The bankrupt, thinking that' he was only the nominal defendant in a suit naming him as co- defendant wiW his wife, and unaware of the necessity to plead the bankruptcy discharge affii~natively, failed to appear and defend. The circuit court held that the district court improperly exercised equitable jurisdiction. The court reasoned that the `bankr,upt had a legal remedy which he waived by not appearing to defend in the state proceeding. Jiven if the state judgment was patently unfair, equitable relief is unavailable, and no "unusual circumstances" exist, when a bankrupt waives his legal remedy. In addition, `the court thought that the bankrupt still had a state remedy which he could pursue to obtain equitable relief from the judgment. Judge Paul, `in his dissent, argued `that denying equitable relief effectively circumvented the policy of the Bankruptcy Act, by failing to appreciate the actual situation of tl~e bankrupt: [T]his modern view of the right of a bankruptcy court to protect by injunction the effect of a discharge in bankruptcy has been inspired by the neces- sity of dealing with manifest injustices that have arisen rather than from any essential error in the theory of the earlier cases. The average bankrupt is a lay- man who has been advised that a discharge in bankruptcy releases him from his debts and who has faith in the dignity, force, and effect of a decree of a federal court, He has surrendered his property and has no means to defend himself against further litigation." 31 In addition, Judge Paul argued that the federal court should take cognizance of a state proceeding where unscrupulous creditors take advantage of bankrupts by arguing spch cases before state magistrates who are sometimes almost as ignorant on the subject of bankruptcy as laymen. The disproportionate expense necessary to achieve the fruits of the discharge decree must be considered, espe- cially in this ~ase where Judge Paul considered any `possible state remedy to be effectively undvailable. Recently t~o notable eases have taken the approach of Judge Paul in evalu- ating the advisability of exercising equitable jurisdiction: state Fi~~tance Co. \r. Morrow 32 and Matter of Forgay.23 These cases do not seem indicative, however, of any trend toward the equitable substantive approach in `these cases. The "unusual circtimstance" approved in the Morrow case was the inability of the magistrate to properly adjudicate a bankruptcy discharge. The "unusual circum- stance" in the Forgay case i~ more difficult to pinpoint; the opinion, in fact, 3° P. A. Smedjey, Bankruptcy Courts as Forums for DetermMinç,r the bischargeabiljjy of Debts, 39 Mlnn. L. Rev. 651, 665-6 (1955). See, also, cases cited therein, 3°Id. at 622. 3° 129 F. 2d 2(3 (4th CIr., 1942). 31Jd at 269. 3°2i6F.2d6'~'6 (lOthClr., 1954). 3° 140 F. Supp. 473 (Utah, 1956) ; aff'd. 240 F. 241 18 (10th Cir., 1957) ; cert, denied, 354 U.S. 922 (1~957), PAGENO="0461" CONSTJMER CREDIT PROTECTION ACT 1043 highlights the heroic nature of the courts employing Local Loan and presents the problem of using that case as precedent. The Forgay court was influenced by what they thought was an obvious circumvention of the Bankruptcy Act by the plaintiff loan company who had notice of the federal bankruptcy proceedings hut made no attempt to block the discharge in the federal bankruptcy hearing. This view was justified before passage of the 1960 amendment eliminating "false pretenses" as a ground for blocking the discharge decree.34 Today a creditor raising "false pretenses" in the Bankruptcy Court woulcj be specifically told to raise the issue in the appropriate state proceeding. 1~urther case analysis might be pursued, but the limited utility of Local Loan in most jurisdictions justifies a more abbreviated treatment. The N~rtbern D~s- trict of Illinois, which had 11,587 voluntary bankruptcy deerecs last year alone, is a good example of the viability of this doctrine.3° According to Bankruptcy Referee Bruno Nowogrodski, Local Loan is used in the Northern District "only in the grossest cases of injustice." To his knowledge only two or three t'ime~ during the last eight or nine years did his federal court judge exercise post- discharge equitable jurisdiction on the basis of Local Loan, EXISTING STATE REMI~DIE5 (CO1~tON LAW) ". . . [T}he practice is too common for creditors with ciiscbargeible debts to disregard the judgments of this Court discharging bankrupts and to file proceed- ings in the State Courts, hoping, and too often obtaining, judgments on various pretexts, thereby coercing bankrupts into paying out of future earnings debts which in law have been discharged, or imposing upon them expensive and bur- densome litigation. "Furthermore, every such case that is successfully maintained in the State Court induces others to try the same method, thus impairing or destroying the efficacy of the judgments of discharge of this Court." 36 Even today, the situation described above is quite often the case. "Schlock" merchants and shady loan companies will all but ignore the discharge in banJ~- rup'tcy in attempting to collect money from the indigent, often unrepresented, debtor. In some instances the case is scarcely more promisipg for `the debtor with an attorney. A couple of very effective loop-holes exist in the law and they provide unscrupulous creditors with a method of effectively evading the dis- charge in bankruptcy as it applies to the debts owed to them. This section of the paper will discuss these loop-holes and suggest methods of coping with them. A) THE WILFUL A~D MALICIOUS PROaLn~t "A discharge in bankruptcy shall release a bankrupt from all of his provable debts.. . except liabilities for. .. wilful and malicious injuries to the person or property of another.. . ." °~ The wording of the above section is one important factor In limiting the ef- fectiveness of bankruptcy. There are two elements to the problem. First, most credit sales to the poor Involve secured financing. When banl~ruptcy occurs, the debtor normally surrenders possession of the property and lists the debt In the bankruptcy schedule. Difiicultie~ arise when the debtor no longer has possession of the security. The creditor may then threaten a suit for illegal conversion of the security. The second aspect of the problem involves claims for wilful and malicious injtiry to persons or property. A poor person, fbr exump1e~ may have failed to defend himself in a suit for damages and, therefore, since many tort pleadings allege wilful and malicious injury, will be liable even after bankruptcy. In the illegal conversion situation, the secured creditor, eitherL before or after the discharge in `bankruptcy, will attempt to repossess the security. If the debtor is unable to return it, the creditor will bring suit in the state court charging the bankrupt with wilful a~d malicious copversion of the security and will demand that the debtor either return the goods or pay dameges. The amount of damages probably equals the amount due on the original loan or note. If the creditor wins this suit, he can then collect from the debtor the same amount of money that was owe~[ on the debt djscbar~n4 in ba~kruJ?tcy. By thws converting the action from one on the debt to one in tort, the amount of the debt can be collected, bank- ruptcy notwithstanding. 3° Amendment to § 14 of the Act, 11 U.S.C. § 35(a) (2) (1964). 3° "Tables of Bankruptcy Statistics," Administrative Office of the U.S. Courts, p. 251. 36 In re Caldwell, 33 F. Supp. 531, 635 (1940). ~ U.S.C. § 35 (1964). PAGENO="0462" 1044 CONSUMER CREDIT PROTECTION ACT In some cas~s these suits are relativel~V easy to defend. For example, if a male customer buys a woman's watch, it is obvious that his intention is not to wear the Watch himself. Should the creditor attempt to sue the buyer for conversion, the argitment can then be made that the seller knew that the property was' not purchased for the buyer's own personal use, and therefore he cannot charge the bu~yer with the wilful and malicious conversion of the watch Another technique is to ask for a jury trial in such conversion cases, as well as in all post-bankruptcy cases. For even if the client may technically still he liable on the debt, the cost and inconvenience to the creditor may be great enough that he will drop the case. This "harassment in reverse"-the threat of a lengthy and expen1sive jury trial-can be a very ef1~ec'tive deterrent tO unscrupulous creditors. And even if the case does go to trial, the debtor will have the benefit of having a sah~pling of the j~ubiic-the jury-hearing his plight and coming to his aid~ If the creditor is going to get judgment for wilful and malicious injury to his person or property and therefore avoid the effect of a discharge in bankruptcy,~' he must prove that the act done was both wilful and malicious39 The burden of proof is on the creditor; if he cafluot assume It, the' bankrupt's discharge will serve as an effective affirmative defense.4° The leading case in the' conversion area is Davis v. Aetna Acceptance Co.,41 where the court stressed that not all liabi~ities for ~ouver~iion of another's prop- Crty were nondisehargeable: "There is n~ doubt that an act of conversion, if wilful and malicious, is an injury to prop~rty within the scope of this exception. . . But a wilful and mali- cious injury d*es not follow as of course from every act of conversion, without reference to the circumstances. `There may be a conversion which is innocent of technical, an unauthorized assumption of dominion without wilfuiness or malice. [citing cases] There may be an honest, but mistaken belief, engendered by a course of dealing, that powers have been enlarged or incapacities removed. In these and like eases, what is done is a tort, but not a wilful and malicious one." ~ A ease illustrative of non-malicious conversion is Bone Jewelry Co. v. Conley.~ In that case the defendant had purchased a ring an'd a set of silverware from the plaintiff. ~Ie lost the ring and sent the silverware to his mother in New Jersey. The creditor sued the debtor for the illegal conversion of his property. The Tennessee Supreme Oourt stated: "We think that section 17. . clearly shows that the present case does not fall within this se~tion of the statute for it plainly provides for wilful and malicious injuries to the person or property of another. In this ease `the defendant merely converted the property `by sending it oul of the State and this was not a wilful and malicious injury to the property of another as comes within the statute. The giving of this property to defendant's mother was wilful, but in the absence of proof could ~ot be defined as malicious." A New York Court outlined the scope of the "wilful and malicious" require- ment,in Brown v. Garey,4' where it said; `~The cQur~ must ~xamine the circumstances of each particular case and say whether it finds among them the `elements which ,the Jaw has come to accept as b'adges of wil~ulness and legal malice. It has been said that `a wilful disregard of what one knows to be his duty, an act ~vbieb If against good' morals, and wrongful ,in and of itself, and which necessarily causes injury and is done in- te~~iona1ly, may. be `sajd to be done wilfully and maliciously, so as to come within the exception.~ (Tinker v. CoIwell, 193 U.S. 473, 48,7>, . . A wrongful act done intentionally which necessarily causes harm and is without just cause or ex- cuse constitutes a wilful and malicious injurV. (Kavanau~jh v. `McIntyre, 210 N.Y. 175, 182;, aff'd 242 U.S. 138) .,. Since a Wrongful intent is not an essential element of conversion (Boyce v. Brockway9 31 N.Y. 490, 493; Laverty ~v. Net hen, 68 N.Y. 522, 527), an act of dominion done under mistake or misapprehension, and without conscious intent `to violate right or authority, may ye't be a conver- sion; Jut it is i~iot a wilful and maliciou~ conversion." ~ ~ areenfleld v. Taeeiflo, 129 P. 2d 854 (2d CIr.,, 1942). ~° ~Seward v. Gatlin, 193 Tenn. 299, 246 S. W. 26 21 (1952). 40 Tudryck v. Mutch, 320 MIch. `86, 30 N. W. 2d 412 (1948) ; cert. denied, 334 U.S. 819 (1948). 41293 U.S. 328 (1934). 42~~j at 332. ~ 204 Tenn. 275, 319 `S. W. 26 24,5 (1958). ~ Id. at 277-8, 319 S. W. 26 at 246. ~ 267 N.Y. lot, 196 N. Ui. 12 (11135) cert. dented, 296 U.S. 615 (1935). Id. at 169-70, 196 N. E. at 13. PAGENO="0463" CONSUMER CREDIT PROTECTION ACT 1045 The court in this case held that the liability arising out of a negligent con- version of the plaintiff's property was discharged in bankruptcy. These cases may indicate that even debtors, who owe debts that are secured by collateral no longer in their possession, may find relief in the Bankruptcy Act. Admittedly, there are cases holding to the contrary in this area,47 but courts are showing an increased concern for the unwary debtor in such matters. The other aspect of the "wilful and malicious" problem in the bankruptcy field involves judgments arising from negligence suits where one of the counts in the plaintiff's allegation charges "wilful and malicious" ~ "wilful and wanton" conduct. Often the indigent defendant in such cases cannot afford a lawyer, or fails to retain one because he knows, or thinks he knows, that be is liable. As a result, the wilful and wanton aspect of the complaint is never challenged and remains in the judgment as rendered. Therefore, even though tim deJ~tor may subsequently receive a discharge in bankruptcy, normally an ~t~e~uatê ~lefense, the bankrupt is Still liable because the "wilful and wanton" tort judgment is not discharged. Tn some jurisdictions, if there has been a default judgment, the judge will look behind the decision of the case to the evidence in the record and make an inde- pendent determination of the defendant's "wilful and malicious" actions.48 Some courts have held that negligence alone does not constitute sufficient "malice or wilfulness" to defeat discharge under the Bankruptcy Act.49 Courts today are increasingly suspect of a defaut judgment decree establishing a debt as wilful and wanton.7° B) THE FALSE PRETENSES PROBLEM "A discharge in bankruptcy shall release a bankrupt from all of his provable debts . . . except such as . . . are liabilities for obtaining money or property by false pretenses or false representations, of for obtaining money or property on credit or obtaining an extension or renewal of credit in reliance upon a material false statement in writing respecting his financial condition made or published in any manner whatsoever with intent to deceive . . ." In a post-bankruptcy action to recover a debt which would have been discharged in jankruptcy but for misrepresentations by the debtor, loan companies often sue the debtor for fraud rather than for the debt on the contract. Most loan companies usually will only sue a debtor discharged in bankruptcy if they suspect clear-cut and abusive fraud on his part. However, unscrupulous loan companies use this same technique to collect debts which should otherwise have been discharged. The plaintiff-creditor must prove actionable fraud in order to collect. The evidence must establish: "1) that the defendant made a material misrepresentation; "2) that it was false "3) that when he made it ho knew it was false or made it recklessly without any knowledge of the trust and as a positive assertion; "4) tl3at he made it with the intention that it should be acted upon by the plaintiff; n Stephens v. Slonthern Discount Co., 105 (Ia. App. 657, 125 5. E. 2d 235 (1962) ; Fred Finance Camp, Inc v. Tannerhill, 140 So. 2d 202 (La. App., 1962) ; Fruchter v. Martin, 350 Mich. 12, 15 NW. 2d 125 (1957) ; Verheyleweghen v. Klein, 208, Misc. 783, 145 N.Y. S 2d 178 (1955). 48 Wiecrorek a. Merskin, 308 Mich. 145. 13 N. W. 2d 2.39 (1944) ; Seward v. Gatin, supra; Panagopulos a. Manning, 93 Ut. 198, 69 P. 2d 614 (1937), rehearIng denied, 93 Ut 215, 72 P. 2d 456 (1937) ; Globe Indemnity Co. v. Granslcov, 246 Wis. 87, 16 N. W. 2d 437 Robet'ts, 290 F. 2~57 (H. D. REich., 192g Wylsa v. Benedicts, 266 App. Div. 1025, 44 NY.S. 2d 907 (1.943), reversIng 4,1 N.F.S. 2çli 127 (1943). 70 This has not been the case in Illinois, however. Until very recently Illinois courts have held that where the decalaration consliteci of several counts, one or more of which stated a cause of action based on malice, the other counts based on negligence o.hly, the pre- sumption was that a general verdict not stating the specific reason was founded on malice. E.g. Greene a. Noonan, 372 Ill. 386, 23 N. H. 2d1 720 (193.9), A recent appellate case Indicates a possible change in this rule. The First Division of the Illinois Appellate Court, in an opiplon by. Schwartz, J., said that "[t}be charge of malice stated in . . . general terms `and included with charges of simple negligence, is not sufficient to sustain a judgment as one based on maliciops, wilful, and wanton misco~i- duct." Serpe a. Rivera, 42 Ill. App. 2d, 84, 191 N. H. 2d 4~16 (1963). `iThe case came up on an appeal from a default judgment of the Municipal Court of the City of Chicago. The wilful and malicious court was the last of eight; the other seven counts were `charges of ordinary negligence. Facts in the complaint did not sRpport the charge of wilful aRd malicious conduct. 511.1 U.S.C. 35 (1964). PAGENO="0464" 1046 CONSUMER CREDIT PROTECTION ACT "5) that piaintiff acted in reliance upon it; and "6) that he thereby suffered injury: "All of these facts must be proven with a reasonable degreee of certainty and all of them must be found to exist." 52 Furthermore, the `burden of proof is on the creditor, as in the "wilful and malicious" cases. In both situations, the creditor is c1~aiming that his debt is excepted from the operation of the discharge in 1~ankruptcy because of the alleged fraud.u The usual procedure for the plaintiff in these cases is t~ intro- duce in evidience the bankrupt's financial statement filed when the loan appli- cation was ~ade and compare it with the scbç~dule of `debts listed in the bankruptcy petition. This usually creates a prima fade case of fraud, the financç~ company maintaining that these financial statements are "credit granting" instruments relied upon ~y loan company managers in approving loans. The finance company manager `then testifies that he would not have approved the loan if the dobtor submitl~ed an accurate fin~ncial statement. The burden of proo~ shifts to the bankrupt to show non-reliance by the loan company. The greatest weakness of `the creditors' cases is `that the loan companies knpw that these sthtements are no't true and often do not rely on them. It may even be that loan companies actually encourage a debtor not to list all his debts. This fact, however, is difficult to prove. The de~tol' must have an unusually well- documented base to prove non-reliance.54 If the defe~4ant can show that he and the plaintiff company had done business over a long period of time, and ther'efore that the company was really loaning him money becau~e of the established relationship, not in reliance on the statement, he might be abis to win. In I*xcel Finance Treme, Inc. v. Noel,n the facts showed that fifteen previous loans bad been transacted between the same p'arties and that the defendant had been told to just list just one of his debts. The court said that the procedure of having the debtor list a debt on his applica'tion was a mere formality -the financial statement played no actual part in the process of granting the loan. The `task of post-discharge attorney is to gather as much evidence as possible to indicate methods used other than the financial statement in the processing of loans. Some `loan companies, for example, will send their Investigators into the debtor's neighborhood to check his reputation and appraise the security: In such cases a court may find that a debt has been discharged in spite of the incorrect statements oh the application.56 The dejto~'s literacy may also be a factor. In Accounts kS1up'erei.sion Co. v. Atley,57 the debtor was illiterate, but the loan company manager nevertheless had him make some scrawlings on the application. The manager, tho'ugh admitting the illegibility of `the marks, claimed that they were `supposed to say, "I owe Accounts Supervision Co. only." The debtor though't he had written, "Don't owe no loan company but Asco." The judge felt that this statement would not have been executed with any intent to de~raud.~' A closing word of warning is in order. It should not be assumed that the authors feel that a d~btor w'ho willingly and fraudulently makes gross misrepresentations in order to ,o~tain credit `should receive the benefit of a bankruptcy discharge. This ~s~as n~t the ~ntention o~ the Bankruptcy Act. The concern here is to protect the innocent debtor from abuses arising out of his ignorance. 1~~ISPI'NG SP4tE R~ME1~I1iS (STATVTOW~) A few states, notably New York, Oalifornia, Minnesota, and ~c~tb PalcQ'ta, have adopted Ieg&sJationo~ the fo~owir~g nature: "At any time after on~e year has el~ed `since a bankrupt was discharged from his debts, pursuant to the acts of congress relating to bankruptcy, the bankrupt, his receiver, trustee or `~py other interested person or corporation, may apply upon proof of the bankrupt's d'lscbar~e, to the court in which a judgment was rezldered `against `him . for an order, directing the judgm~n~ to )~e cancelled and disch~rgOd of record . . ." ~ ~ See Tyler V. Jiart/ord Accident and In4emn,~ty Co., 195 Okia. 5~3, 159 P. 2d 722 (1945). 5~DeLatour v. Lala, 15 La. App. 276, 1.~31 ~o. 211 (19~O), ~ Personal 1~ndysfrial Loan ~1orp. V. Porgay, 24~0 F. 24 1~ (19th Cir., 1957), cert, denied, 3~i4 U.S. 92~ ~i~57). ~513S So. 20054 (La., 1~&~'). a' Acconnts ~~apervisios 60. v. Atley, 89 So, 2d 5Q8 (La. App., 19,56). 67Thid. ~~Id ~t 510. ~ l~.Y. DebtOr and Creditor Law, § 150. PAGENO="0465" CONSUMER CREDIT PROTECTION ACT 1047 The California. Minnesota, and North Dakota statutes are similar~~'° The cluoted legislation applies only to actual judgments of record issued before the debtor was granted his discharge by the federal Bankruptcy Courts. These statutes do not extend to other claims which were Ziot as yet reduç~e~ to final jhdgxn~nt as of the date of the discharge. This is because the purpose of these statutes j~ to eypui~ge from the records uncollectable outstanding judgments- not to relieve debtors from unwarranted creditor harassment. Opç? state-Wiscon~in-permits the debtor himself `to go into the state courts to depa~m~ an immediate detergiiu~tio~ regarding the discbargeabili'ty of debts ~cl~e~qled in the benkriiptçy proceeding.°' Its statute removes the one year waiting period and allows the debtor to proce~ on his ç~wzi motion. The utility of the statute i's quectiopable, as the poor debtor is not likely to spend the money to maintain this action. Putting aside for a moment the consideration of expense, the Wisconsin statute does have potential vah~e for the poor. It would be an obvious aid to the impoverished debtor to kiic~w that the discharge i~ final, and that there is no w'ay for the creditor to revive `a discharged debt `by gojn~ into the state courts on wb~tev~çr pretext. For an immediate post-discharge determination of discharge- ability to be of maximum vali~e to the poor man, this determination should extend to all claims `and not be limited to judgments of record a't the time of the dis- charge. The California `Code of Civil Procedure provides as follows: "The court may, upon such terms as may be just, relieve a part or his legal representative from a judgment, order, or other proceeding taken against him tbro~ugb his mistake, inadvertence, surprise, or excusable neglect. Application for such relief must be accompanied by a copy of the answer or other pleading proposed to be filed `therein, otherwise the application shall not be granted, and must be made within a reasonable time, in no case exceeding six months, after such judgment, order or proceeding was 62 Statutes allowing for the reopening `of default judgments are found irj many states. Six months, ho'wever, is an unusually generous time limit. Thirty days is far more common. As previously noted many debtors discharged in bankruptcy are unaware of the effect of their discharge. When a summons is received on a debt, which the bankrupt thinks has been cancelled, be will ignore it. The debtor cannot avoid execution of the judgment. That is probably the first time the bankrupt will realize just what the summon's was actually `about. When he finally seeks legal advice, it is frequently too late to do anything to help him. If the period in which default jud~inen'ts could `be opened was extended, perhaps the plight of the poor debtor would then be at least partially relieved.63 OThER ERCOMMENDATIONS There are a number of steps which could be taken legislatively on `both the state and federal levels in order `to Implement the Bankruptcy Act more effec- tively. There are `two modes of attack on this problem, both of whic~h result from the split state-federal jurisdiction on the discharge decree. All bankruptcy questions could be dealt with in the federal courts initially and in post-discharge proceedings, with the empha~ts on `strengthening the effectiveness of `the federal proceeding. Alternatively, state procedures utilizing the bankruptcy decree could be simplified `and strengthened. A simple proposal to impreve the bankrupt's understanding of the decree, a job in which many attorneys are often remiss, is to have a notice handed to the bankrupt, with an explanation by `the Referee of the nature of the decree and a watnlng to consult `a lawyer `should he receive summons on any `debt, even those `discharged in bankruptcy.°i The hope is that the bankrupt who receives a summons will `then consult these directions and `turn the summons over to hi~ lawyer. As previously indicated, the bankrupt will often win a oontertecl suit in 60 cal. Code of CivIl Procedure, § G75b; ~Unn, St~t. .&s~n. § 548.18 (1947) ; ND. Cettury Code, § 2i8-2~O-30 (1960). 61 Wise. Stat. Ann. 270.91 (1958). °~ Cal. Code of Civil Procedure, § 473. 63 S,ee Wilhialu London, "Confessions of Judgment and the Poor," student workshop paper presented at the Conference on Consumer Credit and The Poor, University of Chicago Law School, Nov., 196i5. 64 A possible notice might read: In the event you receive a sounmons or othe'r notice concerning any debt related to this bankruptcy proceeding, Immediately See a Lawyer. If you fail to do this, you may find that you will be held unnecessarily liable for some of the debts listed In your bankruptcy discharge. Remember, See a Lawyer In all matters relating in any way to this discharge. 83-340-67-pt. 2-30 PAGENO="0466" 1048 CONSUMER CREDIT PROTECTION ACT a state court-~tbe problem lies in letting the bankrupt know that a contest is necessary. But in any event it is more likely that a legally trained person will communicate with the suing creditor before a default judgment is entered. Another proposal to reduce the default judgments in post-discharge proceed- ings would be an amendment requiring a bankrupt to personally waive the affirmative defeitise of his discharge decree in open court. If the creditor failed to have the bankr~pt present in the state proceedings, the bankrupt would have grounds to collaterally attack Or reopen the case when the creditor attempted execution on the judgment. This procedure would deter the unscrupulous creditor from prosecuting actions in the State courts gambling on the bankrupt's ignorance of the need to affirmatively plead the discharge. Thirdly, it has been suggested that credits who are listed on the schedule of debts owed by the bankruptcy petitioner be required to give notice of their intention to later object to the disch'argeability `of the debt in the state court. In this way, the debtor's attorney could either arrange to represent him in. the later suit, or at least explain to the debtor that he m'itist appear and ~pl'e~d his bankruptcy discharge as a defense. A possible shortcoming to this recommen- dation might be that every creditor would file such a statement `of intention to protect himSelf and leave the door open should he later decide to sue on the debt. To eiikainate' or reduce this problem, It might be possible to charge a filing fee as sdcurlty. Such measures would serve to reduce the number of statements filed as a matter of form, but even if they did n'ot, the fact that such a statement was filed should `be sufficient to alert those concerned. The problem of post-discharge actions could be alleviated by giving the Fed- eral Bankruptcy Court jurisdiction over all actions which relate to debts in- volved in bankruptcy. The 1~ankruptcy Court would issue a partial discharge decree listing all provable debts which have been discharged in bankruptcy; this adjudication would be res judicata in any state `court action on the debt. Any creditor who' wished to `challenge the dischargea'bility of hi's debt would object in the federal proceeding or be barred from any further actions on the debt. If any new evidence tending to establish nondischargeability came to light after the bankruptcy proceeding, the federal court would take jurisdiction at the bankrupt's opti~n. An altern'ath~e proposal accomplishing many of the same goals could be utilized in the states. A simple administrative procedure for laying the bank- rupt'cy decree ~ut in the state records could implement `the effectiveness of the dsch'arge. `~Phe bankrupt subsequent to discharge would be instructed to take the decree to a state agency established specifically for the purpose, pay a minimal filing fee, and have the discharged debts recorded in the state record's under his name. The creditors would be notified and given a perio'd to object to the discharge. After expira'ti'on of `the period the di'scbargeability of these debts would he res judAca~ta in the states also. If a creditor wished to chal1~nge the. di'sehargeaJbility `of his debt, he wo'uld have to file suit during the prescribed period or be forever barred. Proper re- cording of a debt could' `be pleaded as `a defense `to e,çecuti'on of a default judg- ment on a suit filed after the pres'crih~d period for filing. This' procedure, how- ever, would no~ eliminate the ignorance problem-the po'o'r bankrupt might still fail tç p~ead the debt re'corda'tiOn çl~fense in the e~ecnti'o'n proceeding. It also. seems unnecessary `to burden `the bankruptcy pro'~e'ss any more than it is al- ready. The added expense and administration makes' this a less desirable alter- native than those proposals which utilize the federal court to eliminate' post- discharge problems. Another recommendation is to provide more frequent bankruptcies for cer- tain classes of c'opsumers. I't might be possible to permit bankruptcies every three years for persons who earn, pay, less than $4,000 per year. Most creditors cancel accounts unpaid for three years anyway. Further'mo~e, such a change hopefully would force lenders into more responsible and c'autio'us `credit policies in this higbrisk area. Knowing tbSt they can only pursue their high-pressure collection techniques for three years at the most, the "s'c'h'Iockmeisters" may `be less willing to' sell products to' just anyone who wanders in. As indicated earlier, a debtor l's not `discharged on debts arising out of fraudu- lent misrepresentations made in `receiving credit, provided the credito'r relies in some way on such statements. Possibly the reliance aspect of this requirement should he made `more stringent, so as to necessitate co'mplete reliance by the creditor on the statement in order to prevent the debt from being discharged. As the laws stand now in s'o'me jurisdictions, partial reliance is sufficient, even PAGENO="0467" CONSUMER CREDIT PROTECTION ACT 1049 though the creditor may have weighed other factors in addition to the debtor's statement of his liabilities. The suggestions that "false pretenses" be eliminated as a ground for establishing debt non-'dischargea'bility seems to go too far, because it would encourage fraud. A corollary to tightening the reliance requirement might be to require all lenders and creditors in `a specific vicinity to make use of the facilities of a lender's exchange or have a state lender's exchange set up.~ A recording type statute would put creditors on constructive notice of their customers' financial obligations. In this way, creditors could not say that they relied on any state- ment made `by the borrower omitting debt's `that had been recorded, thus' allow- ing the discharge of these debts in bankruptcy. This system might be only partially effective, for it could not easily be made applicable to every single businessman who extended credit. The administrative burden involved in re- quiring all merchants to use the system might well make it impractical. This proposal would, however, go a long way toward alleviating the problem, because many post-discharge actions based on "false pretenses" involve small loan company loans which the debtor has outstanding; many of these loans are not presently listed with the existing Lenders' Exchange. CONCLUSION This paper has attempted to, survey bankruptcy law and the poor in hopes of making bankruptcy a more effective remedy-both by expanding existing law and proposing new law. We have not examined the effect these proposals will have on credit. We make no judgment about the availability of credit. In addition, we have made no study `to determine `the magnitude of the problems considered. These considerations have been left for others to explore. A few other caveats are also in `order. Voluntary bankruptcy is anything but a panacea for correcting creditor abuses. Although the bankruptcy proceeding could have some utility In raising questions of uncons'cionabili'ty and elimination of debts, bankruptcy is a remedy of last resort. Indeed, creditor abuses should be corrected before they are `perpetrated. Furthermore affirmative actions short of bankruptcy should also be recommended to the debtor. A prospective bankrupt should be told `the possible hazards as well as the benefits of bankruptcy: 1) for various reasons, he will have to reaffirm some debts e.g., `to prevent suit against his cosigner or to retain possession of the security; 2) credit in `the future may cost him more and will probably be advanced by only the least scrupulous cred- itors; 3) he will be vulnerable to the creditors for six years, the period he must wait before he can again declare bankruptcy. In Biblical times, all Jews were relieved of their debts every seven years. The Bankruptcy Act offers a prospect similar to such "Jubilee Years" for those debtors who today are victimized and need relief. With constant diligence on the part of thos'e concerned with the problems of the poor~ the Bankruptcy Act may prove an even more effective remedy in the future. [Journal of the National Cotiference of Itefersees in Bankruptcy~ October 1966] ~nrEitEE CLIvE ~ARS~ Excis~s Ustxay ~ SafALL LOAN COMPANT OLAIM IN CHAPDER XIII PROOEIIDING IN THE UNITEJI~ STATES DISTRICT OOURT' ~OIt THE E'~SPE'RN DISTRICT OF TEN'NES'S~E, NORTHERN DIVISION In Proceedings utiderOhapter XIII~ No. 28,372 IN tHE MATTER OF WILLIAM SyLVE~TISLI ~3IIANOH, DusT0R (See p. 952 for full text.) `~ In Chicago, the Lender's Exchange does exist to facilitate the flow of credit infor- mation among the various small loan companiea and thus to provide an independent method of ascertaining a person's indebted,ness. However, many loan companies do not belong to this group-especially those of the schlock variety--so that the possible value of the Ex- change is presently greatly diminished. PAGENO="0468" 1050 CONSUMEE CREDIT PROTECTION ACT [Journal Qf the National Conference of B,eferees In Bankruptcy, January 1966] CONSUMEB BANiuweTox: A CoNTINUING PEQSLIIM By Robert DOlphin, Jr., Assistant Professor of Finance, School of Business~ the Florida State University, Tallahassee Although a great deal has been written about consumer bankruptcy, neither the bankrupt nor hi's creditors have been satisfactorily identified. Little is known about the bankrupt's characteristics or the sources of his credit. Is `a particular segment of society subject to bankruptcy, `or is it a `malady of the general popu- lation? Do all creditors share the responsibility, or, as frequently asserted, does the couaumer loan company play aa i'n~portapt rqle in the consumer's flight toward banl~ruptcy? This paper attempts to answer these questions and to supply a workable ~o'lu'tion to the ever-increasing nnmber `of consumer b~n~ruptcies~ The consumer `ban~~i~pt shall be defined as an individual who uses the Bank- ruptcy Act to `discharge hi~ Ue~s, Imne of which are the result of past business endeavors. In bseal 1965, filings of 135,386 consumer `bankruptcies were recorded, a record repri?senting a 5.8 per cent increase over the previous year and 214 per cent incretise in the past decade.1 Adequate data and the amount o'f debt involved o'n a national level are no't availahle; 2 however, data developed in the writer's study, as well as in other studies, indicate that the typical bank- rupt owes about $3,200 `o'f non-real estate debt.3 Based on this figure, consumer bankrupts held about $433 million of debt at time of bankrup'tcy in 1965. Perspective `may be obtained by `comparing the `debt to' the amount of con- sumer credit outstanding. `Consumer bankruptcy debt, in 1965, represented ap~ proximately tL5 per `cent of consumer credit outstanding. Thus, although con- sumer bankruptcy i's growing at a rapid rate, it still involves a relatively small amount o'f consumer credit. The `study providing data for this paper was `done in Flint, Michigan, `co'unty seat of Gene'~ee, and `covers 482 consumer bankrup't'cy petitions, all petitions filed in 1983 in th'at `county. The area is a highly industrialized `automobile based eco'nomly. It should be `typical `of many industrial communities of the nation, and, thus, lend some degree of generality to the data. CHARACTERISTICS OF PHIl CQNSUMIDII BANKRUPT The bankrupt's identity may be briefly summarized in the following manner. He typically is `a white male thirty years old with a family of five. With a tenth-grade education, he works at a blue~collar job for an income of $4,656. Although the bankrupt in terms of `his social and income characteristics is atypical of the general populatien, he is typical of a large part of contemporary society. A clbser look at the underlying, data reveals several intere~t4ng characteristic~. iThese ~d~ga~te a ~l~gh~iy slo~wer rat's of gr~~itb af ba*rupteies than usually reported, due te the exclusion of Chapter XIII cases. Although Chapter XIII cases are providof fçr In ~ B~'akruptcy Ac~ 1~~y u~pa~l~y p~ovb~,e fox' debt renaymeut rather than discharge; ther~fore, they are not cóiistderel bankriipt~ies in this paper. 2 Administrative Q$lpe of the flnU~ed' S*ates Courtn reports the amount of debt recorded on the petitions filed in bankruptcy, but does not classify the data so that con- sumer I~anio~uptcy dept can, be dis,tjagu~shed from business, ba,nl~rnp~tcy debt. Note, in this paper, real estate i~ excluded du~ to the ina~cur~ey of available data and because it is the only type of debt In consumer bankruptcy on which little is lost by credi- tors. See the following studies for average debt estimates. Robert Dolphin, An Analysis of Personal and Economic Factors 14eading to qonsu~'aer $ankru~tcy, Bureau of Business on Economic Research, Michigan State University, 1965; George A. l3runner, Personal Bank- ruptcies: Trelufp ayi~d U1iarac,~aris,ti~, ]~ireau of Business. I~esi~arcih, Ohio Stats University, 1965; John ,~t. Brosky, A ~ucZy of Personal Bankruptcy in the £!eattle Metropolitan Area, Retail Credit A~sociation of Seattle, 1965. PAGENO="0469" CONSTJMER CIIEDIT PRoTEetroN A~T 1051 Family ~tatii,,~ During 19G3, in Genesee County, Michigan, 97 percent of all the petitioners in bankruptcy were male.4 This ~1oes not mean that bankruptcy is strictly a man's problem. Ninety-four percent of these individuals were married. Thus, most bankruptcies represent the financial failure of a family unit rather than merely `an individual. Interviews with petitioners indicated that, in the typical case, the financial trouble may well be the result of both the husband's and wife's lack of frugality. Most of the family's daily purchases are made by the wife while both the wife and husband participate in the purchase of big-ticket durable goods. The husband's bankruptcy reflects the family's financial failure. There is a significant difference in the marital status of individuals going into bankruptcy and the marital status of members of the same community. Ninety-four per cent of the bankrupts are married as compared to 84 percent of the `community. Interpretation of this difference should be tenipered by the credit grantor's extreme caution in extending credit to single men, especially younger men (most bankrupts are less than 30 years old). This attitude may mean that young single men are subjected to higher credit standards and this leads to a lower rate of bankruptcy for them. There are two feasible explanations of the greater incidence of bankruptcy among the married than among the unmarried segments of the com'mur~ity. lfirst, as an individual begins married life, the need for additiofial funds arises, but the marriage does not change his `occupational level or income level. Thus, a newly married couple must reduce their respective standards of living,5 or use credit in anticipation of higher income. This may be the beginning of financial trouble which is culminated in bankruptcy. Second, marital discord may be another factor leading to the higher bank- ruptcy rate among married persons. Three per cent of both groups, the bankrupts and the community, were divorced at time of bankruptcy. However, 12 per cent of the bankrupts were separated, as compared with one per cent of the com- munity. Nevertheless, there is always a question as to whether the marital problems caused the financial difficulty or whether the financial difficulty caused the marital problem. A check of a limited sample indicates that many of the separations were of long st4anding. To the extent that this prevails, the signifi- cance of marital discord is reduced. Not only do most bankruptcies involve a family, they involve a family that is large in comparison to the average family of the community. The average bank- rupt family has one more person than `the average family in the community, 4.t~ versus 3.8 members respectively (Table 1). However, the difference Is greater than indicated by the averages. Twenty-three per cent of the bankrupt families had seven or more members while only seven per cent of all families were that large. The nature of the difference in family size is more Strikingly Illustrated by considering the percentage of families with five or more members. ~`ifty percent of the bankrupts had families of five or more while only 29 per cent of all families were that large. The individual representing the family in bankruptcy is a relatively young sian. His median age is 30.2 years versus 40 years for the general population (Pable 2). There is a high concentration of bankrupts in the 25-34 age category. Sixty per cent of the bankrupts are in this group as compared to 25 per cent of the general population. In the ages of 40 and over, there are fewer bankrupts than would be expected, considering the age distribution of the community. Existence of more young bankrupts and fewer older bankrupts than would All data on the characteristics of the bankrupt are based on a subsample of, n~l72, unless otherwise indicated. See appendix for estimates of Statistical error. ~ however, employment of the wife may delay the adjustment. PAGENO="0470" 1052 CONSUMER CREDIT PROTECTION ACT be indicated by the age distriht~tion of the general population Is undoubtedly the reflection of t~ie lack of correlation of needs and Income over the life cycle. In addition to the rising expenses of a young growing family, there is a need for a substantial a4iount of durable goods. This occurs at a time of low and un- stable income thus, this group is prone to use credit. With aging, Income nor- mally increasOs and becomes more stable while expenses stabilize; consequently, there is less nd~ed for credit. Data availa~ble on use of consumer credit by age groups, although less than might be desired, support the preceding observations. During 1962, a higher pro~ portion of spending units under 35 years of age used installment credit than any other age group. Sixty-one per cent used credit.° While 45 per cent of the Indi- viduals 45-54 years old used installment credit, only 32 per cent of those 55-64 used it. Note that the groups with high and low use of credit correspond to those with high and low bankruptcy rates. Education, Occupation, and Income The hankrt~pts' level of education was higher than might be expected. The median level ~f education for the bankrupt group was 10 years versus 10.4 years for the community (Table 3). However, examination of the data indicated that the bankrupts bad a higher drop-out rate in the first three years of high school than did the community members in general. Few bankrupts were college edtLcated. Given the lack of college training and the failure to finish high school in many cases, it should not be surprising that 94 per cent of the bankrupts are blue-collar workers versus 69 per cent of the general male population. A further considera- tion, the extent to which each group uses credit, should not be overlooked. Blue- collar workers appear to be more frequent users of installment credit, 59 per cent for skilled and unskilled workers as compared to 42 per cent for clerical workers based on 1951 data.7 Nevertheless, more bankrupts are blue-collar workers than would be indicated by the credit use data. Considering that the bankrupts' education and occupation are somewhat at variance with the community, the difference in income is less than might be expected. The median incomes for the bankrupts and the community were $4,656 and $~,078 respectively (Table 4). Income data are based on 482 cases. It is clear that bankruptcy is not limited to the lower income groups. Sixty-three per cent of the bankrupts had income of $4,000 or more while 43 per cent had $5,000 or more. Although there is considerable variation in income among bank- rupts, the income of most bankrupts is fairly stable within a given income bracket. Forty~euigbt per cent reported no change in income in the six months preceding bankruptcy and 28 per cent had an increase. Thus, only 24 per cent experienced ~t decline in income. Data on the amount of spouse income was not available, buI~ only four per cent of the spouses reported a decline and 87 per cent remained the ~ame. Apparently most families did not experience a decline in Income just ~rior to bankrup4cy. Rate and Mo~iZity Due to the problems that often face minority grqups, the racial composition of the bankrupts is of importance. Apparently there is a tendency for some to think that the Negro rate will be more than proportionally represented. Data in this study do not support such a conclusion. There was a proportional representation between the Caucasians and Negroes with eighteen per cent of the community being Negro and the same relationship prevailing among the bankrupts. 6 George Ka~ona, Charles A. Liniger and Richard F. Kosabud, 196~ Survey of Consumer Finances (Survey Research Center, University of Michigan), p. 69. Consumer rnstazimesvt Credit Growth and Import, Part I, Vol. I (Board of Governors of the Federal Reserve System, 1957), p. 118. PAGENO="0471" CONSVMER CREDIT PROTECTION ACT 1053 Another opinion expressed is that many bankrupts are individuals who have, recently migrated to the community. Again, such a conclusion is not borne out by the facts. Sixty-five per cent of the petitioners had lived in Flint (the location of this study) during the six years preceding fi'ing for bankruptcy. Seventy-nine per cent of the bankrupts had lived at least within the county and 93 per cent of the bankrupts had lived within the state. Although be remains a resident of the community for several years, the bankrupt tends to move frequently. Forty- four per cent bad moved three or more times while 25 per cent moved four or more times in the measured time period. SOURCES OF CREDIT The potential bankrupt has a wide variety of creditors. They range from doctors to commercial banks. Determination of which creditor is the most impor- tant in the individual's financial plight is fraught with difficulties, not the least of which is choosing the criteria for measuring importance. Two criteria employed here are the amount of debt owed each type of creditor and the number of creditors of each type owed. Types of Creditors In terms of the amount of debt owed to each type of creditor, financial insti- tutions as a group (commercial banks, sales finance companies, small loan com- panies, and credit unions) were quite important. They held 47 per cent of the bankrupts' debt at the time of his filing for bankruptcy (Table 5). Commercial banks and sales finance companies held the largest amount of debt, 17 and 16 per cent respectively. Most of the debt held by these two institutions was for the purchase of durable goods as opposed to personal loans.8 Medical service creditors doctors, dentists, druggists, etc.) were the next most important group for they held 15 per cent of the debt. They were followed by retailers with 12 per cent of the debt. Small loan licensees were the only financial institutions, other than banks and sales finance companies, of major importance. They held 11 per cent of the debt. Credit unions were next, but held only three per cent of the debt. Although financial institutions are of prime importance in terms of the amount of debt, they are of much less significance in terms of the number of Creditors owed. In this case retailers rank first followed closely by the medical group. Thirty-one per cent of the creditors were retailers and 28 per cent were medical service suppliers. These two groups held many small debts compared to a smaller number of larger debts held by financial institutions. The average debt per retail and medical creditor was $47 and $44 respectively for small loan licenses, sales finance companies and commercial banks. Thus, to the extent that collateral pressure is the function of the number of creditors, retail and medical service creditors were possibly more important than financial institutions. Amount of Debt and Number of Creditors Owed All creditors, as a group, bad claims against the average bankrupt of $3,184 (median). However, 19 per cent of the bankrupts owed less than $2,000 and 47 per cent owed less than $3,000 (Table 6). The mean number of debts was 16, or two greater than the median (Table 7). The higher mean was due to a few individuals with extremely large numbers of creditors. Over one-fourth of the bankrupts had 20 or more creditors and one petitioner had 75 creditors. Financial Behavioral Patterns Observation of the bankrupts' financial behavior in the 12 months preceding bankruptcy is interesting. It seems reasonable to expect that an individual in financial trouble will recognize that he has overextended himself. If this is so, it then should be reasonable to expect that the individual would not assume 8 In tabulating the data all personal loans ~rere placed in the category "small loan licensees" and all sales finance debt was placed in the "sales finance company" category. PAGENO="0472" 1054 CONSUMER C~REbIT ~EOTE~TION ~CT additional debt. However, as sho~vn in ~ab1e 8, the potential bankrttpt tends to assume greatei~ and greater amounts of debt as he approaches his filing day. An interestifig question which should be asked is, could these people have paid their debts if 1~bey had curbed their spending? Disregarding psychic factors, the burden of debt is a function of onO's ability to repay. Thus, debt repayment must be related to income level, sIze of family, etc. Analysis of a selected group of bankrupts in this study indicated that up to 49 per cent of them could have paid off 100 per cent of their debts within three years.9 SUMMARY AND SUGGESTIONS Although, in general, no particular supplier of consumer credit seems overly represented in the consumer bankrupts' financial difficulties, the characteristics * of the consumer bankrupt indicate that a definite social-economic class is gener- ating most of the bankruptcies. It is typified by the young married family whose income is earned by the husband as a manual worker, while the wife is occupied with a more tl~an average number of children. Their income is similar to that of the average for the community. Also, the burden of the debt is not unbearable. The social ~haracteristics of the bankrupt, his behavioral patterns and the relationship of his income to his debt provide the basis for the following sug- gestions. Thert~t is need for legislation which will restrict the availability of bankruptcy to certain individuals.~° In addition, there is a need for programs dealing with consumer counseling on credit matters. Eestricting the availability of bankruptcy will reduce the use of the Act to avoid debt repayment but at the same time this will not deny individuals court protection through Chapter XIII of the Act. Credit counseling, such as the nonprofit community counseling services established by private business, should help prevent the type of financial distress which leads tG bankruptcy. TABLE 1.-SIZE OF iAMILY BEING SUPPORTED BY INDIVIDUALS FILING FOR BANKRUPTCY CONTRASTED WITH THE TOTAL POPULATION [Percentage distribution of familiesi Size of family I Bankrupt population Total population 2 2 3 4 * - 5 6 7 and over 8 17 24 19 8 23 -~ 100 30 20 20 14 8 7 All families 100 Mean 4.9 3.8 iSize of family is defined as the number of people being supported including the bankrupt. 2 Genesee County, Mich. Note: Percentages tnay not add to totals due to rounding. Source: U.S. Department of Commerce, Bureau of the Census, U.S. Census of PopulatiOn: 1960. `General Population Characteristics, Michigan" (Washington: U.S. Government Printing Office), Final report PC (l)-24B; the data pertaining to the bankrupts are based on questionnaires adniunistered by the referee at the first meeting of creditors in Elint, Mich., 1963. Sample size: 172. Chapter XIII (Wage Earner's Plan) of the Bankruptcy Act was set up as the vehicle for paying ofi~ the debt. This plan, administered by the Court, insulates the debtor from creditor collecti4n pressure for three years and funds paid iii by the debtor are dhstrihutecl to his creditors~ See my "The Economic Feasibility of Chapter XIII," Business Lawyer, XX (January, 1965), pp. 477-81. 10 A proposal to amend the Bankruptcy Act was introduced on October 2, 1964 in the House of Repre~entatives as HR. 12784. This amendment would give the courts the power to deny an individual relief in straight bankruptcy where Chapter XIII could be used by the debtor, without undue burden, to repay his indebtedness. PAGENO="0473" CONSJJ~t~ CE~DI'~L' ~ROTECTIOW 4CT T~B~LE 2.-~/~E ç~F f~4plylppALs FIUN~1 FOR B~NKRQPTQY CQNT~ASTED ~ITH THE MALE P0PU~ATl0N tPerce~ta~e distribpt~on of individuals) Age Bankrupt population Male population Under 20 20to24 0 11 (1) 10 25 to 29 37 12 30 to 34 23 13 35to39 40to44 45to49 12 6 5 13 10 9 50 and over 32 All individuals Median age 30.2 240. 0 1Since bankruptcy is limited to individuals 21 and over (except in special cases), the percent of bankrupts in each age group is compared to the percent o~ tl~e population 2~ apd over~in e~ch~age group. Of the total population, 42 percent are und~r 20. 2 This figure is the median age for the male population 20 and over. Th~ n~pdian a?e far the total mal~ popul~tipn is 32.6 years. r~ote: Perc~~flages may notadd tp totals du,e to rounding. Source: See table 1. Sample size: 172. TABLE 3.-EDUCATION OF INDIVIDUALS FILING FOR BANKRUPTCY CONTRASTED WITH THE MALE POPULATION 1 Num~erof years Bankrupt population Male population Elementary: None 1 and 2 land4 5and6 0 (2) 1 9 5 16 14 18 13 20 1 (2) 1 (2) 0 (2) (2) 3 6 7 20 8 9 7 24 3 3 1 3 3 7 8 High ~chooI: 2 College: 1 2 Over4 All individuals 100 10 100 10.4 Median 1 f'~Iate pQpulation of individuals 25 y~rs çld ~nd over was ~~cl t~cassse the next lower age group, 14 to 24, includes people in school and thus not comparable to the bankruptcy group. 2 Less than 1 pexcent. Source: See table 1; sample size, 172. h~ote: Percentages may not add tp tot~s 4~e to rounding PAGENO="0474" 1056 ~ON~UME1t CREDIT PROTECTION `ACT TABLE 4~-lNCOME I~EVELOF INDIVIDUALS FILthGFOR BANKR1JPTC~CONTRASTED WITH THE MALE P~ULA'tION (Percentage distribtit(on of individualsi Income level Bankrupt popula- tion Male populatIon None Under $2,000 $2,000 to $2,999 $3,000 to $3,999 - $4,000 to $4,999 + $5,000 to $5,999 $6,000 to $6,999 $7,000 to $9,999 $10,000 and over..~.4 1 10 10 16 20 22 15 5 1 3 12 7 8 17 20 12 17 5 All individuals 100 100 - Median income $4,656 $5,078 Source: Petitions filed in bankruptcy, Genesee County, Mich., 1963; Bureau of the Census, see table 1, sample size, 482. Note: Percentages may not add to totals due to rounding. TABLE 5.-RELATIVE IMPORTANCE OF VARIOUS TYPES OF CREDITORS BY AMOUNT AND NUMBER FOR INDIVIDUALS FILING FOR BANKRUPTCY (Percentage thstribution) C~editor ~ Amount of debt (percent) Creditor Number of creditors (percent) Banks Sales Finance Co.' Medical Retail Small loan licensees Individual personal loans Service (other than medical) Credit unions Other All debt - 17 16 15 12 11 7 6 3 13 100 Retail Medical Service (other than medical) Small loan Iic~nsees Banks Sales Finance Co.1 Individual personal loans Credit unions Other 31 28 12 7 6 5 2 1 8 All creditors 100 1 The category "Sales Finance Co." includes only the installment sales contracts of those companies that extend both installment sales credit and loans under the small loan laws. Source: Petitions fi~ed inbankruptcy and data supplied at first meeting of creditors by petitioners from Genesee County, Mich., 1963. Sample size: 482. TABLE 6.-A~noi~nt of Debt Owed by Individuals Filing for Bankruptcy [Percentage Distributions of Bankrupts] Amount Bankrupts Under $1,000 $1,000-$1,999 $2,000-$2,999 $3,000-$4,999 $5,000-$6,999 Source: Petit~ons filed in bankruptcy in Genesee County, Michigan, 1963. Sample size: ~182. N0TE.-Percebtages do not add to totals due to rounding. Amount Bankrupts 1 $7,000-$8,999 4 18 $9,000- and over 4 28 36 All Bankrupts- 100 9 Median $3,184 PAGENO="0475" CONSTJMEfI CREi~iP ?I~oTECTIoN ACT 1057 TAmB 7.-J~Tumber of Creditors Owed by Individuals Filing for Bankruptcy [Percentage Distributions of Bankrupts] Number Bankrupts Number Bankrupts Under 10 20 40 and over 4 10-14 32 15-19 21 All bankrupts 100 20-29 16 Median 14 30-39 6 Source: See Table 6. Sample size: 482. NOTE-Percentages do not add to total due to rounding. TABLE 8.-Amount of Debt Obtained by Individuals in Each of Twelve Months Preceding Filing for Bankruptcy Amount Amount Month Obtained Month Obtained 1 $53,000 7 $47,000 2 50, 000 8 58,000 75, 000 9 41, 000 84,000 10 26,000 5 47, 000 11 39,000 6 42, 000 12 45, 000 Source: See Table 6. APPENDIX Significance of a Difference Between Sample Proportion and Population Parameter Data from this study are to be related to the general population data; there- fore, the population figures are accepted as parameters. Parameters of the pop- ulation are those provided by the census bureau. There are two possible errors introduced in using census data as parameters. One is the possible difference between the census data and the true parameters; however, this is minimized by the large size of `the sample from which the census data are derived. The other error is due to the age of the census data. Data on the bankrupt population of 1963 are being compared with data on the general population of 1960. This error is probably insignificant, since the characteristics of the population `are unlikely to change markedly in three years. * The probability that `an o'bserved difference between a s'tatistic computed on a sample and a corresponding population parameter is due to sampling error which can be te'sted by accepting the parameter as error-free and noting the significance of the difference in terms of the sigma of the sample. The level of significance computed for various proportions is shown in Table A-i and may be used by the reader in approximating the level of significance. The use of this table may be illustrated by considering the prpportion of bank- rupts and the proportion of the general population 30 to, ~4 years old (Table 2). Twenty-three per cent of the bankrupts `are 30 to 34 while thirteen per cent of the population is 30 to 34. To determine at what level of confiden~ce the difference is statistically significant, find the difference, 23%-13% of ten under "Sample Difference" on Table A-i and read the entry in this row under the column at the nearest "]~eported Percentage." In this case the nearest column is 25-75, indicating a "Z score" of 3.03. The normal curve table indicates that the differeI~e is significant ~t the .0024 level of `confidence. Commonly used levels of confidence, .05, .02 and .01 have,"Z scores" `of i96, 2.33 and 2.58 respectively. Internal Estimate for ~S'ample Proportions ` The intervals within which the true proportidns will lie for the sample, n=i72, used in `this paper, are shown in Table A-2. These are `reflected for two levels of confidence, one per cent and five per cent. To illustrate the nse of this table, refer to Table 2. Note'that 37 per cent of the bankrupts are 2~ to 29 years old. Under "Reported Percentage," in Table A-2, the nearest percentage Is 35; reading under PAGENO="0476" ~Q~SLTh~ O~WIT PJt0TECT~ION A~T the .05 level c~f conflUence, .a rt~gff of plus or mini~s 7.173 ~p~r ~cent Is in~licated. Thus, the interval that contains the "true proportion" at the .05 level of con- fidence is 29.8't-44.13. TABLE A-i--NUMBER OF STANDARD DEVIATIONS BETWEEN SAMPLE PROPORTION AND POPULATION PROPORTION Sample difference Report ed percentage - --- 50-50 5-95 10-90 15-85 20-80 25-75 30-70 35-65 40-60 0.01 0.02 0.03 0.04 .~ 0.05 0.06 0.07 0.08 0.09 0.10 0.11 0.12.. 0. 602 1.205 1.807 2,410 3,012 0. 437 .873 1.310 1,724 2,183 2,620 3,057 0. 366 .733 1.099 1,465 7,832 2,198 2,564 2, 9371 3,297 p. 328 .656 .984 1,312 7,639 1,967 2,295 2, 623 2,951 3,278 0. 303 .606 .909 1,212 1,515 1,818 2, 121 2, 424 2,727 3,030 0. 787 .573 .850 1,146 1,433 1,719 2,006 2, 292 2,579 2,865 3, 152 0. 275 .549 .824 1,099 1,374 1,648 1,923 2, 198 2,473 2,747 3, 022 0. 267 .535 .802 1,070 1,337 1,604 1,872 2, 139 2,406 2,673 2,941 3. 209 0. 762 .525 .787 1,050 1,312 1,575 1,837 2, 3071 2,362 2,~624 2, 887 3. 150 TABLE A-2.-INTERYAL ESTIMATES FOR n=172 Reported percentage Level of cv nfidence, intervals percentage 1 percent 5 percent 5-95 10-90 4.28 5.91 3.25 4.49 15-85 7.04 5.35 20-80 25-71 7.87 8.51 5.98 6.47 30-70 9.00 6.84 35-65 40-60 4555 50-50 9.79 9. 65 9.78 9.33 7.13 7. 33 7.43 7.47 (Mr. Richard L. P. M&rse, head, Department of Family Economics, Kansas Sta~te University, Manhattan, Kans., submitted the following letter and ~e1ated material for inclusion in the record:) KANSAS STATE UNIvERsrry, Mae~hatta*, Kaus., August 17, 1967. Mrs. Luowon K. SULLIVAN, Chairman, Consumer Affairs P~~wbconunittee, Committee on Banking anti Cur- rency, Hquse of Representatives, Washington, DXI. DEAR Mn~. SuLLIv~w: I appreciate this opportunity to comment on the page labeled, "Appendix A, an Actual Consumer Account from a Department Store Demou~trati~ig Calculation of Annual Service Char~e Rate." 1. I do no~ know what tbi~ exhibit is intended to show. It is an exercise in arithmetic bi~Lt be~vrs no direct relation either to the ~llJ ~r tp actual dep~rtpieut store praetic4~. 2. If anytl1i~, it demonstrates the need for H.~. jj6Ql. The bill w~uId require h*S~ction 203(d) (.73) (E) the annu~ti perce71tg~e rate, (F) the balance on wbich the finance ebar~e w~s computed and a statem~nt !=f ixow the balance w~ss deter- mined and (U) the "free ride" possibility. If such Information were disclosed in the exhibit, I would understand how they computed the monthly charges. This is something I eanno~ 40 even by ~ue~s Wor* with the inforinatian they have dise~osed. $o I `say ti'e exl4b&t itself provides excelLent proof of the need for KI~. 11(IQCL eq th~s gpo~nd ~Jo~e, ~inLess ebscuratio~ is -tbeiv goal. 73, Nç~ ~ th~it E lçr~o~ çvf ~~e~ps ~~ily i~a1ancee jind figures' tln&nce charges daijy o~r eq ~ average ~fly balanee. I~e~baps their b~tei~vt is ~ indicate 1t~a~t this PAGENO="0477" CO~SUM1~R CREDIT PROTECTION ACT 1059 bill reflects: an averaye stOre practice of the storO and an avCra~ge oo~isu~ner of'that store. Hence, thi~s~ proves that disclosure of 1S9~ would not pi~of5~rly reflect the store's yield from this account. I have no patience with such "average" rea~onhig~; this bill is intended for the individual. Some customers use revolving credit and pay 0% while others pay 18%. If these customers wore equally represented the average of 9% might pre- vail as thest~re's yield Ofl its accounts receivable. Yet, 9% i~epr r~ts the practice of neither class of customers. It is useless inforthation for the consumer. If the bill were rewritten to apply to average experiences, individual consirtu- ers would have to think along such lines as: "Am I an average customer of Macy's?" "Am I the typical consumer of Fedei~ated Stores?" "Am I an average Sears mail order purchaser? . . And if I am not average, how shall I interpret their quotations based on experiences of their average customers?" This is ridiculous. 4. If the store should choose to use a dully billing cycle (with monthly state- ments), they could comply with Section 203(d) (3), under the suggested amend~ ment (Number 13) in my Memorandum of August 5, by disclosing the daily rate of .0315% and its equivalent annual percentage rate of 11.49%. The column now headed "Monthly Service Charge," would read "Daily Service Charge." That is, if the dollar days of $6,791.97 is multiplied by .0315%, the service cha~yge will be $2.14. Likewise, the same result would be obtained if we applied the daily rate of .0315% to $41.26 eighteen times, to $26.26 for 10 days, etc. Enclosed is an amended form showing the daily rate. Tile legislative draftsman may question whether the daily billing cycle with monthly mailing of statements to consumers would be in direct compliance with the bill as written. This is a relatively minor detaiL The major point is that if the retailers really want a mechanism whereby the 11.49% can be disclosed, I seriously suggest the mechanism of employing a daily periodic rate to obtain their objective. But I suspect this is not their objective. 5. Retailers were very firm and outspoken in their objection to S. 1740 and 5. 750, which was very different from S. 5 and H.R. 11601. It required "disclosure of the simple annual percentage rate or rates providing a yield equal to the financial charge imposed." Their exhibit shows clearly how they could have com- plied with 5. 750 in that 11.49% provides a yield of $2.14 equal to the finance charge imposed. It is difficult for me to understand why they propose for con- sideration now a mode of disclosure which they once claimed to be impossible. I agree with the retailers that this provision of S. 1740 (S. 750) of disclosing an effective yield or rate was impracticable. So I am in no position now to sup- port their plea for revision of HR. 11601 to require disclosure of the effective rate. Nor do I have patience with their argument that HR. 11601 would re- quire the disclosure of untruthful information. The more they demonstrate the inequity of 18% disclosure when the effective rate is 11.49% the more con- vinced I am that they are opposed to any disclosure. Attached herewith is my March 8, 1967 letter to Mr. McLean evaluating Mr. Vancil's testimony on S. 750. You will note that I not only concur with Mr. Vancil, but predict that if he were to testify on 5. 5, he would favor it. You will note Mr. Vancil's support of 5. 5 appears on page 487 of the 5. 5 Hear- ings. It's one qualification to full endorsement of S. 5 was met by adding the words now in subsection (II) of HR. 11601. 6. In summary, this document proves the need fOr IT.R. 11601 to disclose how the service charges shown were figured. If their intentiOn is to relieve stores from quoting 18% when in Met the yield rate is closer to 11.5%, they can comply under the bill by disclosing the daily rate of .0315% and its annual equivalent of 11.49%. FInally, if they object to disclosing the 18% nominal rate and wish to have the bill reworded to disclose the 11.49% yield, then t~tey responsibly answer all their earlier objections to the disclosure require- ments under 5. 1740 and S. 750. The present bill nicets their previous objec- tions, and this is acktiowiedged by their prime witness against S. 750, Mr. Vancil. I am confused, therefore, as to what useful point is intended in their exhibit. It indicates to me how desperSte they are fOr an issue to block the annualized periodic rate disclosure. Sincerely yours, RICHARD L. D. Moimu, Professor and Head. IP.S. I am also enclosing selected pages (16-18) from my statement prepared for the 5. 5 Hearings to clarify two points: (1) The first two Douglas bills made no provision for revolving credit. (2) The only hearings on revolving PAGENO="0478" 1060 CONSUMER CREDIT I'ROTECTION ~CT credit, prior tot S. 5, were on S. 750 and it contained the yield concept. In my opinion, not untIl S. 5 was legislation proposed that was acceptable. Enclosures: Appendix A, amended by It. L. D. Morse; Memorandum to Mr. McLean, March 8, 1967; Selected pages from Morse statement on 5. 5. API~ENDIX A AN ACTUAL CUSTOMER ACCOUNT FROM A DEPARTMENT STORE DEMONSTRATING CALCULATION OF ANNUAL SERVICE CHARGE RATE Purchase Monthly Number of Daily Dol~ar Date (payment) service Balance days service days charge charge' I Daily rate equals 0.0315 percent. Note: Average daily balance equals $21.29, $6,791.97 divided by 319; average daily service charge equals $0.0067, $2.14 divided by 319; ~nnual service charge rate equals 11.49 percent, $00067 times 365 divided by $21.29. KANSAS STATE UNIVERSITY, MANHATTAN, KANS., MARCH 8, 1967 MEMORANDUM ~O MR. KENNETH A. MCLEAN, FROM RICHARD L. D. MORSE-RE: REPLY TO VANCIL TESTIMONY, PAGE 1100-1110, TRUTH IN LENDING, 1963-4 PART 2 1. Vancil restricts his testimony to the single question of the accuracy of the calculation of a `simple annual rate' as provided under the terms of 5. 750. And he limits his attention to revolving charge accounts. Ills concern has been made obsolete by S. 5 because it does not require cal- culation of the simple annual rate. S. 5 requires disclosure of the periodic rate, its annual rate equivalent and the base to which the rate applied. 2. If Vancli were to testify On S. 5, he would favor it: On page 1104 (mid-page) he says, "but I think the important thing to be disclosed to the consumer here is that the department store bases its charges on the balance in the account at the beginning of the month, it does not base its charge on the average daily unpaid balance." He continues in satine vein and concludes, "and I think disclosures ought to empha4ize that the charge Is made at a point in time' rather than on the average unpaid daily balance." After the Chairman's efforts to defend 5. 750 as meaning exactly what Vancil held tc~ be important, Vancil correctly responds that the bill (750) re- quires the yield expression to be determined "after the fact" (p. 1105) producing rate depending on the timing of the transactions during the month. Then be reinforces his concept: "But even more importantly, such a com- putation is not operationally `useful to the conswrner. . ." (italic mine'). On page 1109 be reiterates, his opinion as to what constitutes adequate dis- closure. 3. Vancil fitirther assists the case for S. 5 by distinguishing "service charges" from "interest." On point No. `2, page 1108, be points out the difference in cop- cepts: Intere~t is for the use of money over time; service charges are levied on the unpaid ba~[ance of the acèoflnt at that date. Thus be says, there is po, simple way of relatitig the service charge to an annual interest rate without going Feb 1 Feb 18 Feb 28 Mar31 Apr21 Apr 30 May3, May 13 June8 June 30 July31 Aug 20 Sept 6 Sept 9 Sept 16 Oct21 ` Oct31 Nov 22 Dec21 Dec27 Jan 31 Total ($15.00) $41.26 18 $0. 234 $742.68" 26.26 10 .083 ` 262.60 $0.46 26.74 31 .261 828.94 -- .40 27.14 21 .180 569.94 (15.00) 12.14 9 .034 109.26 .18 12.32 3 .012 36.96 13.00 25.32 10 .080 25320 (12.32) 13.00 26 .106 `338.00 11.00 24.00 22 .166 ~ 528.00 3.00 .20 27.20 31 .266 843.20 .36 27.56 20 .174 ~, 551.20 (27. 56) 3. 08 3. 08 3 . 003 9. 24 3.08 6.16 7 .014 43.12 4.12 10.28 35 .113 359.80 1.55 11.83 ` 10 .037 118.30 .15 11.98 22 .083 263.56 (11.98) 10. 82 10. 82 6 . 020 ~4. 92 14.01 24.83 35 .274 869.0~ .37 25.20 2.14 319 2.14 6,791.97 PAGENO="0479" CONSUMER CREDIT PROTECTION ACT 1061 through the rigors of computing "dollar days," "average daily unpaid balance" and the "simple annual rate." The Proxmire bill circumvents these semantic problems by using its own defined terms: "finance charge," "periodic rate of finance charge" and "annual percentage rate." 4. Vancil is much more restrictive than Proxmire. Vanell seems to believe the proper balance base should be the balance ~at the beginning of the next month. And he prefers a monthly rate. S. 5 gives the retailer freedom (1) to select his own period-daily, weekly, monthly, quarterly.. . (2) to select the base of his own choosing. Morse shows that the same periodic rate, applied to the same billing can produce as many as six different costs (page 26-27 in Truth in Lending). The only way to curb this lack of uniformity in costs would be to prescribe a uni- form method of retail accounting. Opponents will seize upon this observation as proof that S. 5 does not tell the truth. Although freedom provided by S. 5 for each retailer to declare his own method of calculating his base will result in different costs, S. 5 does give the consumer operational information, that is, (1) information needed for making rational decisions regarding alternate uses of his money (2) information needed to check the accuracy of the store by recalculating the charge. (Likewise, consumers can utilize the price per pound quoted on fryers, roasting turkeys, and chuck roasts-each yielding different numbers of servings at different costs). 5. Is 11/2% per month 18% per year? This question is raised on page 1105. Vancil says, "you can state the monthly service charge as an annual rate," but he goes on to say, "it is not the actual rate." This gets back to the recurrent problem of nominal or stated rate vs. the actual or effective rate. The Proxmire Bill is clear on this score whereas S. 750 was not! 6. He confronts Senator Bennett with evidence that even without the free period, the effective rate may be higher than 18%. (See page 1105). I will not discuss this further since 5. 5 is not concerned with the effective rate. In summary, Vancil presents a good case for S. 5; (1) He illustrates the hor- rendous task of computing average daily unpaid balances which S. 5 would not require. (2) He declares in favor of information operationally useful to the consumer, which 5. 5 would provide. (3) He distinguishes interest from service charges, and 5. 5 uses neither term. (4) He prescribes by implication only one method of figuring the service charge: 11/2% of the previous month's ending balance with no allowance for credits or returns unless the balance is fully paid. S. 5 is much more liberal, requiring that the retailer only declare the period, the periodic rate and the base to which it is applied. So S. 5 frees retailers to accommodate their customers, their accounting system, and their concept of good merchandising, yet gives the consumer the operational information needed for decision making. (5) Vancil makes a good case for not yielding to requests that S. 5 be amended to disclose the actual rate on some average of daily unpaid balances. If such were made, Vancil and a host of other NRMA friends would be ready to testify against it. Their motive is not to improve the bill, but to set a noose for hanging S. 5. 4. Rnvoi~viua CREDIT Responsible critics of 5. 2755 and S. 1740 requested that special recognition be given to open-end or revolving credit. Under this form of credit arrangement both parties know before entering into an agreement: the maximum amount of credit that can be extended, the rules for repayment of whatever credit is extended, and the rate of charge to be applied to an unpaid balance of credit to compute the finance charge. Rut not until alter the credit has actually been extended would either party know the amount of credit used, and, therefore, the amount of finance charge. Thus, pleaded the critics with justification, any bill which required prior disclosure on all forms of credit was unrealistic with regard to revolving credit. The problem was partially remedied on April 21, 19~2 by creating in the Com- mittee Print of S. 1740 (which became 5. 750) Section 4(b) for revolving or open- end credit. The effort was only partially successful because of the word "yield" in Section 4(b) (F) : "The simple annual percentage rate or rates providing a yield equal to the finance charge imposed." The yield concept was deleted in S. 2275, but no hearings were held on ~. 2275. Thns most of the objections to revolving credit disclosure, as recorded in the hearings are irrelevant. Furthermore, many of the objections raised against S. 2275 and S. 750 would not apply to the provisions of S. 5. PAGENO="0480" 0 ci 0 C) 0 C) COMPARISON OF TRUTH iN LENDING BILLS 1' DISCLOSURE OF FINANCE & 2~I55 86th 2nd (Original Bill) Jan. 7, 1960 S. 2755 86th 2nd (Committee Print) May 3, 1960 S. 1740 87th l~ April 27, 1961 Section 3. Any person engaged in the business of each to whom SectionP~ 4. Any~a~eagaged-in~e-bnsine5s~ extending crcdit to shall faraids to each person Section 4. Same as 2255. extending credit shall to person to the consummation to whomsueb credit is extended, prior to the such credit it extended, prior in consummation of the transaction, a clear statement of the transaction, a clear statement writing, which inwritissg, setting foOls, to the extentapplicable and in aiscorsiance with sssles and regulations the Board of Governors of the Federal Reserve in accordance with rules and regulations prescribed bywhiah the BoaOls4-Geeesnessef-theedefol System shall prescribe, of the finance lsesewe System-shah pmscribr., ~ ~ (1) setting faith the amount inconnection (1) the cash price or delivered 5xice of the (I) Same as 2735 chasges to be borne by person and paopritor~sewice to be ac wish such extension credit, that such nmousstbears (~)theamoentt,taaXay. tobecrp~litedaS (2) ° (2)stating pescentage to the outstanding principal obligation, oruopaid balance, expressed in ternss of simple annual interest. downpaysnentand/or trade-in; (3)the difference bel teen thss fosthunderclsuset(l)ffsd(Z) ~~ssges,isidivkhsally itemized, which are paidor to be paid~yysch person in connection with the transaction butwhich are not Incident to the (3) 00~~ (4) 0 (5) ° (6) (7)tlse percentage that th~ finance cIsa!g~ bearcto the tots) amsssnt to b~ financed expressed an a sinopln annual rate on the outitanelisg unpaidk~nne~ ~ . extension credit; (5)the total amount to be financed; (6) the finance charge expreasedin terrors of dollars and cents; and fl)the pestentage that the finance chacgebessn ~ ainap~azasrnal rate. PAGENO="0481" (7) the finance charge expressed as an assssual percentage rate to be competed as set forth Insectioss 3 (5); (8) the time and amount of payments scheduled to reua~rtIyp indebtedness: ansi (9) the terms applicable In the event of advanced or delayed payments from those specified In (8) above. Section 3, As used In thu Act, the tems -- (5) "Annual percentage rat&' means the percentage rate per period expressed ~s percent per ansssm, It shall be competed by multiplying th~p~pra~ rate per period by the number of periods per year. (~)~l~rcentage rate per period" means the percentage ratio of the finante charge for the period forwhich the chas~e Is made to the balance unpaid of the total amount to be financed. (7)"PIniod" means the time intesval between payments specified In the credit agreement for repayment of the total amount to be SectionS, RegulatIons, Reldsrased giving the Boassi duty to descsibe "the methods which maybe used In determining the annual percentage rate, 00 CO CO sin 0 Cl "l `li to Contract Credit - COMPARISON OF TRUTH IN LENDING BILLS (con't) S. 1740 S. 750 S. 2275 5 87th 2nd 88th 1st 89th 2nd 90th 1st Committe Print April 21, 1962 Jan. 15, 1963 July 12,1965 Jan. 11, 1967 Section 4, (a) Except as provided In subsection (b), anycreditor shall Isnslds,,, Same asS, 1740 (1) ft ft " (2) ft it (3) CI' ft (4) "ft ft (5) a" e SectIon 4, Same as S. 750 w1th~ ascertainable Inserted after the words: `extent appllcable'~ (i)Same asS, 750 (2) (3) Ii t~ II (4) " ft I' (5) I' ft Is Section 4. Same as S. 2275 (1) " " " (2) I' " s (3) ft (4) ft " tEl tI.c tatol nm,..,.r c~ 5.. fs......s. 5.1.. (6) ft ft N (6)"" (3) and(4)r above), (6) the finance chasgeassyeeaued In teesse-ef dollars and cents; and- (7) the percentage thatthe finance charge betas to the total amount tobe fInanced expressed ass alsnple annual rate on the average outstanding impald balance of the obligation, Sec. S. Reéulatlons provided for the Board to describe "the methods whirls maybe used In determining the `simple anassal rate' or'slmple annualpercentage rates! for the pirpose olSec, 4," (7)Delete -*,eeage-' -0~- basest .~ Same asS, 750 0 PAGENO="0482" .Revolving Credit - COMPARISON OF TRUTH ZILLENDING BILLS (con't) S. 1740 S. 750 S. 2275 S. 5 90th 1st 87th 2nd 88th 1st Committee Print April 21, 196~2 Jan. 15, 1963 July 12, 1965 Jan. 11, 1967 to Section 4. (b)Aisycreditor agreeing to extend credit or open-end credit pian shall, inaccosdasise with riles and regsa- ~ issfonnation described In subsection (a)- (1) furnish to such person, prior to agreeing to extend Same as S. 750w1th amendments as noted 71lsssefu on the montbll )asextt ~2(!!f~el(!F.l applicable and ascer ~nakle 3.. elate. LQBSW~O~W~ Insert' and~ previously furnished ~ F t)elet -penv.dosg-a- .yisldsquaito-Uie fleanee-ehaige-- -. Section 4. (b) Anycreditor agreeing to extend credit to anypesson pennant a revolving or open-end credit planshall, in accordance wish stiles and regis- lations presçrBsedbythe Board and in lien .f the infuaaatien deensdmd-ia oubscctinn4a3 - (1) furnish to suds poison, prior to agreeing to extend credit undersuch plan, a clearstatement inwritlng setting forth theaimpie aaasal psnnatage eaSe-an ssue.-aiwhiah a fin~ee ehargewilibe imposed onthe nsontidybrdassrerasrd~ following infonnatlons crndmderaan~aclearst!~emrt5S settis~gjorthtIse!(75pleasrnuaL~0tefltage ratp or rates atwhich a finance clsa!ge wilibe imposed'; and (2) furnish to ouch pe~p,~e end of each monthly period (wisich need notbeacalendar month).fF!iowan the entering into of any ouch agoeem~,3.~f~ statrnntmwfltspp ttas5 f tth2 - ~ pesson as of the begin igofsuc~sm9othlYPeri0d ~ amount of each exten5io~4~i3.~jt_t9 such ~ anyproper~y9rsewkeacquimyk~tt2'5L4B suci nod toge erwith3 lie dale sisereof soda brief identification of tmE! L?~r!~c-ei!o~ acquired; (C) the total amount received from, or credited to the account of5 such person daring such period; (D)sIse finance chasge (in dollars and cents) required for such period:; CE) the outs ndingbalsnceiothe accrsa~ipla pessas I the end f such m nthly period and (F) the simple annual percentage rate of rates pro ding yaeld qu 1 t di fusanc chang impooed be imposeds (ii)tisr percentage rate per periodof the finance charge to be(popp~j~5~ (su)th periods rate of financ chargpress d aaan annualpepe q(g rateS (2)furnish to sucisperson, se ~gf theend ofeachmen,1,iyperiOd(WhiSisflandao& be a calcudar month~foliowing the entering into of any such agreement, a clearstatement in writing setting forth to the extent applicable and asceitainable -- (A) Same as S. 2275with "monthll' deleted, (B) (C) (D), (E), & (F), From S. 2275 deleted (D) the outstanding unpaid balance in the account of such person as of the chper.od; ~ tocosnpstetlfincecharge. for ~ period; (F)thbalanc nwhich sit periods f.nanc chasg was mpated,and (G)the finance charge (in dollars and cents) impnsed forsuch period. ~ An used in this subsection, the term "revolving or open-end credit plan" means Asusedinthis_ubsectIoneei'o2~ Insert' spen-end credit pins" means a credit planunder finance charge has which the total amount of credit tobe utilize~ the been Imposed onthe f0fl~nfthefiethargetobdp as monthlybalance. the amounts and times of repayment are not specified I) f " at the time an agreement to extend credit piirsuautto shownunderS, 5 such 1fasa is entered into. a credit plan prescribing the terms of credit transactions which maybe made der~i_timet~ time and underthe tersni of which a finance charge maybe competed on the outstanding unpaidbalassce from time to rinse thereunder. PAGENO="0483" CONSUMER CREDIT PROTECTION ACT 1065 In my judgment those who declare S 5 to be misleading or uninformative do not do themselves or the many responsible retailers and financial institutions justice Many of these institutions are now quoting monthly rates And since the annual rate is merely 12 times the monthly rate it is a matter of simple arithmetic and not a matter of substance as to what the rate reveals Thus one who argues that the 18% disclosure is misleading is also arguing that the prevailing practice of quoting monthly rates is misleading S 5 requires no change in present book keeping or accounting procedures It presents only a printing problem and then only until present forms are out of stock If present practices are deceptive or misleading, S. 5 will not correct them. Before I introduce my problem I should like to repeat what Secretary Barr said It is not important that the consumer buys a shirt on the third of April is billed on the 17th of April and has until the 17th of May to pay without in curring any credit charges This is a cash transaction up to that point The po'tnt at which it becomes a credit tran~saction so far as the purpose of this bill is con cerned is the point at which the cosisume~ becomes subject to credit charges This is the only thing that concerns him He surely is not going to borrow else where to pay off his revolving credit unless it is to avoid paying service charges This is why I say that revolving credit is the simplest kind of credit to handle for the purposes of this bill If the store charges 1%% per month the annual per centage rate is 12 times 1%% or 18% PAGENO="0484" CONSUMER CREDIT PROTECTION ACT 1066 THE PES~Y WAY* Assume a toll road situation wherein distance corresponds to time in a revolving credit account situation. The Set~pI 1. Given two empty cars, a front and rear car. 2. Starting point is the first day Of a billing period * It is 30 day- units before the first toll point. 3. Toll points are 30 or 31 day-units apart. 1~. Unloading of either payments or returns may be made between toll points; purchases may be made at any point and loaded on the second car only. 5. No toll keeper between toll gates. Toll keeper has no control over when the consumer opts to unload. 6. Instructions for use of cars is as posted: rnin~ Warnings Between Toll Points - Between Toll Points - * Do Not Load Credit * Load Credit Here * Unload Payments or Returns * Unload Returns only - I Instructi~: 1. Pay toll charge at rate of 1-1/2% of load in front car. (Note: At the first toll gate, the front car will always be empty.) 2. Inmiediately, credit load must be shifted from 2nd car to 1st car. First car is accessible to the credit user (and not credit vendor) and then only for the purpose of discharging some or all the load a the option of credit user. 3. Pick up from the toll gate keeper a punch card notifying that at the next toll gate a service charge of 1-1/2% will be levied on the front car load less any unloading by payments or returns he opts to make along the way. I~. Proceeds to next toll point, unloading from front car at option. * Response by Richard L. P. Morse to the Statement of S. H. Setten before the Subcommittee on Financial Institutions, Senate Committee on Brnki~ and Currency on S. 5, `londay, April 17, 1967. PAGENO="0485" CONSUMER CREDIT PROTECTION ACT 1067 (Despite warnings, returns may be unloaded from whichever car it is in, and if from the rear car, equivalent credit may be shifted from front to rear car.) 5. Return to Step 1 at each successive toll gate. What is the rate? - There are two rates: Notification rate. (See instruction 3). Collection rate. (See instruction 1). - Notification rate equals 1-1/2% per month or 18% per year. The free ride may be 1 day unit to 30 day units in the second car; and at his option up to another 29 days in the first car. - Collection rate is equal to the sum of tolls at each of the 12 successive gates divided by total of the loads in the front cars as measured at each gate when the total is paid. - Jifference between notifica'tion and collection rates: Case 1 - If there is no change in load, the notification rate of $1.50 per $100 would be 12 x 1.50 or $18 per $100 at end of 12 successive units, or equivalent to 18% for a 12-unit segment; (or 19.6% per year if not paid at each gate, but added to the load). Case 2 - If there is total discharge of the front car before each of the 12 toll gates, collection rate equals 0, but notification rate equals 18%. Case 3 - If there is partial unloading from the front car, notif ice- cation rate is 18%; collection rate will vary between 0 and 18 depending on the use of unloading options. S. 5 requires disclosure of the notification rate which is always 18%. The creditor may receive or the consumer may pay at any rate between and 18% depending on the use of the unloading options: Observations Rcgarding Penney's 1. Their `effective' rates assume toll keepers are stationed at every day unit along the route. This is not in accordance with the set-up, nor does it correspond to any present-day commercial practices. PAGENO="0486" 1068 CONSUMER CREDIT PROT'ECT~ON ACT 2. Penney's does function according to the set-up, using a monthly notification rate of 1-1/2% which, expressed annually, is i&%. 3. Since Penney's has no control over the consumer's use of their options to unload the debt between toll points, the only rate they can quote with validity is the notification rate. ~. Only the consumer can cause the collection rate to be lower than the notification rate. The hill should require disclosure of this option so the consumer can cause the collection rate to vary from the notification rate if it is his wish. This is an implied responsi- bility in subsection (F). Conclusion: S. 5 does provide meaningful and useful information for the consumer for makinr~ rational decisions. Post Script - The set-up described above is that of Method II listed on pages 26~of Morse's Pamphlet 17 "Truth in Lending". In all cases the noti- fication rate is l8~; the dollar costs range upward to almost 100% greater than the Penney V~y. Other billings would show other dollar cost differences, as noted in footnote ~3 on page 2I~. However, under many of these methods, a consumer approachin~. the toll gate could afford to borrow at rates much higher than 18% to avoid charges. For example, if the consumer in April under Method TV had paid gL~9*99 more, he would have needed only l~ more to avoid the 90!= service charge. ~ecause he failed to pay the full ~6o for lack of the l!=, he was charged 9Oç~. Had he had the penny one day earlier, he could have offset ~is 90% charge, and thereby would have earned a return on the penny of 9,000% per day or over 3 million per cent per year without compounding. Or, if he had waited the 29 days, the rate would still be over 100,000%. From th~s perspective, the nominal "notification" rate of 18% is not an over-statement; it is the only statement that can be quoted which is mean- ingful and operationally useful to the consumer. PAGENO="0487" CONSUMER CREDIT PROTECTION ACT 1069 III. ALTERNATIVES I wish to conclude this testimony by pointing out the alternatives for public policy. If you pass the bill in essentially its present form, you will provide a standard of disclosure that will be universal throughout the common market of these United States. It will expedite the excellent work of the Committee pre- paring the Uniform Consumer Credit Code by relieving them of what is, for them, a most difficult decision. consumer education can become much more effective once the terms of credit are defined and made meaningful. The rates will stimulate a more price competitive market. And as the market comes to recognize the legitimacy of rates up to 36% and 42% there will be greater opportunity for differentiation by loan customers. The administering agency can proceed directly in accordance with Section 5(c) to establish an advisory committee. With their advice and counsel it can exercise its powers to prescribe reasonable tolerances of accuracy, and to make rules and regulations consistent with the bill. I feel certain that with the bill passed the experts of the finance industry will be extremely helpful in developing workable procedures. The alternative is to maintain the status quo. I hope this will not prevail. I can best tell you why if you allow me to share some of my experiences. As a conscientious consumer, student, and teacher, I have taken time whenever I could to learn about credit. This has taken much time. Unlike many of my consumer friends I can justify the investment cost that persistent inquiry in- volves because I need to know about such matters to keep informed as a teacher. Nevertheless I wish to emphasize that there is a tremendous cost in being a re- sponsible consumer, and I feel this bill would reduce that cost. 1. In my 1960 testimony I told of my efforts to help my secretary understand her car refinancing terms. She was dealing with a large reputable national car financing firm. This resulted in 15 letters, long distance calls, and a 100 mile trip. Had S. 5 been in effect at that time, none of this expense would have been neces- sary. Incidentally, as the facts were made known, an error in arithmetic was discovered. My second experience was in regard to revolving credit. I wanted to learn how it worked, so I sent students to find out. We developed a billing sequence so we would have comparable data. One large chain refused to work out the problem, and their literature was not clear with respect to such words as "small service charge" or the "unpaid balance". I had a credit card with this company and knew the credit manager, so I made inquiry and was also told it was policy not to supply such information. So I brought some shirts, charged them on my revolving credit account~ allowed my bill to accumulate, and sent the problem along with my payment. The letter ended up not at the regional office, but was answered by the national office. Had S. 5 been in effect then, I would not have been such a nuisance. The information they would supply as a standard procedure would have enabled me to get the information as a RIGHT and not a courtesy. My last example is less pleasant. Dr. Johnson writing in a journal article had raised a question concerning the legality of a situation Miss Courter and I hypothesized in our artice, "Are Credit Terms Quoted Accurately?": And, often this dollar add-on is not advertised in dollars, but deceptively as a percentage. Only the very sophisticated consumer can recognize an advertised 5% car loan to be the equivalent of 9.5% simple interest. I referred the matter to the Attorney General of Kansas who in 1964 advised that the advertisement of a dollar add-on-rate as a percentage or percentage dis- count is clearly misleading within the meaning of Kansas statute. Furthermore, he invited me to advise him if I knew of any such instance. A month later I noticed a billboard advertisement of a bank 5% car loan. I sent him. a picture of it. Last August, over two years later, I noticed this same bank was advertising an offer to borrow at 5% and lend at 5%. I took a picture of this situation and used it for the cover of Pamphlet #17. Now, it is not my proper role as a professor to engage in policing the market, so it seemed inappropriate for me to institute 1e~al action. However. thiq is not an isolated case. In the June 29, 1964 issue of UJS~. News and World Report page 85-6 there was a feature article on a report of the Consumer Advisory Council. In the course of this interview I struck boldly at the bank advertisements of 3% car financing then current. Although this bill makes no provision for the regulation of advertising, it does establish a standard appropriate factual disclo~ure. As such it will create an at- titude of expectation that will make such advertising less likely. PAGENO="0488" 1070 CONSUMER CREDIT PROTECTION ACT In conclusion, it seems to me that your choice is to allow the present system to endure with its 50% or 100% error, or, pass this legislation which narrows this error to a workable tolerance. STATEMENT BY MRS. ESTHER PETERSON, SPECIAL ASSISTANT TO THE PRESIDENT FOR CONSUMER AFFAIRS I have ju~t received seven resolutions passed by the Consumer Advisory Council at ith meeting here yesterday. These resolutions shall receive full con- sideration, both by my office and the President's Committee on Consumer Interests. The resolutions are attached. ADOPTED RESOLUTIONS OF THE CONSUMER ADVISORY COUNCIL 1. CREDIT DISCLOSURE The rapid rate of consumer credit growth, the many innovations in credit forms, and the segmental approach to credit regulation has resulted in consider- able confusion. Therefore, the Consumer Advisory Council recommends that the Special Assistant to the President for Consumer Affairs bring together representati~~es of all Federal agencies exercising regulatory control over con- sumer credit lending and consumer credit extending institutions for the purpose of establishing such standards of full disclosure of credit charges as consumers need to make intelligent credit decisions. We further recommend under those portions of these proposed standards which could be put into effect under exist- ing authority, and those provisions which would require new legislation be separately designated. In no sense does the Council consider this procedure as a substitute for the truth-in-lending legislation, which the Council continues to feel is a matter of the highest priority. 2. COLLEGE LOAN RATE DISCLOSURE The Consumer Advisory Council takes cognizance of the rising costs of college education ai~d the consequent financial burden this places upOn those who must bear this co5t One means of carrying the burden for some families is a student loan. It is gratifying to note the recent substantial increase in the volume of funds available for such loans from various sources. The Consumer Advisory Council is disturbed, however, by the very high inter- est rates charged for college loans by some financial institutions and, especially, by the failure to disclose rates forthrightly. The Consumer Advisory Council recommends that colleges and universities which allow the name of the institution to be associated in any way with such loan funds should condition their association by requiring the credit lender to disclose publicly the loan cost and rate (in simple annual rate terms), the cost and effective premium rate for each type of insurance coverage, and such other costs as may be included. The Consumer Advisory Council further recommends that the Special Assistant to the President for Consumer Affairs take responsibility for securing the preparation and publication of an analysis of major national and regional com- mercial and publicly supported college loan programs currently offered, includ- ing disclosure of the loan cost and rate (in simple annual terms), the cost and effective premium rate on each type of insurance coverage provided, and such other costs as may be included. The Consumer Advisory Council urges that guidance counselors in the secondary schools of the nation inform themselves of such analyseE in order to be in a position to advise with students on the financing of their college educa- tion. 3. REGULATION OF RATE STATEMENT The Consumer Advisory Council is concerned by misrepresentation of the cost of credit by banking institutions stating the cost as an add-on or discount percentage tate. The Federal Trade Commission has ruled this to be a deceptive trade practice and the courts have upheld the principal involved. However, commercial banks are exempt from Federal Trade Commission jurisdiction, as are transactions not in interstate commerce, leaving an inconsistency in exist- ing prohibitions. Another gap is reflected in the recent opinion of the Attorney PAGENO="0489" CONSUMER CREDIT PROTECTION ACT 1071 General of Kansas that such advertisements are misleading. The jurisdiction of his office over the practices of National Banks is not as clear as that of the Federal agencies, thus again leaving an inconsistency in existing prohibitions. Therefore, the Consumer Advisory Council recommends that Mrs. Peterson direct letters of inquiry to all those Federal agencies which have some admin- istrative authority over the National and other banks, asking each to reply by August 15. 1. Can they issue regulations which would bar National and other banks from representing the cost of credit as an add-on or discount percentage rate? If not, why not? 2. What specific legislative authority would be needed to sustain such regula- tions? 3. What administrative agency other than their own presently has authority to effect this prohibition? Among those to whom this letter should be directed, should be the Comptroller of the Currency, Chairman of the Federal Reserve Board, and Chairman of the Federal Deposit Insurance Corporation. 4. NATIONAL BANKS It is the understanding of the Consumer Advisory Council that National Banks are required to comply with existing State anti-usury laws or other State laws establishing maximum credit charges for various types and classes of credit transactions. Furthermore, it is understood that the State officials do not have the right of visitation in regard to National Banks to insure that State laws are being coin- plied with. Therefore, in behalf of consumers who use the services of the National Banks throughout the Nation, the Consumer Advisory Council wishes clarification regarding their protection by the Federal agencies concerned, and requests the Special Assistant for Consumer Affairs to obtain the following information: 1. Do the standard procedures of Federal examiners of National Banks in- clude the examination of individual consumer notes to insure that: a. the State laws are being complied with, and b. the consumer is not being charged in excess of the terms of the note 2. How many cases have been reported in the past five years of noncompliance with State laws in regard to rate of charge? 3. What action has been taken in respect to any such violation of State laws which have been discovered? 4. If a loan is discovered to be contrary to State law, what steps are followed to inform the consumer involved so he may seek appropriate legal remedies? 5. What remedies does a consumer have under Federal law if a loan contrary to applicable State law is discovered by the examiners? 6. And, how recently was there a policy-level discussion of these matters by the agency? Are there any position papers available for study? Furthermore, in order that the Consumer Advisory Council may be lietter in- formed concerning the consumers position in securing consumer credit from National Banks, the CÁO requests Mrs. Peterson to secure from the Comptroller of the Currency a compilation of the information used by bank examiners to determine compliance with anti-usury statutes in each of the states. 1. The maximum rate that may be charged on contract single payment and installment payment loans, and on open credit revolving credit accounts. If the rate is expressed in a form other than a simple nominal annual rate, this should be noted. 2. The method by which examiners compute in each state the rate from the Thllar off charge if the statute limiting the charge uses a rate expression. 3. Those charges which are considered incident to the loan and those which are not, for the purpose of distinguishing interest from other charges. The Consumer Advisory Council requests that this be directed to all the Federal agencies which have direct or indirect regulatory authority over the National Banks, particularly, Comptroller of the Currency, Federal Reserve Board, Federal Deposit Insurance Cornoration. 5. CLOSING COSTS The Consumer Advisory Council has taken cognizance of the wide variation in Closing Costs assessed in Federally financed home purchases. It notes, further- more, that the charges are widely different for essentially the same services. PAGENO="0490" 1072 CONSUMER CREDIT PROTECTION AC1~ In the interest of preventing abuses in closing cost charges, the Consumer Advisory Council recommends that the Special Assistant for Consumer Affairs request reports from the Federal Agencies concerned, particularly the Housing and Home Finance Agency, the Home Loan Bank Board, the Veterans Adminis- tration, the Board of Governors of the Federal Reserve System, and the Comp- troller of the Currency which will: (1) appraise present practices, and (2) formulate those policy recommendations which can be implemented under present legislative authority, and other recommendations which would require specific legislation. 6. BANKRUPTCY AND INSOLVENCY The Consumer Advisory Council has noted with alarm the rise in consumer bankruptcies, the lack of uniformity in use of chapter XIII throughout the Nation, the abuse of wage assignments and garnishments and the failure of contracts to convey meaningfully to credit users essential facts in the credit contract and their rights and responsibilities as creditors. At its March 1963 meeting, the Consumer Advisory Council recommended re- search into the manner in which families use credit, and into the causes for misuse of credit leading to bankruptcy and debt adjustment. And, in December 1963, the Colisumer Advisory Council included in its stated scope of activity for the coming year, study of "the social pathology of consumer credit addicts." There is gtowing interest in and concern about consumer credit. Suggestions have been received by Mrs. Peterson indicating that those directly concerned with bankruptcy, namely, the referees and trustees in bankruptcy could con- tribute greatly to and would participate in a conference concerned with the debtor. The Consumer Advisory Council recommends, therefore, that a Committee of the Federal referees in bankruptcy, trustees in bankruptcy for wage earners plans, representatives of the Department of Labor concerned with garnishment and wage assignment, representatives of the Housing and Home Financing Agency, the Veterans Administration and from the Bureau of Federal Credit Unions be foi~med and that a conference be called to: 1. formulate recommendations regarding revision of the Bankruptcy Act 2. review wage assignment and garnishment practices and recommend model legislation 3. develop a uniform credit contract form 4. appraise the variety of methods by which the credit eligibility of a con- sumer is assessed, and recommend improvements 5. suggest improved methods for meeting the credit needs of low income families. 7. PESTICIDES (Not relevant to credit.) AUGUST 5, 1967. From: Richard L. D. Morse Subject: Suggested amendments to Title II of H.R. 11601. II.R. 11601 presents a significant improvement over 5. 5 as passed by the Senate. The purpose of this memorandum is to call attention to specific portions of H.R. 11601 which do not fully meet the declared purpose of the bill. It is recommended, therefore, to: 1. Delete on page 5 sec. 202(d) (1) (A) Reasons (1) "fees and charges. . . for determining. . . perfecting. . . or releasing or satisfying any security related to a credit transaction" are clearly an Incident to the extension of credit. (2) The purpose of H.R. 11601 is not to reveal creditor's profit margins, but to enable cOnsumers to comparison shop. Lower rates could be quoted by ~redi- tors who reduce the risk of inferior collateral by so perfecting the security at the expense of the consumer. This extra cost complicates comparison shopping and shifts to the consumer the cost of perfecting the security. (3) If creditors bear the cost, they will be less inclined to burden public officials with unnecessary paper work; they will incur this cost only for doubtful cases; that is, for risks higher than those noripal to the creditor's type of operations. 2. Change on page 5 subsectIon (B) to read subsection (A) of sec. 202 (d) (1). PAGENO="0491" CONSUMER CREDIT PROTECTION ACT 1073 Reason (1) Cash buyers would pay taxes. Taxes'are not an incident to credit. 3. Add new subsections (B), (C) and (D) to sec. 202(d) (1): "(B) insurance against liability arising out of the ownership or use of prop- erty related to the credit transaction if the creditor has no economic or control- ling interest in the insuring company or its agencies, or if the creditor receives no commission payable directly or indirectly for the sale of such insurance cover- age; and "(C) credit life, health and accident or other insurance on the obligor, if not required by the creditor as a condition for obtaining credit, or if the creditor has no economic or controlling interest in the insuring company or its agencies, or if the creditor receives no commission payable directly or indirectly for the sale of such insurance coverage; and "(D) charges which are reasonable in relation to the benefits conferred on the obligor if they are of commensurate value to the obligor apart from the grant- ing of credit and if they have been approved by the Board by rule or regulation. Reasons (1) Such insurance coverage primarily protects the obligor and he should have the option of carrying it. (2) If the creditor chooses to make such insurance available or to finance its cost, he may do so. (3) However, limitations are imposed to remove the temptation to offer credit services at a loss with the intention of recovering through profits on insurance. (4) The Board should be authorized to broaden the exemptions from time to time. 4. Delete on page 5 subsection "(E) appraisal fees" and on page 6 "(F) credit reports" of section 202(d) (2). Reason (1) Both are an incident to credit and are not customarily incurred by a cash buyer. 5. Delete subsection (A) and substitute for (C) in sec. 202(F) (1) (C) All payments are scheduled at equal intervals if all payments are so scheduled except the first payment, which may be scheduled to be paid before, on, or after one period, and if the number of payments is adjusted for such ir- regularly scheduled first payment by subtracting (if before) or adding (if after) the nearest number of full period equivalents in double the time by which the first payment differs from a full period. Reasons (1) Subsection (A) is not necessary. (2) The substitute wording for (C) provides a more appropriate correction for deferred payments. A 3-month deferment would have been treated as. one month, but more correctly as 6 months under the substitute wording. 6. Delete the words "or rates" on lines 10 and 11 of page 7 in section 202(f) (3). Reasons (1) Multiple rates, step rates or graduated rates should not be tolerated since they are contrary to the purpose of the bill: "To assure a meaningful disclosure of credit terms so that the consumer will be able to compare.. . credit terms. . (2) Creditors choosing to employ graduated rates to compute the finance charge would disclose this system as their `method under 203(d) (2) (B) on page 12, but would express the rate as required under 203(d) (3) (E) as a single blended rate. (3) In practice, creditors using graduated rates would use a series of single rates applicable to specific levels of total indebtedness, for example: 18% if the balance is $500 or less 17% if the balance is betw~en $501 and $600 16% if the balance is between $601 and $700 15% if the balance is between $601 and $700 9% if the balance is $1,500 or more PAGENO="0492" 1074 CONSUMER CREDIT PROTECTION ACT 7. Substitute on page 9 for sec. 203(b) "(6) The amount of the finance charge (such charge or charges shall be itemized, showing those charges which are an incident to credit extension and not required of cash paying consumers) ." Reasons: (1) There is no need to introduce time-price differential terminology. (2) Itemization of charges is informative for the consumer who wants to know. (3) The criterion for finance charges is established. 8. Substitute for the second sentence beginning on line 3 of page 10: "Oompliance shall be attained (1) by disclosing the annual percentage rate to any prospective consumer or in any advertising of the finance charge or rate, and (2) by disclosing such other information as is required in the contract or other evidence of indebtedness to be signed by the obligator." Reason: (1) The ednsumer who shops for credit needs to know the rate; the consumer needs to know the cost and payment terms before signing a contract. The motorist presents an analogous situation: When driving down the high- way, price per gallon quotations are meaningful and adequate. However, once he has selected a .station, the rate becomes secondary in importance to total cost and payment terms. 9. On page 10, line 25, add: "and an itemization of "the charges". 10. On page 11, line 9 substitute the following sentence: "Compliance shall be attained (1) by disclosing the annual percentage rate to any prospective consumer or in any advertisements, and (2) by disclosing such other information as is required on the note or other evidence of indebted- ness to be signed by the obligor." 11. On page 12, subsection (C) of Section 203(d) (2) delete all words follow- ing the words "finance charge" on line 7. Reasons: (1) "Inst3llment open end credit" appears no where else in the bill; it should be deleted here. (2) The words in parenthesis tend to give legal sanction to a practice that can be treated better by the regulatory authority. The use of minima and fixed charges could be so abusively used as to render the rate insignificant. 12. On page 13 subsection (D) of 203(d) (3), delete all words on lines 2 to 5 after the word "period". Reason: See number 11. 13. On page 13 substitute for (E) of 203(d) (3): "(E) the periodic percentage rate, and its equivalent annual percentage rate, applied to the balance to compute the finance charge for that period." 14. On page 14 add at the end of section 203(f) line 13: "The % symbol shall represent an annual percentage rate, unless another time period is explicity and clearly designated." Reason: This confirms the customary use and interpretation of the % sign. 15. On page 15, 203(j) ; (1), substitute for (A) and (D) "(A) the cash sale price or total amount of credit extended," "(D) the time sale price, if a credit sale, and" Reason: (1) Since this is intended to apply to both loans and credit sales, the wording needs to be broadened. 16. On page 17, line 9, section 203(1) (2): Delete: "18 per centum per annum" Substitute "0.15 per centum per day, or "1.0 per centum per week, or "4.5 per centum per month, or "50.0 per centum per annum". PAGENO="0493" CONSUMER CREDIT PROTECTION ACT 1075 Reason: The 18 per centum rate is unreasonably low. These rates would give full dis- closure opportunity to operate without the interference of ceilings. 17. On page 18, Sec. 204(b), some revision of the tolerances is needed for clarification: Delete on line 20 all after the word "installments." On page 19, change (2) to read: "(2) The use of rate tables or charts may be authorized. Such tables or charts. . ." Reason: This will eliminate any question as to how the creditor arrived at the quoted rate which is quite incidental to its accuracy. This establishes a method for rounding up figures, authorizes the use of tables, and establishes a tolerance for the tables. 19. Page 24, line 2, insert a modifying word so as to limit the excessiveness of this amount. Insert "not excessively greater." (From the Washington Daily News, fune 11, 1964] PROBE ASKED ON HIGH CosT OF CREDIT (By William Steif) The President's Consumer Advisory Council has told the White House official in charge of consumer affairs to probe the high cost of credit. In six resolutions passed yesterday, the 12-men~ber council a~sked Mrs. Esther Peterson, Special Assistant for Consumer Affairs, to: Set up "standards of such full disclosure of ei~edit charges as consumers need to make intelligent decisions." Crack down on "the very high interest rates charged for college loans by some financial institutions and the failure to disclose rates forthrightly." Look into "possible abuses" in "closing costs, assessed home purchasers." Call a conference of Federal executives because of "the rise in consumer bank- ruptcies, the abuse of wage assignments and garnishments and the failure of contracts to convey meaningfully essential facts to credit users." Find out what laws are needed to close a gap in regulation of bank credit. Ask that national banks obey state anti-usury laws. In two days of meetings here, the CAC also drafted resolutions indorsing an Administration inquiry into the Food Distribution Industry, the President's anti~poverty program and the pesticide regulation bill introduced by Sen. Abra- ham Ribicoff (D. Conn.). The Council suggested Mrs. Peterson "bring together representatives of all Federal agencies" regulating loans to set up the standards. Once standards are established, the Council urged quick application of "provisions w'hich could be put into effect under existing authority." A new law might be needed for other provisions. The council's interest in home buyers' closing costs was triggered by the "wide variation" in such cost around the U.S. "for essentially the same services." The `GAO asked Mrs. Peterson to get data from Federal Housing Agencies for rec- ommendations on new laws. PAGENO="0494" 1076 CONSIJMER CREL~IT PEOTECTION ACT "Misrepresentations of the cost of credit" by banks "concerned" the Council too. It pointed out the Federal Trade Commission ruled some ads "a deceptive trade practice," but "commercial banks are exempt from FTC jurisdiction, leaving an inconsistency" in Federal law. [From Changing Times, June1967] How MUCH Youn MORTGAGE REALLY Cos'rs-THESE TABLES SHOW WHAT RATE You ACTUALLY PAY WHEN YOU'RE CHARGED INTEREST PLUS "POINTS" In times of scarce or "tight" money, a person wiho `wants to buy or sell a house may find himself required to pay the money lender a commission, `commonly known as a "discount" or a's "points'." A point i's a one-time charge equal to 1% o'f the loan `and, in most places, is `considered a `perfectly legal way for a lending institution to `boost its retu'rn `without violating the legal ceiling on interest `rate's. Points may be dha'rge'd to the buyer, the seller or to both. When a borrower `pays point's, the money i's, in effect, deduc'ted from the total amount of the loan he is `seeking. Thus, `for example, if he is paying four points on a $20,000 loan, he actually gets only $19,200 ($20,000X.04%=$800) but ha's to p'ay interest on the full $20,000. `The `result of this i's to `raise the "effective" interest rate-the `real `rate the lender is earning on the amount he loaned-well a'bove the rate stated in the loan contract. And if the `borrower `pay's off his loan sooner than expected, the impact of paying points is even more pronounced. The tables on t'he next page were prepared for Changing Times `by `Carleton Fi- nancial Computations, Inc., of South Bend, md. If you are comparison shopping for a mortgage loan, yo'u can use them to help de'ci4e whic'h of two lenders to do business `with if both are `charging points, or if one is an'd `the other is not. Let's `say, for example, B'ank A agrees to a 20-year loan. For this, it will charge 61,4% interest-but no points. Bank B offers a `s'imilar deal for only 6% interest. But it requires that you pay four points b~fore it will approve the loan. Which is the better deal? Look at the table calculated on the `basis of 6% interest `rate payable over 20 years. You'll see th'at Bank B's "nominal" 6% interest rate goes' up to an effective rate of 6.51%-slightly more than 61/2%-if you pay four points. And if you sell the hou'se in `five years, the effective rate `will have been even `higher-7.02%. All el'se being equal, in this `case you'd obviou'siy do better with Bank A, even tho'ugh i'ts nominal rate i's higher than Bank B's. (The difference in rates has no effect on tax-deductible interest, `by the way. You still deduct only the `dollars you pay in interest each `month-points are not deductible;) The tables can also be used to satisfy curiosity. Let's assume, again, that you are the buyer and are being charged four points by Bank B. You learn from the `person who is selling the house that the bank is also charging him points, - let's say `five~ What is the bank's `rate of return all told? If you a'dd your points `to `his points, the grand total is nine points, `so that Bank B i's really earning a yield orf more than 7% (7.20%) on the deal. PAGENO="0495" 01 N) 0 0 0 0 0)~N)N)N) oooooo-~--~ N)C)C) °0000 0000N)N)N)N)0)C)0)0) ~ ~ 0)N)~N) ~ N)QN)01N)0) W 0 ~ (#1 00N)N)N)N)0)N)N)N)N)N) N)N)N)N)N)0)0)0)N)N)N)N)N)N)0)0)0)0)N)N)N)N)0)0)0)0)0)0)N)N)N)0)0)0)0)0)0)01 ~ N)N)N)N)N)N)N)N)N)N)N)0)N)N)N)N)N)N)N)0)0)0)N)N)N)N)N)0)0)0)0)0)N)N)N)0)0)0)0)0)0)0)N)0)0)0)0)0)0)0)0)01 ~ -` ~ 0 1 0)010)0) N) 0)0)0)0)0) ~D 0)01 00 ~ CON) N) CO ~ 0)0) N) ~O 0)0) CON) 0Q~ QN) 0)0)00 ~ 0)0) N) C001-~ 00(J) 0) 0O~ 0)0) N)(OCO 0)0) N) C) 0 01 0 00oc Coo~ N)0)N) CJ1N)0) 0)0001 NJ0)N) C)) N) 0)- COC)~) 0)N) 01 N) 0) N) 00010) QN) 01 N)C0 N) 01010)0) N) Q1N)CO N) ~ N)0) CON) 01 N)CON) ~ N) CO -` 0) COCO0C0)CDN)0CCOCJ)COQ~ CO0)N)-.(J,CO Q~N)~ (O~ ~N)01CO~CM C0~C0~CO 0 ?OOO000ON)N)N)N)N)N)000O0ON)~N)N)N)N)CO0ON)N)N)N)N)N)COCOCON)N)N)N)N)N)0)0)0)0)N)N) - _~ 0 ~ -1; N)..JN)N) ky.- ~ ~ 101 1~ CON) C)) CC CD 10 0 CD 0) CD PAGENO="0496" 1078 CONSUMER CREDIT PROTECTION ACT gage. But this option is rarely available to builders `using conventional financing. A Senate subcommittee tried to probe closing costs in 1956, but shelved the inquiry becaus~ they are so complex (NEWS, Apr. `57). Now the President's Consumer Advisory Council bas recommended that his special assistant for consumer affairs. Mrs. Esther Peterson, ask all federal bous~ ing agencies to see what they can do to solve the problems-under present laws or by suggesting new legislation. SAME ADVICE, VARIED CHARGES Phe council resolution takes particular note of wide variations in closing costs for essentially the same services in federally financed home purchases. FHA defines closing expenses as "incidental costs" including FHA examination fees, mortga'gees' initial service charges, title search fees, deed and mortgage preparation fees, `mortgage taxes an'd recording fees. Tax escrow and insurance premium deposits, also usually posted `at `closing, are not `strictly closing cost's, because they ~tre prepayinents on expenses the `buyer must later meet. Hearings oil the Senate's ill-fated trixth-in-lending bill documented the charges that worry the council. Items: attorney's fees ran from $13 in Indianapolis to $116 in Columbia, S.C.; title-search charges from $3 in Grand Rapids to $131 in Washington, D.C.; surveys cost from $14 in Indianapolis to $50 on Long Is- land. And total closing costs ranged from $98 in Burlington, Vt., to $657 in Grand Rapids. FHA also told the Senate closing costs are rising faster than house prices. The 1053-to-1961 increase: from 1.7% to 2.0% of house value (or from $174 to $301 a house). That money comes out of the buyer's `pocket, after he has already stretched hi's finances to `mflke the down payment. So, not surprisingly, more and more `buyers are complainitig more and more loudly. Pbeir cries have rea'dhed Dr. Richard L. D. Morse, who `rallied the Advisory Council to action and drafted it's `resolution. Morse ha's headed the department of family ecotiomi'cs `at Kansas State University `since 1955. His inte're'st in clos- ings quickened in 1960 when the Kansas attorney general bade him investigate a case of quadruple closing co'sts on a single building `site. He found the land `split into `four quarter's, each requiring a title search, appraisal fee an'd credit report. COLLUSION? "The Consumers Council is especially interested in cases where there is some feeling of coltu'sion," Morse says. He names no names, but hints at fixed legal and title fees and `search `costs. And, `some critics argue, while many a builder protests that high closing costs are the wor1~ o'f title or mortgage `companies and hence beyotid his control, he often profits via an ownership in the same companies. Nor is he unwilling to co- operate with lawyers who insist on `being present at closings, say the critics, even though they may do nothing more than collect a fee. THE BUILDER'S SIDE The other `side is told by a `Senate banking `committee aide, John Lindley, who supplied data to support the truth-in-lending bill. He quotes a Virginia builder who pai'd a closing on buying hi's land and another to get a `construction loan three month's later. When he `finally offered a house for `sale, the buyer threw up his hand's at the closing `costs, result: the builder `paid closing costs a third time in order to save hi's sale. THE SHAPE OF REFORM The Consuthers Council wants a better explanation of what buyers pay different costs for the same service. Above all, it seeks some warning for the unwary buyer-this to protect him and the builder. Action may take these forms: A call for investigation's `by the Justice Dept. and Federal Trade Comniis- sion to determine if legal, mortgage and title groups are fixing artificial fees for closing `services. A requirement that closing costs, like ap'prais'al costs (NEWS, May `63), be disclosed to FITA buyers several days before the closing. FHA has already been asked to consider a'dding a footnote `showing closing `costs to its estimate of value. PAGENO="0497" CONSUMER CREDIT PROTECTION ACT 1079 [From the Kansas Consumer Credit Journal, summer 1967] THIRTY-SIX PERCENT Too MUCH? Too LITTLE?' Often I am asked: "Isn't 36% TOO MUCH TO PAY ON A LOAN?" My stand- ard answer is that if you can get the same service at a lower rate elsewhere, yes it is. But if you cannot, then 36% in a bargain. I am also asked: "Isn't 36% too much to charge? It's an outrageous rate !" My standard reply is that there are some people whose credit habits are so poor that even a 100% rate would not be adequate. There are many consumers who cannot be serviced profitably at a 36% rate. There are others who can. The problem for the creditors is to know the difference. Consumers want low-cost, low-rate, good-service loans. Lenders want reliable, steady, low-cost borrowers. A free market allows both consumers and lenders to choose each other. It is an ill-informed or irresponsible consumer who pays 36% when he could have obtained the same service for 18%. And it is an ill-informed or irresponsible lender who lends at 36% to a class of customers with loan repayment habits that cost 72% to service. Better communication can reduce the number of con- sumers, and lenders who are ill-informed. Improvement will come through better credit-reporting services and full disclosure of credit costs and rates. Progress is being made on both fronts. But isn't 36% usurious? The answer to this is that most states have enacted Consumer Loan Acts which are exemptions to the usury statutes, so that in most situations, 36% is not a usurious rate. There is need for a good hard look at our usury laws. If they are intended to protect the consumer, they are about as use- ful as a mixture of cracked bats is to the baseball player. The rate is unrealis- tically low. And non-money lenders, such as retailers, escape coverage. So con- sumers who think of credit as a way of getting today's needs with tomorrow's money are totally unprepared for the uneven coverage of present laws. Those who see injustice in high rates need also to look from the other side of the counter. The focus is too often on the high rate lender. But what is most ill need of study are the characteristics of consumers who use this higher cost credit service. Unfortunately, not enough study has been given to these people, and not enough money management education is devoted to their needs. This is a short answer to a simple question of how much is too much? It depends on one's perspective. What is too much for one is not enough for another. `Written by Dr. Richard Morse, Professor and Head of the Family Economics Depart- ment of Kansas State University at Manhattan, Kansas. 83-340 0-67--pt. 2-32 PAGENO="0498" 1080 CONSUMER CREDIT PROTECTION ACT Truttt~ in L1~g by Richard L. b. ~4or~e Wàt~Id you believe this ba~1t barrow~ aiad 1n4.s at 5% stifl makes a~rof~t? c~ __ COU?~C1L ON CONSUMER 1NrO~ATIO~4 Pa~p1~Ji~t ~u~,ibor 17 PAGENO="0499" We invite you to charge an amount up to this iig~sre RIGHT NOW I %ou may add this amount to your account without $ 1 94 * 00 bcreaslng your monthly payments. * DATE TYPE OF ~ TRANSACTION DEPARTMENT NUMBERS shown below are identified on the reverse side, CHARGES Including ~y tnx and ship. ping cl~argez I ~ PAYMENTS 1 NUMBERS OR or CREDITS RETUItN~ PREVIOUS BALANCE t(S 6O6~23295 $ ~4.b0 I I. `s 31 [0 :12 :12 12 ci ~c1 `9 9 ACCCUINT NO. SER~IICE CHG M. C. SALE Cl ( .~l. 4,.s RETLRN PAYMENT t~.ETML SALE .96 32.9C 2.2~ 1.25 ~c~7 ~ FEf~ 4 ~ ~ ,f ,I7Y~ ~ 1C.7C' 40.00 79 4 $ 63.94. 01- 14-63 BILLING DATE This statement covers charges, re* turns, and .paymenta processed through the above date. Those reaching our office alter this date will appeoi on your next statement. 0 C 0 I IBALANCE `~~ YOU CAN PAY r~ ~ ~ ~ `This statement tells the consumer "everything" except the service charge rate and the balance to which it is applied. This could be supplied by printing on the face of the form: "Monthly service charge is 1 1/2% (18% per year) of the previous balance," PAGENO="0500" 1082 CONSUMER CREDIT PROTECTION ACT The earned ititerest can immediately be used to earn interest~ The following table gives the values of a sum variously compounded at a nominal annual rate of 6%. Earwings on $100 at 6 percent End of Compounded: first year Annually Semi-annually ~ 09 Quarterly 6. 1364 Monthly 6. 1678 Weekly 6. 1800 Daily 6. 1831 Continuously 6. 1837 These earnings are referred to as the effective annual rates in contrast with the nominal annual rates. To show the maximum difference, the following table was prepared: Nominal annual rate 0 2. 00 6. 00 12. 00 24. 00 30. 00 36. 00 42.00 Effective annual rate, continuous compounding 0 2.02 6. 18 12. 75 27. 12 34. 49 43, 33 52. 20 Morse: Consumer Ctedit C omputat ions, pamphlet No. 18, p. 30. Double your money. A dramatic way of seeing compound interest at work is to ask: "In how many years will a sum be double in value?" This is shown in Figure 1. The answer depends on the rate. As the rate is doubled the number of years is halved. For example, money invested at 6% will double in 12 years, but at 3%, 24 years is required. A rule of thumb is to divide the rate into 72 for the number of years required to double your money. The compounding effect i.s even more dramatic if one recognizes that a sum which could be doubled at the end of 24 years (ait 3%) would grow an equal amount in the next 12 years, again in 6 years, again in 3 years, and again in 11/2 years. The~i, a growth which originally took 24 years would, at this sixth stage, take on1~ 8Aths of a year. It 1:5 this same geometric progression which is responsible for the population explosion. "It took all the vast reaches of time to build today's population of slightly over 3 billion. It will take only 40 more years for the population to reach 6 billion, if the present growth rates remain unchanged." If the growth rate is 1.7% a year, the expected doubling of the population in 40 years can be read from Figure 1. In addition to the compounding effect there is also likely a rate change as a result of medical advances. The resulting expansion is beyond the imagination of most people. Morse: Consumer Credit Computations, Pamphlet #18, pp. 30-32. PAGENO="0501" SQ 70 60 50 40 30 20 ic CONSUMER CREDIT PROTECTION ACT 1% 2% 3% 4% 5% 6% 7% 6% Annual Rate Number of ycara required for & principal eum to double by accumulating intereot at speolfied rates, compounded annually. Figure 1 1083 For example, suppose that approximately $2,000 is needed to complete a car purchase. The left side of the diagram below shows the amounts that must be saved monthly for 36 months to accumulate the required $2,000 to pay cash. On the right side is shown the amounts that must be paid every month for 36 months to dlischarge a $2,000 note, at stipulated annual nominal interest rates, com- pounded monthly. Yearn Double Your Money... 90 It would take 70 yearn for $100 to double iteelt it invoeted at 1% compounded annually. But only 35 years at a 2% rate. and 17 1/2 yearn at 4%. 9 years at _I_____________t_ I - I I I 1 I PAGENO="0502" 1084 CONSUMER CREDIT PROTECTION ACT MONTHLY PAYMENTS REQUIRED onnuat rate to pay off a to save $2,000 (compounded $2,000 note in 36 months monthly) in 36 months 0 6 12 18 24 30 36 42 The rate can be a "tailwind" or a "headwind" in effect-requiring less money "fuel" than the $55.56 to accumulate $2,000 at higher rates, or more money "fuel" to offset the resistance of higher rates. When the rate is zero the same amount ($55.56) is required. But at a rate of 24%, less than one-half as much need be saved monthly to accumulate $2,000 as need be paid to satisfy a $2,000 note in an equal amount of time. (It is inter- esting to note that the difference in amounts of payments into savings or on the note is $10 times the multiples of the 6% rate. At 18% the difference is $30; and at 42% the difference is $70.) GLOSSARY OF TERMS SUBMITTED BY PROF. RICHARD 0. D. MORSE Accommodatiçn Co-maker: A person signing a note, evidencing a loan trans- action, for the accommodation and benefit of a borrower, without sharing in the proceeds of the loan and without compensation, although primarily liable with the borrower for repayment. Accounts Receivable: Accounts which are due to be paid either now or at some future time by debtors. Accounts outstanding. Actuarial Method: (1) A method for computing a true rate of finance charge. For a unit time period the basic formula is the finance charge divided by the principal sum unpaid. This ratio is the same for each unit time period and for the total term from the contract date to maturity. (2) Meets the conditions of the United States Rule. "Add-on and Discount" Rates: Unless otherwise specified rates are for the contract period without regard to instalment payments and expressed as dollars per hundred or as percentages. Add-on is computed on and added to the original amount lent. Discount is computed on and deducted from the face amount of the note. Amortization: A term used to signify the exact repayment of a part or all of the principal of a loan before maturity and interest charged during the period by periodic payments over the term of the loan. Amortization Schedule: A table giving the periodical payments scheduled to reduce a debt to zero, showing for each payment the amount applied to prin- cipal, the amount applied to interest, and the balance of the principal due. Annual Percentage Rate: The nominal annual rate determined by the actu- arial method. Annuity: A series of payments payable in the future usually of equal amount and including interest. Balance: The principal amount outstanding on any account at a given time. That which is outstanding at time of contract date is the beginning balance; otherwise it meflns the unpaid balance. PAGENO="0503" CONSUMER CREDIT PROTECTION ACT 1085 Balloon Note (1) An instalment note in which the final payment is a larger amount than the preceding series of equal periodic payments (2) A note providing for a final payment greater than one and one half the amount of the regular payments Balloon Payment The balance of principal still clue at maturity Beginning Unpaid Balance The amount to be financed Blended Payment An amount paid in discharge of a debt including portions applicable to both principal and interest Carrying Charge See finance charge Cash Advance The face of the note minus the discount Cash Price The price at which a vendor is prepared to sell goods or services for cash Chattel A property which is moveable such as furniture cars livestoci or farm machinery Chattel Mortgage Legal instrument under which a piece of personal prop erty stands as security for a debt but continues in the possession of the debtor so long as there is no default Closed End Credit See contract credit Cognovit Note Written authority of debtor and his direction for eritr~ of judgment against him Defendant has confessed judgment and justice of claim Collateral Property or possessions placed on deposit as security for the per formance of an obligation or payment of a commitment Collectibility The quality of a debt or obligation whereby a person may be made to pay the debt or fulfill the obligation by means of legal process Co maker Co signer on a note Compound Interest An amount of interest charged on an amount of interest previously charged and unpaid Conditional Sales: Sales made under a payment contract where title remains with seller until all payments are made. Conditional Sales Contract Legal instrument used in credit sales of personal property which provides that title remain in the seller until the purchase price i~ paid but that possession may be enjoyed by the buyer so long as there is no default Confession of Judgment The act of a debtor in permitting judgment to be en tered against him by his creditor, for a stipulated sum, by a written statement to that effect or by warrant of attorney without the institution of legal proceed ings of any kind voluntary submission to courts jurisdiction Constant Ratio Method A method for computing an approximate interest rate It assumes that both principal and interest are proportional to the number of periodic payments. Consumer: An individual who acquires a service or property for his personal use Consumer Credit Sale See H R 11601 section 202(c) Cooling Off Period A period of time bet~ een the signing of a contract and the time contract becomes binding Contract Credit A form of credit contract which requires the aniount of credit and the amount and time of repayments to be stipulated or in lieu of one term the annual percentage rate may be stipulated This closed end contract contrast'~ ~ ith open end or revolving credit Cost of Borrowing All charges payable by a debtor incident to the extension of a credit purchase or cash loan Credit (1) Acquisition of purchasing power by a debtor represented by an advance in cash, kind or deferred payment by a creditor. (2) HR. 11601, section 202(b). Creditor (1) A person to whom a debt is owing by another PCISOfl who is th debtor. (2) }T.R. 11601, section 202(e). Credit Charge See finance charge Debtor One who owes a debt an obligor Deferment Difference in time lapse betw een time of first Payllient and 0fl unit period of contract For contracts with monthly paynients it is the time to first payment less one month Deficiency Judgment That part of a debt secured by mortgage not realized from sale of mortgaged property In ordinary parlance it refers to the amount still due after the return of the special execution PAGENO="0504" 1086 CONSUMER CREDIT PROTECTION ACT Disclosure: Statement by the creditor to the consumer of all terms relevant to a contract. Dollar Add-on: The add-on rate expressed in terms of dollars per hundred dollars of the original amount of the principal per year, unless another time unit is specified. Dollar Add-on per Contract: (1) The dollar add-on for the period beginning at contract date to maturity. (2) For contracts with regular monthly pay periods FC/$100/contract equals FC/$100/years divided by 12 and multiplied by number of months in contract. Dollar Add-on per Year: (1) A dollar add-on rate which makes explicit the time period otl~erwise assumed. (2) For contracts with regular pay periods FC/$100/year equals the FC/$100/ contract divided by the number of pay periods in a year and multiplied by the number of pay periods in the contract. Dollars per Hundred per Year of the Average Unpaid Balanee: Same as "An- nual Percentage Rate" but expressed in dollar rather than percentage terms. Due Date: A date upon which a payment is required under a loan contract. Effective Interest Rate: Rate actually earned or paid, taking into account compounding during the year; the yield in contrast to nominal rate. Equity: The value of the borrower's unencumbered investment in property. Equivalent Annual Percentage Rate: The analyzed expression of the periodic rate, obtained by multiplying the periodic rate by the number of periods in a year. Evidence: Document or record, as "evidenced by a note" or contractual agreement. Face Amount of a Note: (1) The sum of money specified to be due or payable; if note bears interest, "face amount" includes interest accumulated at maturity. (2) The cash advance plus finance charge. Finance Charge: (1) All charges incident to the extension of credit. (2) All charges related to the credit transaction, but not including charges for those goods and service the person as a cash customer of the credit vender, or nonborrower from the credit lender has the option of not procuring. (3) H.R. 11601, section 202(d). First Payment: The date specified in the contract for making the first payment. On monthly contract, the first payment is assumed to be one month from contract date. Floor Planning: Plan of financing a dealer's stock of goods (particularly auto- mobiles or electrical appliances). Forbear: To avoid voluntarily. Forbearance: A creditor's giving of indulgence after the day originally set for payment; an abstaining from the enforcement of a right. Free Ride: The period of time during which as a result of options exercised by the obliger and extended by the creditor relieved the credit for that period from the impositioi~i of a finance charge. Garnishee: One garnished. Garnishment: A proceeding whereby property, money or credits of a debtor in possession of another, the garnishee, are applied to the payment of the debts by means of process against the debtor and garnishee. It is a statutory proceed- ing and can only be resorted to where authorized. (4 Am. Jur. 553, 554; 38 C.J.S. 1) Graduated Rate: See Step-rates. Holder: The person who has legally acquired possession of a promissory note, by endorsement or delivery and who is entitled to receive payment of the instrument. Holder in Due Course: A holder who has taken a note under the following conditions: (a) Became holder of it before it was overdue, and without notice that it had been previously dishonored if such was the fact. (b) That he took the note in good faith and for value, and that at the time it was negotiated to him he had no notice of defect in the title of the person who negotiated it. Hypothecate: To give (personal property) in pledge as security for a debt. Installment Credit: A form of contract credit with repayments made in installments. Interest: ~he amount charged for the use of money or credit, calculated pe- riodically on the principal outstanding. PAGENO="0505" CONSUMER CREDIT PROTECTION ACT 1087 Instrument: A legal instrument or document, a note, contract, agreement which is in writing. Kick-Back: Payment of part of finance charge to seller. Legal Fees: Costs of legal service and documentation necessary to protect the lender (and presumably the borrower) in establishing the validity and security of the loan. Matured: Fully paid up, fully carried out as to terms agreed upon. Maturity: The date upon which the balance, if any, of the principal is payable in full. Merchandise "Add-On": Additional credit grant which is added to a debt the purchaser already owes for previously purchases. Mortgage: A loan secured by lien upon property. Mortgage Repayment Plan: Unamortized-wherein no repayments of the prin- cipal are required until maturity or payments are flexible as to date and amount. Amortized-wherein repayments of principal are made periodically over the term of the loan. Negotiable Paper: Includes a bill of exchange, promissory note or other ne- gotiable instrument and is transferable so as to give the transferee all the rights originally created by it, without affecting him with any equities between the original makers of the instrument. Net Amount: The net cash actually received by the borrower after the cledue- tion of any points or charges. Nominal Interest Rate: Quoted annual rate which does not take into account compounding during the year. Open End Credit: See revolving account credit. Other Fees: Costs of discharges of previous debts, registration of loan, etc. Periodic Rate: Expresses in percentage terms the ratio of the financial charge to the amount of credit owing for that period. Points: (1) The number of percentage points the principal amount of the note is discounted. (2) A sum paid by the borrower in addition to interest as a cost of obtaining the net amount. The bonus may be paid as a separate money `transaction or may be included in the principal. It is expressed in percentage points. Power of Attorney: An instrument authorizing another to act as one's agent or attorney. Pre computation: A procedure whereby the finance charges that were obtained with `the monthly rate applied to the schedule monthly balances is added to the amount to be financed and is in present rated equally so as to be paid in equal instalments. - Present Value: The value of a sum payable in the future, including a calculated accumulation of interest. Principal: The sum stated to be repayable by the borrower exclusive of in- terest or the balance of such sum still unpaid at any given time. Proceeds of a Note: Amount received by borrower. Repossession: The exercise of the right of a creditor to re-acquire chattels given as security by a debtor or to take possession of property sold under con- ditional sales contract. Revolving Account Credit: A form of contract credit which does not specifically except to limit the amount of credit that may be extended: the time or amount of payments. However, the rate of charge is usually specified. This open end credit contract contrasts with closed end credit contract. Sales Finance Company: Company which buys at discount promissory notes received by retail sellers in payment of merchandise sold and which may or may not engage in direct lending or in floor planning. Schedule of Payments: An itemization of each time and amount of payment needed to retire the debt. See also amortization schedule. Secured: Guaranteed as to payment by the pledge of something of value. Service Charge: See finance charge. Stated Charge: The published, advertised, mentioned or agreed rate to be charged by notice published, advertised or mentioned. Step-Rates: Different rates on loans of different size; graduated rates. Term: The number of periods during which the loan contract continues. Term: A period of time; in finance, the time from the beginning of a debt to its final payment. Terms: Essential statements on which the validity of a contract depends. PAGENO="0506" 1088 CONSUMER CREDIT PROTECTION ACT Time Price: The total amount payable by a debtor under a deferred payment contract in purchase of goods or services. Time Price Differential: Difference between time payment price and cash price when goods are sold on credit. Total Amount to be Financed: The total credit extended, excluding the finance charge (S. 5). True Rate: The rate as computed by the actuarial method. United States Rule: A ruling by the United States Supreme Court that in partial payments, interests computed on the unpaid balance for the elapsed time at the stated rate, is first deducted and any remainder applied to reduce the principal. Unpaid interest cannot be added to the principal or compounded. Unpaid Balance: The principal. Wage Assignment: A transfer of the right to receive wages by the debtor to the creditor: from the assignor to the assignee. Waive: A release from some performance or duty that could be legally or morally enforced. Yield: The amount of interest or finance charge a credit instrument generates as it is paid out. KANSAS STATE UNIvERsITY, DEPARTMENT OF FAMILY EcoNoMIcs, Main h~attan, Kan&, August 16, 1967. Mrs. LEONOR K. SULLIVAN, Chairman, Consumer Affa4rs Subcommittee, Committee on Banking and Currency, House of Representatives, Washington, D.C. DEAR MRS. SULLIVAN: I am pleased to answer Mr. Annunzio's request for cer- tain information concerning Miss Leonard's study of the impact of the DoD Directive on creditors. The first seven pages of the full study summarize findings and give recommendations and observations. These are attached. Copies of the full study are available from this department. Mr. Annunzio asked specifically about the "loophole" in the Directive that per- inits creditors to circumvent the intent of the Directive which is t.o require full disclosure to the serviceman before he is obligated. Actually, the "loophole" allows the disclosure to be made after the credit is granted, so that the filing of the Certificate of Compliance becomes an approved method for burdening the DoD with the collection of debts. This "loophole" can be corrected with the amendment suggested. Two other observations are noted which would require DoD attention: (1) Creditors generally fail to include insurance premiums in the total finance charges; although, the Directive is explicit in this regard. (2) Retailers have not been advised by the DoD as to the full meaning of that portion of the Section X, E which exempts revolving or open end credit ". . . if the account shows the periodic rate and its annual rate equivalent and the balance to which it is applied to compute the charge." The Directive is an excellent document. If properly executed, it can iiiake a significant cotitribution to the welfare of servicemen and greatly reduce involve- ment of the armed services in consumer credit abuses. Respectfully submitted. RICHARD L. D. MORSE, Professor and Head. EFFECT OF DEPARTMENT OF DEFENSE DIRE0'rIvE No. 1344.7 ON CREDITORS BORDERING FORT RILEY (By Louise Leonard, Assistant Instructor) RECOMMENDATION It is recommended that the "loophole" provided by Section X, B, 2 be closed for it enables credit grantors to obtain the assistance of the military in the col- lection of debts from servicemen who were not given the full facts about the credit at the time the debt was contracted. Only credit contracted prior to July 1966 or the serviceman's induction into the military should be eligible for as- sistance of the Department of Defense (DoD) in debt collection without the credit grantor, supplying evidence of having fully met the borrower's right to be informed at the time the credit was contracted. The Directive was written with the expectation that all who sell or loan to military personnel would subscribe with the Standards of Fairness and make Full Disclosure (Section IX, B). The Full Disclosure Form was designed to PAGENO="0507" CONSUMER CREDIT PROTECTION ACT 1089 give servicemen information needed to make prudent use of credit-to know the terms of the credit contract and the cost both in dollar amount and annual rate. Such information enables servicemen to become self-educated, discourages de- ceptive practices of unscrupulous creditors, and alerts conscientious borrowers to avoid unwarranted extensions of credit. If the DoD contract and Certificate of Compliance are negotiated, only after the credit is granted and the borrower is obligated, then the advantages of full disclosure are lost and the Certificate of Compliance becomes merely a legalized mechanism for burdening the DoD with the collection of bad debts. Specifically it is recommended that the privilege under Section X, B, 2 of com- pleting the second Certificate of Compliance, which begins: "If Attachment A is not executed before the obligation was incurred. . .", should be limited to those situations in which servicemen were not in the military at the time the contract was signed, or the contract was dated prior to the effective date of the DoD Directive, July 1, 1966. SUMMARY The revised Department of Defense Directive Number 1344.7, which pertains to the issuance of credit to servicemen, was issued May 2, 1966, and it became effective July 1, 1966. The Directive prescribes conditions and procedures for creditors who deal with military personnel which must be observed if the help of the DoD is to be requested in collecting defaulting obligations. Those who do not elect to do business with servicemen are under no obligation to observe and follow the conditions and procedures as outlined in this Directive. Since the Directive has the potential of establishing a new standard for many creditors, it seemed appropriate that a study of local creditors bordering an army base be made to see if and how they were affected by the Directive. Fort Riley was the army base selected. It lies eight miles southwest of Man- hattan, Kansas, and extends to the city limits of Junction City, Kansas. It com- prises 1,000,000 acres, and with a full division training, it becomes one of the larger cities in Kansas with a population of near 24,000. Creditors Interviewed All creditors presumed doing business with military personnel in Manhattan and Junction City were contacted. These creditors were classified according to the type of business in which they were engaged. The creditors consisted of banks, finance companies, new and used car dealers, furniture and appliance dealers, department stores, and mobile home dealers. The pawnshop brokers were in- terviewed in Manhattan, but not in Junction City. In Manhattan a total of 43 creditors were approached and 39 (90%) responded. In Junction City a total of 47 creditors were approached and 42 (89%) responded. The creditors in Manhattan were interviewed during working hours between September 20 and October 24, 1966, and continued in Junction City between December 13, 1966 and January 19, 167. Approximately half of the creditdrs had heard Colonel John Jay Douglass, Staff Judge Advocate at Fort Riley, Kansas, explain the Directive either in Junction City August 17 or in Manhattan August 24, 1966. He used the same format and notes at both meetings. Copies of the Directive were made available to the creditors through the cooperation of the respective Chambers of Commerce. Understanding of Directive Forty percent of the Manhattan creditors had their first contact with the Directive through this int~erview. A larger proportion of the Junction City creditors (90%) had seen and were familiar with it. All creditors who were familiar with the Directive expressed some degree of understanding: "Com- pletely" (44%), "generally" (17%), and "somewhat" (17%). Proportion of Credit Business with servicemen The creditors in Junction City, with the exception of the banks, do a larger proportion of their business with servicemen than do the creditors in Manhattan. The banks in both cities proportionately do about the same. Types of' Credit Es~tended Seven types of credit were cited by the creditors extending credit in Junction City, and ten types were cited by the Manhattan creditors. In both cities, of all the credit extended approximately `two-thirds was installment credit, which included automobile papers, consumer goods loans, repair and modernizing loans, PAGENO="0508" CONSUMER CREDIT PROTECTION ACT 1090 and personal loans. The non-installment credit included single~payment credit, revolving charge accounts, and 30, 60, and 90-day charge accounts. Effects of Standards of Fairness on Creditors All creditors were asked to respond on a three-point scale of "no effect," "some effect," Or "major effect" how each standard would effect their w.ay of doing business with servicemen. Standards One, Two and Three, had very little effect, if any, on creditors in both Manhattan and Junction City. Standard Four had some effec1~ on one-quarter of the creditors in Manhattan and on one-fifth of the creditors in Junction City. The most frequently mentioned objection to the standard was that servicemen could move security beyond state and national boundaries. Nearly all creditors found Standards Five, Six, and Seven to have "no effect" on their business dealings with servicemen. The Junction City creditors (95%) found Standard Eight to be of "no effect," but one-quarter of the Manhattan creditors, primarily the car dealers, indicated "some effect." Over 80% of `the creditors in Manhattan and Junction City reported Standard Nine to have "no effect" on them. The Junction City creditors (93%) also found Standard Ten to have "no effect" on them. However, almost half (45%) of the ç~ar dealers in Manhattan reported it would affect their business with servicemen since they r~quired a non-refundable deposit for new cars which must be ordered. Effect of Full Disclosure Contract on Creditors Each creditor was asked how difficult it would be to complete each section of the contract d~sclosure form. All said it would not be difficult to secure the necessary information for all parts, except No. 6 and No. 9, because they supply this information on their own contracts in compliance with Kansas Law. The creditors said it would be difficult to supply the information called for in the sixth part because their present contracts do not include the filing fee, investigating fee, or insurance as part of the finance charge. This information is shown separately on their contracts and `is added into the total amount due, but not as part of the finance charge. Also, they said it would `be difficult or somewhat difficult to supply the information c.alled for in the ninth part because they were una~cusomed to expressing the finance charge in terms of an approxi- mate annual `percentage rate. Other Effects of Department of Defense Directive Non-Equal Payments Fifty-eight percent of the creditors in Manhattan and 75% in Junction City said all their contracts were written to be paid in equal monthly payments. The volume of credit extended for repayment in other than level `monthly payments in both cities was less than five percent. Department of Defense Rate Table More than half of the creditors in Manhattan and Junction City reported the DoD Rate Table was not difficult to understand and use. In Manhattan, slightly more than one-quarter of the creditors (26%) said they are or would use this rate table to disclose the annual percentage rate. In Junction City, 50% said they would prefer to use the DoD Rate Table. Use of the Directive In Manhattan, twenty-nine (76%) of the creditors were not using the Directive, and in Junction City, 24 (60%) were not using the Directive when extending credit to servicemen. Some creditors in Junction City reported they were using the Directive in part. That is, some fill out the Certificate of Compliance only if they need assistance with collection of debts. Others fill out the contract disclosure forms only for 25% of the contracts written with service- men because it "confuses them, takes too much time, and adds more paper work." Another creditor said he asks the servicemen if they would like it worked out; if not, he does not fill it out. Additional Problems Seventy-four percent of the creditors in Manhattan and 70% of the creditors iii Junction City stated they could see no problems other than the ones discussed previously. Additional problems mentioned were: (1) The Directive calls for much more paper work thus increasing time necessary to fill out forms and increasing expenses incurred; (2) Extension of credit will be tightened; (3) / PAGENO="0509" CONSUMER CREDIT PROTECTION ACT 1091 A lot of sales will Je lost if they begin quoting the annual percentage rate because people will think it is the rate of interest being charged; and (4) Paper will no longer be purchased from door-to-door salesmen. Creditors Affected The creditors were asked to indicate those for whom they believed the Directive might present serious problems. Thirty-three percent of the Manhattan creditors and 46% of the Junction City creditors did not think the Directive would give any creditiors serious problems. The remainder named one or two creditors they believed might have problems with the Directive. None of the creditors listed were mentioned by more than five percent of the creditors in Manhattan nor by more than ten percent of the creditors in Junction City. The ones listed were finance companies, banks, jewelry dealers, fly-by-night salesmen, door- to-door salesmen, independent creditors, car dealers, retail creditors, mail order houses, loan sharks, and pawnshop i~rokers. Effect on Servicemen Obtaining Credit Nearly 50% of the creditors in Manhattan and Junction City said the Directive would have "no effect" on servicemen and their ability to obtain credit. One creditor said it will make it more difficult because they will be more selective in the contracts they buy. Another creditor said that the Directive adds more work, thus making it less attractive to deal with servicemen. OBSERVATIONS Most creditors considered the Department of Defense Directive to be neither unduly burdensome nor too difficult to understand. Some may have csnsidered it not burdensome because they had found a convenient "loophole," and some "understood" who did not fully comprehend the Directive. Approximately one-quarter of the creditors had adopted the DoD forms, and believed they were executing the Directive properly. They did not consider the Directive a burden. Another one-tenth of the creditors had found a tolerable escape which allowed them to adapt the Directive to their own needs. They filled out forms only if the serviceman's credit worthiness was questioned. Or, they filled out a Certificate of Compliance after the contract was negotiated with the serviceman and needed assistance of the DoD with collection of the debt. Another larger group who refinanced the credit they extended did not comply unless required to do so by their financing source. Few had been so directed, and so these creditors found the Directive to be of little effect. Evidently Standard of Fairness No. 3 Is not considered to affect the holder of purchased credit paper. Some creditors who said they understood the Directive, in fact, did not. When questioned about the finance charges being expressed as an annual percentage rate, they showed as evidence of their compliance their rate schedules, which were dollar add-on and not actuarial rate based. Others said their contracts provided for the finance charge to be expressed in dollars per hundred as re- quired by Kansas statutes. Nevertheless, most creditors said the DoD Rate Table was not difficult to use and understand; it did not pose a threat to them or appear to be something they could not use. Al4other major misunderstanding was the failure of creditors to include insur- ance premiums in the total finance charges. Instead, they included them as one of the charges to be financed. Although the Full Disclosure form is quite explicit in this regard, the practice of not including insurance as a finance charge will prob- ably continue to be ignored until enforced by the DoD because (1) it would raise the disclosed rate so much in some cases as to give the appearance of exceeding the legal rate, and (2) servicemen might be discouraged from adding this insur- ance coverage, thereby reducing a profitable line of service being extended by the credit grantors. Retailors seemed not to understand clearly their possible exemption from the requirements of Full Disclosure and Standards of Fairness for claims based on a revolving or open-end credit account. Such claims are exempt "p * * if the account shows the periodic rate and its annual equivalent and the balance to which it is applied to compute the charge ;" (Section x, E). Since the Directive assumes monthly periodic payments, the annual equivalent is twelve times the monthly rate. PAGENO="0510" 1092 CONSUMER CREDIT PROTECTION ACT Except for the efforts of Colonel Douglass, there was no other significant educational effort observed. Merchants did not `indicate that military personnel were demanding Certificates of Compliance of Full Disclosure statements, and, managers of local chain outlets were generally without guidelines from national and regional headquarters. The seriousness of the DoD Directive was not in full evidence. (Mr. Vern Countryman, professor of law, Harvard Law School, sub- mitted the following article on wage garnishment by George Brunn in the California Law Review:) PAGENO="0511" CONSUMER CREDIT PROTECTION ACT 1093 \Vage Garnishment in California A Study and Recommendationst George Brunn* FT OLIYWOOD HAS m~ouoiir us a familiai picture of the Western sheriff, .1 ~uth his ten gallon hat, star on shirt, riding after the black hatted criminal or outdrawing him in the middle of the tov~n's dusty main street Today's deputy sheriff in Califoinia is likely to ~ ear a business suit and to carry a briefcase instead of a gun Rather than pm suing criminals, he m'ty spend his career doing nothing more glamorous than serving paper~s in civil lawsuits--summonses, subpoenas, writs, and orders. As law and order followed the flag, papers followed the law. Lots of papers The San Francisco Sheriff's Office has a civil depart ment with ele~ en field deputies and sixteen persons in the office just for serving papers In the first two months of 1965 the deputies made more than 5,900 seivices, among them over 3,700 levies under writs of attach ment and execution Most of these levics-sevcnt~ five to eighty per cent -were wage garnishments ~ The sheriff's busmess is booming, he makes more levies than ever and collects over a million dollars a year for creditors 2 Society subsidizes the sheriff's collection work, the cost of operating the civil department runs more than double the amount of fees the department receives To the deputy, ~age levies are mainly a job, to the credttor, a useful collection devicc, to the employer who must piocess them, a nuisance and an expense, to the debtor, a humiliating experience that may bring t Based on a study madt. for the Center for the Study of Law and Society, University of California Berkeley * A.B., 1947, Stanford University; LL.B., 1950, Stanford University; Member, California Bar. 1 Data obtained from Carl Olson Chiet Dt~puty Civil Dep'trtment Office of the Sheriff City and County of San rraiicisco [hereintftcr cit&.d Olson dr'ta] Writs of attach nent and execution including g-trni hments must be levied by a sheriff constable or m~trshall C&L CODE Civ PROC §1 540 542 682 The ratio of wage levies to leues on other pioperty is Olson s estimate A separate survey corroboi~tes the r-itio See Appendix B zn/re (taking the number of leues when, the type of property le~ied against was known 47 out of 68 levie or al-no t 70% were wage garmsuiments in executions the ratio is substanti ily higher) 2 Trust furd disburseme ~ts by the San Francisco Sheiiff s Office rose from $5-~7 000 in fiscal 1953 5~ to ~1 144 000 in fiscil 1963 64 Pcr onal property attachments and executions totaled 1356 in February 1953 and 1781 in February 1965. Executions rose sharply while attachments declined Of the February 1953 le~ies 78~ were attachments and 572 execu tions; in February 1965 ther~i were 696 attachments and 1085 executions. Olson data. Compare Appendix B zn/re 8 ~ote 48 zn/ra With respect to fees see text accompanying note 46 zr/re PAGENO="0512" 1094 CONSUMER CREDIT PROTECTION ACT serious hardship in its wake. Society has a major stake in the garnish- ment process, which is not only a creature of law but an activity of gov- ernment. Society has a legitimate concern that legal debts be paid; society also has a legitimate concern that the collection tools it fashions and whose use it sanctions do not cause undue distress and hardship. How well garnishment serves these various competing interests is the question underlying this study. The study first considers the operation of wage garnishment in Cali- fornia. Next it reviews the equivalent laws of other states, especially with respect to the amount of earnings exempt from garnishment. Then it dis- cusses major factors pertinent to a garnishment policy, among them the relation of garnishment to employment, bankruptcy, and consuther credit. The final section includes several recommendations. I GARNISHMENT STATUTES A. California The words "attachment," "execution," and "garnishment" have a formidable ring. Their meaning is simple enough. Both attachment and execution refer to the seizure of a defendant's property by legal process; attachment takes place before judgment "as security for the satisfaction of any judgment that may be recovered";4 execution may be had after judgment for its enforcement.5 The term "garnishment" is little used in California statutes, but in common legal parlance refers to the use of either attachment or execution to reach property of the debtor which is in the possession of a third person.6 Among such items of property may be wages payable to a debtor by his employer-hence the term "wage garnishment." The key California provision that limits garnishment of wages is Code of Civi' Procedure section 690.11:~ 4 CAL. CODE Civ. Paoc. § 537. ~ CAL. CODE Civ. PROC. § 681. * 6 See Kimball v. Richardson-Kimball Co., 111 Cal. 386, 393, 43 Pac. 1111 (1896). See alss~ RESTATEMENT, JUDGMENTs §~ 35, 36 (1942). A `special note" to § 36 states: "A proceed- ing by which the plaintiff is enabled to reach and to apply to the satisfaction of his claim a debt owing to the principal defendant is ordinarily called garnishment, and the principal defendant's debtor is called the garnishee. The word `garnish' means `warn': the garnishee i~ warned that he is not to pay his debt to the defendant, his creditor, but to the plaintiff. In some of the New England States the proceeding is called `trustee process,' and the defendant's debtor is called the `trustee.'" 7 California Code of Civil Procedure § 690.10 provides a special exemption for the earn- ings of "seamen, seagoing fishermen and scalers" in the amount of $150 or $300 depending on conditions specified in the section. PAGENO="0513" CONSUMER CREDIT PROTECTION ACT 1095 One-half of the earnings of the defendant or judgment debtor re- ceiv~ for his personal services rendered at any time within 30 days next preceding the levy of attachment or execution shall be exempt from execution or attachment without fiJing a claim for exemption as provided in Section 690.26. All of such earnings, if necessary for the use of the debtor's family, residing hr this State, and supported in whole or in part by such debtor unless the debts are: (a) incurred by such debtor, his wife or family) for the common necessaries of life; or (b) incurred for personal services rendered by any employee, or former employee, of such debtor. Prior to causing any levy of attachment on earnings of the defend- ant received for his personal services, the plaintiff shall file with the levying officer an affidavit that the defendant whose earnings are to be attached has been served with a copy of the summons and of the complaint or that the defendant has been given notice pursuant to Chapter 5 (commencing with Section 1010) of Title 14 of Part 2 of this code that a writ of attachment on his earnings will issue after eight days from the date of such notice. Such notice shall only be required on the first writ of attachment on earnings. Two featu~es of this section are of fairly recent origin. First, the provision that half the earnings are automatically exempt was enacted in 1955.8 Prior to that time the debtor had to file an affidavit of exernp~ tion with the levying officer in order to obtain any exemption at all. Debtors are still required to follow this procedure if they want to get more than half of their earnings exempted from levy.9 Second, the last paragraph of section 690.11 was added in 1963.10 It applies only to attachments (not to executions) and is of very limited benefit to debtors: They simply get one more "pay or face the conse- quences" notice. The provision is of' greater help to creditors who are given sanction to send the debtor a threatening notice "that a `writ of attachment on his earnings will issue after eight days from the date of this notice." The bill which ultimately became the 1963 amendment started out with entirely different provisions: In its original form it ex- empted all earnings from levy; an amended version exempted all earn~ ings from attachment and seventy-five per cent (with a maximum of 200 dollars a week) from execution." Subsequent amendments dropped all changes in exemptions and substituted the notice provision. Soon after enactment of this provision a question arose whether col- lection agencies could give the notice required by section 690.11. Collec- tion agencies are prohibited from practicing law, from using forms 8 Cal. Stab. 1955, ch. 793, § 3, at 1393. See also CAL. CODE Civ. Paoc. §~ 542(5), 543, 682(1), 682.1, 688, 710. 9 CAL. CODE Civ. PROC. § 690.26. 10Cal. Stats. 1963, cli. 1540, § 1, at 3124. 11 Assembly Bill 482 (1963). The author was Assemblyman Foran. 83-340 O-67-pt. 2-33 PAGENO="0514" 1096 CONSUMER CREDIT PROTECTION ACT ,~c~rnbling legal forms, and from engaging in any unfair or misleading ractices.12 The Collection Agency Licensing Bureau takes the position that the notice may be sent by the collection agency's attorney but not ~y the agenc~T itself.13 The Bureau's position was sustained by the Su- ~erior Court in Los Angeles County, whose judgment was not appealed ,~I has become final.14 A bill introduced in the 1965 general session of t:ie legislature would have undone the decision and let collection agencies ~ivC the notice.'5 j. "Common Necessaries" and Exemption Claims In practical operation section 690.11 exempts only half the wages of the great bulk of debtors-for example, while San Francisco's sheriff levied 1781 attachments and executions in February 1965, he received only 52 exemption claims during that period, a ratio that he considers typical.'° Two related factors account for this: the "common necessaries" clause of the section and the practical difficulties in obtaining an exemp- tion for more than half of tile wages. Reported decisions on the meaning of "the common necessaries of life" are scant,'7 for the very good reason that few debtors can afford to litigate this issue at all, let alone fight an appeal. In Los Angeles Finance Co. v. Flores'8 (where the debtor was represented by the public defender), tile debtor's wife had bought him a gold wrist watch for his birthday. The court held this was not one of the common necessaries of life. Noting "the general policy of the courts of this state to give a liberal construction to exemption statutes in favor of the debtor,"9 the court said that the question of what is a common necessary involves a determination of whether or not it is such an article that in the hands of anyone it is to be regarded universally, or substantially so, as necessary to sustain life. Obviously, the Legislature, cognizant 12 CAL. BuS. & PROI~. CODE § 6947(h), (k). A regulation of the Collection Agencies Licensing Bureau prohibits such agencies from employing "instruments simulating forms of notice pertaining to judicial proceedings . . . other than to notify the debtor that the matter will be referred to its attorney for appropriate action." 16 CAL. ADMIN. Cons § 628(b) (7). 13 Stores Collection Bureau v. Powers, Los Angeles Super. Ct., No. 831522 (1965). See also Assembly Interim Comm. on the Judiciary, Proceedings on Attachments 44 (June 23, 1964) [hereinafter cited Hearings). 14 Stores Cøllection Bureau v. Powers, su~ra note 13. Judgment was entered on Jan. 22, 1965. The judgment also prohibits collection agencies from splitting attorneys' fees awarded in their cases v~ith their attorneys. ~ Assembly Bill 2925 (1965) (introduced by Assemblyman Foran). The bill was not enacted. 16Olson data. 17 See generally Seid, Necessaries-Common or Otherwise, 14 HASTINGS L.J. 28 (1962). 18110 Cal. App. 2d Supp. 850, 243 P.2d 139 (1952). `~9Id. at 854, 243 P.2d at 142. PAGENO="0515" CONSUMER CREDIT PROTECTION ACT 1097 of the fact that to the great majorIty of persons supporting a family the earnings of the past 30 days are required for such basic things as food, heat, shelter, etc. (common to all) desired to make sure that these earnings shall riot be taken to pay for something less basic.2° Los Angeles Finance Co. v. Flores has been of little help to debtors. The half of the wages that is not automatically exempt can be attached by a routine allegation in the affidavit for attachment that the action is brought to collect a debt incurred for the common necessaries of life;2' for a writ of execution not even an affidavit is needed. If the debtor wants to get that half of his earnings exeml)ted, his road begins by his filing an exemption affidavit. He first has to obtain the forms from the sheriff; they are not given to him at the time his wages are garnished.22 He coin- pletes them in duplicate, "specifying the section or sections of this code on which he relies for his claim to exemption, and all facts necessary to support his claim . . ." and returns the affidavit to the levying officer.23 Does he then get his wages? No. Then he waits at least five days. During that time the creditor may file a counter-affidavit.24 Tithe creditor doesn't, the wages are released.25 But ii he does, they remain tied up for at least 201d. at 856, 243 P.2d at 143-44 (1952). This is the latest word on the subject. The court could find only three earlier cases dealing with this clause. White v. Gobey, 130 Cal. App. 789, 19 P.2d 876 (1933), held that clothing bought by the defendant's wife before marriage did not come within the "common necessary" limitation because, having been bought before she became his wife, the articles were not "necessities . . . used for the very maintenance of the debtor's family, for food, clothing and the like . . . ." Id. at 792. In Evans v. Noonan, 20 Cal. App. 288, 293, 128 P. 794, 795 (1912), the court said common necessaries of life include "besides food, clothing and shelter such medical atten- tions in cases of illness as are absolutely requisite to relieve physical suffering and pain and to overcome and conquer disease, if by such attentions it can be done." The third case was an unreported decision, also involving a watch purchase, which Flores, in effect, overruled. It should also be noted that the exemption provisions of California Code of Civil Procedure, § 690.11, do not apply to alimony, child support, and attorney's fees in divorce actions. Mcintosh v. McIntosh, 209 Cal. App. 2d 374, 26 Cal. Rptr. 28 (1962); Henry v. Henry, 182 Cal. App. 2d 707, 6 Cal. Rptr. 418 (1960). 21 CAL. Coox Civ. Paoc. § 538. This section also provides that no attachment may be issued where the principal claimed is below $75. Assembly Bill 1127, passed in the 1965 session, Cal. Stat. 1965, cli. 668, § 1, raises this to $125. Attachment in California is available in (1) actions on unsecured contracts, express or implied, (2) support actions, (3) contract and tort actions against nonresidents or persons absent from the state or who conceal them- selves to avoid service, (4) unlawful detainer actions, (5) tax collection suits, and (6) suits by the state or any political subdivision to recover funds expended in certain narcotics investigations. CAL. Cona Civ. PROC. § 537. None of the limitations applicable to attachment apply to executions. 22 The San Francisco Sheriff's Office advised the author that at one time it supplied debtors with affidavit forms at the time of the wage levy, but discontinued this practice following objections from collection agencies. 23CAL. Cona Civ. PRoc. § 690.26(1). 24 CAL. Cona Cxv. Paoc. § 690.26(3). 25 C~x.. CODE Cxv. Paoc. § 690.26(4). PAGENO="0516" 1098 CONSUMER CREDIT PROTECTION ACT five more days. During that time either party may move to have the ex- emption claim heard in court. If no one makes such a motion the wages are then released.28 If a motion is made, the levy stays in effect pending the hearing and the money remains in the hands of the sheriff.27 The hear- ing is to be within fifteen days after the making of the motion.28 Thus, as much as twenty-five days may elapse between the garnishment and the hearing. When the claim for exemption finally comes up in court, the debtor has the burden of proof.2° That means he must prove both that the debt was not incurred for the common necessaries of life and that he needs all of his earnings to support his family.30 No wonder exemption claims are infrequent. The special treatment of debts for "common necessaries" is difficult to justify. It can be argued that those who sell essentials should have better means of collecting their debts than companies which extend credit for unessential or luxury purchases. The other side of the picture* is that the statute puts the prudent (or poor) family which buys only essentials into a worse positior~ than the family that buys nonessential items on crddit. For example, .a big medical bill could lead to garnish- ments81 while a debt resulting from the acquisition of a luxury car might be exempt from execution on wages-at least where the debtor is sophis- ticated in the use of the exemption provisions. Thus, to the extent that the distinction between debts for "the common necessaries of life" and other debts really works, the results are paradoxical. In many cases the distinction disappears in the day-by-day operation of the statUte as it affects people in debt. Whatever the origin of their debt, the wage exemption is limited to fifty per cent except for the rare debtor who can successfully follow the exemption steps, take the time out from work to do so, and avoid falling further into debt while he waits for his earnings to be released.82 As will be discussed below,33 a fifty 26CAL. CODE Cxv. Paoc. § 690.26(5), (6). 2TCAL. CODE Civ. PROC. § 690.26(8). 28CAL CODE Civ. PROC. § 690.26(5). 29 CAl.. CODE Civ. Paoc. § 690.26(9); Perfection Paint Prod. v. Johnson, 164 Cal. App. 2d 739, 741, 330 P.2d 829, 831 (1958). 80 See Seid, supra note 17, at 37. 8~ Hearings 82. 825ee text accompanying note 16 supra. Discussion with Judge Robert J. Drewes, Presiding Judge of the San Francisco Municipal Court, confirms that exemption hearings are infrequent. An examination by the author of 100 cases filed in that court in January 1964, showed at least 47 wage levies (8 attachments, 39 executions and California Code of Civil Procedure § 710 proceedings) in 15 cases. In none was an exemption hearing either moved for or had. ~ Text accompanying note 85 in/ra. PAGENO="0517" CONSUMER CREDIT PROTECTION ACT 1099 Ier cent exemption seems neither adequate nor in accord with the legisla- tive objective. The "common necessaries" rule embodied in section 690.11 is un- common. Only Idaho, Montana, Nevada, and Oregon apply variations of the California provision.34 New Mexico repealed its "iiecessaries" exception in 1961.~~ Delaware and South Carolina use a more perceptive approach to the question of necessaries. In Delaware (New Castle County), ninety per cent of wages are exempt and the excess can be reached only for debts incurred "on account of the purchase of food, provisions and articles used in the home, commonly designated as the necessaries of life, and to taxes owing to the State of Delaware."36 South Carolina provides for a one hundred per cent exemption but permits a levy, on court order, on fifteen per cent of the salary (but not more than one hundred dollars) if the judgment is for the balance due on "food, fuel or medicine accounts."37 2. Multiple Levies Another feature of California's wage garnishment procedure is that it permits multiple levies, that is, a creditor can levy as frequently as he wants to-every week, for example. Other creditors may levy as well.38 Even collection agencies favor some limitation on the number of levies by a single creditor within a given period of time. C. H. McCarty, ~4 In~uio CODE ANN. § 11-205(7) (1947) (exemption limited to 50% where debt is for actual "necessaries"); Mo~. Rxv. CODES ANN. § 93-5816 (1964) (limited to 50% where debt is for gasoline or "common necessaries"); NEV. REV. STAT. § 21.090(h) (1963) (follows California~ wording as to "the common necessaries of life"-SO% limitation); ORE. REV. STAT. § 23.180 (1961) (50% of earnings subject to execution where debt is incurred for "family expenses"). See also NED. REV. STAT. §1 25-1557, 25-1558 (1964). The latter section grants a 90% wage exemption. The former provides, in part: "Nothing in this chapter shall be construed to exempt from execution or attachment property of the value of more than five hundred dollars for any debt contracted by any person in the purchase of the actual necessaries of life . . . ." These provisions, taken together, apparently do not limit the operation of the wage exemption, but refer to other property i'bich a debtor may claim exempt. Compare NEB. REV. STAT. § 25-1552 (1964); Lyons v. Austin, 126 Neb. 248, 252 N.W. 908 (1934). 3~N.M, Laws 1961, ch. 8, § 1, at 21. 36DEL. CODE ANN. tit. 10, § 10-4913(b) (1953). In Delaware's other two counties 60% of wages are exempt. DEL. CODE ANN. tit. 10, § 10-4913(a) (1953). The practice of having different exemption laws for different counties within a state is limited to Delaware and Maryland. MD. ANN. CODE art. 9, §~ 31, 31A (Supp. 1965). In those two states statutes of many kinds have local variations. ~ Coax § 10-1731 (1962). A 1964 law permits attachment of wages for medical care, exclusive of doctor's fees, under certain conditions. S.C. Laws 1964, No. 950, at 2194; S.C. Coox § 71-145 (Supp. 1965). . - 38liearings 19-20, 50-52. PAGENO="0518" 1100 CONSUMER CREDIT PROTECTION ACT legislative representative for the California Association of Collectors, testified at a legislative committee hearing: "I would like the Committee to examine consecutive garnishment. I don't believe iii this and the Association I represent don't [sic] believe in it and I think you have it in writing from Mr. Weissman. This is and can be a very vicious prac- tice. . . . This can really kill a man. He doesn't have a chance."3° However, Joseph J. Weissman, speaking for the same group as McCarty, was willing to limit only the number of attachment levies (to one in any thirty-day period), not the number of execution levies.40 This would be a mean~ngless change since multiple garnishments occur mainly under writs of execution rather than under writs of attachment. A survey by the author of oi~è hundred cases in the San Francisco Municipal Court dis- closed one case of more than one wage garnishment by virtue of attach- ment, while writs of execution in thirteen cases produced thirty-nine wage levies. The main reasons for this difference are: (1) Most collection suits are quickly reduced to judgment, usually by default. In many of them little time elapses--often no more than the statutory ten days41-be- tw~en service of the complaint and rendition of judgment. Hence the occasions fQr multiple attachment levies are limited. (2) The use of writs of attachments in collection suits has been declining.42 A number of collection agencies do not attach wages before judgment.43 Sheriffs are also unhappy about frequently repeated levies.44 Carl Olson, Chief Deputy-, Civil Department, San Francisco Sheriff's Office, notes that when he is instructed to levy every week, he may have to make a levy before he receives the return on the previous week's garnish- ment. Thus he may be required to make a levy that is both unnecessary - and risky. Olson also notes that multiple levies add to the debtor's expense. While the sheriff's fees are iiiitially paid by the creditor, they become part of the costs of the case chargeable against the judgment debtor.45 The sheriff's fees for each wage levy are two dollars46 plus thirty-five * cents per mile from his office to the point of service, one way,47 plus one ~ Hearings 49-50. (Emphasis added.) 40Hearings 52. Weissman would also let each creditor continue to levy. id. at 52-53. 41 CAL. Cona Civ. Paoc. §~ 585, 407. 42 Note 2 supra. 43 Hearings 16 (testimony of Robert C. Kopriva, president of the Associated Credit Bureaus of California. Kopriva said: "We don't feel it's fair."). The speed with which the complaint can be reduced to judgment is probably also a factor. - 44 Olson data. 45 CAL. CODE Civ. PROC. §~ 1031, 1033.7. 46CAL. Gov'T CODE § 26734. 47 CAL. Gov'r Cona § 26746. PAGENO="0519" CONSUMER CREDIT PROTECTION ACT 1101 per cent of the amount collected.48 In addition, there is a clerk's fee of two dollars for issuing a writ of execution.4° B. Other States Garnishment of wages, although it has roots going back to colonial50 and even medieval times,5' is a statutory procedure.52 The varying state laws, observes one writer, "are about as individual as snowflakes."53 The different approaches to wage exemptions in each state are illustrated by the summary in Appendix A to this a~ticle. Upon closer examination certain characteristics emerge from the statutory jumble. .1. Exemptions in Large States In large states exemptions tend to be high. Comparing California, Florida, Illinois, Massachusetts, Michigan, New Jersey, New York, Ohio, Pennsylvania, and Texas-the ten most populous states-Cali- fornia is among the least generous. Half of these ten states exempt ninety or one hundred per cent of earnings (Florida, New Jersey, New York, Pennsylvania, and Texas), Illinois exempts eighty-five per cent and two others, Michigan and Massachusetts, have a one hundred per cent exemp- tion prior to judgment.54 Thus, a married man earning one hundred dollars a week would have the following exemption in these states: 48 CAL. GOv'T Cona § 26739. Despite these fees, the county seems to pay a substantial portion of the collection costs. Carl Olson of the San Francisco Sheriff's Office reports that in 1963-64 his office received $113,554 as fees from all services. He estimates the cost of operating his office as exceeding $250,000 annually. In Los Angeles County, the cost of operating the Sheriff's Civil Division is about $430,000 per year. The Division receives for fees and mileage ap~~roximately $220,000. To what extent should society subsidize the collection process? Raising fees would increase the burden or~ the debtors unless at the same time creditors are required to pay part of the cost. Utah provides that such costs are not to be charged to the judgment debtor. UTAR ConE ANN. § 78-23-1(7) (1953). In Del- aware, the debtor's cost liability is limited to $0.90 per levy. Dza. CODE ANN. tit. 10, § 10- 4913 (c) (1953). A reduction in multiple levies would tend to alleviate the cost burden both of the debtor and of thecommunity. ~ ~ Gov'r Cona § 26828. There may be several levies under a single writ: A writ can remain in effect for 60 days before it has to be returned. CAL. Coon Civ. PROC. § 683. 50Mussman & Riesenfeld, Garnishment and Bankruptcy, 27 MINN. L. Ray. 1, 9-10 (1942). 5~ Riesenfeld, Collection of Money Judgments in American Law, 42 IowA L. Ray. 15S (1957). 52 See Sanders v. Armour Fertilizer Works, 292 U.S. 190 (1934). ~ Seid, supra note 17, at 33. 54 Among this group of states, the posts-judgment exemption could be as low as Cal- ifornia's only in Massachusetts and Michigan. Depending on the circumstances it may be higher or lower in those states. See notes 199, 201 in/ra and accompanying text. PAGENO="0520" 1102 CONSUMER CREDIT PROTECTION ACT TABLE 1 WAGE EXEMPTION IN TEN LARGEST STATES FOR MARRIED Pnaso~r EARNING $100 Paa WEEK55 State Before Judgment Aft er Judgment Florida $100 $100 Pennsylvania 100 100 Texas * 100 100 Massachusetts 100 50 Michigan 100 50 , NeW Jersey 90 90 New York 90 90 Illinois 85 * 85 Ohio 75 75 California 50 50 It should be added that sonic states do not expressly prohibit wage levies prior to judgment but unlike California do not make any attach- ment process prior to judgment freely available in contract actions, limit- ing the attachment remedy to special circumstances.58 To the extent that these limitations work,57 they tend to give debtors a one hundred per cent wage exemption before judgment. 2. The Trend of Statutoiy Changes Wage exemption statutes change frequently, as a comparison with their versions of a decade ago discloses.58 The direction of tile change is almost uniformly toward increasing the exemption of the debtor; at least twenty states did so between 1954 and 1964.~° Some of these states, and others as *ell, also made changes in garnishment procedures. Among ~ The Michigan computations assume that the garnishment is the first in the case; the California figures are based on the 50% exemption-because of its prevalence-dis- cussed in text at p. 1217; the Ohio exemption is computed positing the Ohio practice as set forth in Note, Garnishment of Wages in Ohio, 21 17. Cinc. L. REV. 268, 274-75 (1952). It should be noted that in both Michigan and Ohio judgment debtors can, in effect, obtain substantially higher exemptions under statutory conciliation and trusteeship provisions, respectively. Notes 76-78 in/re and accompanying text. Under the Michigan procedure, partial payment ordets made by the court customarily require the debtor to pay 10% of net income if married, 15% if single. FUSFELD, DON'T GET GARNISHEED! 16 (Michigan State University, Labor and Industrial Relations Center, undated). 56See generally 6 AM. JUR. 2d Attachment & Garnishment §~ 218-51 (1963). ~7 For an indication that they may not work well, see Note, Garnishment in Kentucky- Some Defects, 45 Ky. L.J. 322 (1956-57). ~ Compare Abrahams & Feldman, The Exemption of Wages Irons Garnishment, 3 Da PAUL L. REV. 153 (1954), with Note, State Wage Exemption Laws and the New Iowa Stat ate, 43 IowA L. 1~xv. 555 (1958). ~ One state, Iowa, decreased the exemption. See Note, State Wage Exemption Laws and the New Iowa Statz~te, 43 Iowa L. REv. 555 (1958). PAGENO="0521" CONSUMk~JR CREDIT PROTECTION ACT 1103 these states were California, as discussed above, and New York.6° In- creases were enacted particularly often in states where the exemption is (or had been) tied to dollar amounts.~ Dollar figures in such statutes- even as maxima or minima-tend to get out of date; during an inflation- ary period, such as the one following World War II~ they rapidly become inadequate. Thus they require continuous legislative attention, and even then revision tends to lag. When revision is not forthcoming, the exemp- tion sometimes approaches meaninglessness, as in Kentucky where the ceiling is 67.50 dollars a month.62 Some years ago a writer observed that when the Kentucky statute was first enacted its effect was to grant a one hundred per cent exemption for most employees; at the* time he wrote it amounted to about a twenty-five per cent exemption.63 To elimi- nate this problem several states shifted from dollar to percentage ex- emptions.64 The latter type of exemption has the added advantage that its computation is simple arid uniform, regardless of whether an em- ployee is paid on a weekly, monthly, or other basis. When an exemption statute is framed wholly or partially in dollar amounts, extra comnputa- tion, often involving an element of uncertainty, is required whenever the pay period is not identical to the period which the statute uses in formu- lating the exemption. 3. General Features occurring in several state exemption statutes require addi- tional comment. As already noted some states, such as Michigan and Massachusetts, do not permit wage garnishments prior to judgment. This reflects a recognition that garnishment, with its possible serious consequences for the debtor,65 is less justifiable before the merits of the creditor's claim are established than once a judgment has been obtained. In a number of states, among them Connecticut, Delaware, Illinois, Kansas, Louisiana, New York, and West Virginia, only one judgment 60 Compare N.Y. Civ. PRAC. LAWS & RULES § 5231, with N.Y. Civ. Pa~c. Aci~ § 684. See also commentary following § 5231. 61 E.g., Alaska, Connecticut, Georgia, Hawaii, Illinois, Maine, Massachusetts, Michigan, New Mexico, North Dakota, Ohio, Oregon, Virginia, Vermont, and West Virginia. Compare Abrahams & Feldman, supra note 58, at 157, 161, with Appendix A infra. 62 Ky. REV. STAT. §~ 427.010(2), (3) (1962). 63Note, Garnishment in Kentucky-Some Defects, 45 K~. L.J. 322, 329 (1956-57). 64 Illinois, Maryland (in part), Vermont, and West Virginia. Compare Abrahams & Feldman, supra note 58, at 157, with Appendix A infra. Iowa, again contrary to trend, shifted the other way. See note 59 supra. Exemptions generally remained unchanged in states specifying percentages except where the percentages are combined with dollar amounts. Colorado raised its fiat percentage exemption from 60 to 70% (for heads ci families; bachelors are required to get along on 35%). ~ See text commencing at note 85 infra. PAGENO="0522" 1104 CONSUMER CREDIT PROTECTION ACT creditor may levy against wages at one time.6° Generally the first creditor who gets his papers to an officer is given priority until he is paid off; this seems desirable to minimize economic pressures from more than one creditor concurrently. Such provisions have been criticized from the point of view of collection agencies because one creditor with a substantial judgment can exclude all others for a long time.07 Provisions of the kind just mentioned are usually combined with others that have the effect of doing away with the need for repeated levies by the same creditor. rfIlus the New York and Louisiana statutes provide for i;~stallment payments by the employer.68 Other states make the initial execution levy a continuing one.69 Such a procedure greatly simplifies the garnishment process and reduces its expense. It eliminates the cost of multiple garnishments by a single creditor, at least as long as the debtor retains his eniployrnent.7° Further, it tends to assure other judgment creditors who have to wait their turn that the prior judgment is actually being paid off on a regular and reliable basis. Some states give the courts far more flexibility in dealing with wage exemptions than does California. Thus in New York, what is there termed an "income execution" is obtainable without a court order, but is subject to judicial modification.7' The New York statute has been interpreted to permit courts to raise the exemption where garnishment of the normal amount is "unduly burdensome" to the judgment debtor.72 In Connecticut an execution is subject to modification as the judge "deems reasonable";73 moreover, before any execution can be levied the court first orders the defendant to make reasonable payments in an amount set by the court.74 60 For illustrative provisions see CoNer. CaN. STAT. REV. § 52-361 (Supp. 1964); D.C. CODE ANN. § 16-572 (Supp. 1965); L.~. Ray. STAT. tit. 13, § 3922 (1964); N.Y. Civ. PRAC. LMVS & Ruats § 5231(b). 67flearings 36. A second criticism was that provisions of this kind put "a premium on time rather than negotiation, If you had such a restriction, each creditor would be prone to act as rapidly as possible with a writ in lieu of negotiating or attempting a payment program . . . ." Id. at 53. 68 LA. REV. STAT. fit. 13, § 3923 (1964); N.Y. Civ. Pv~c. LAWS & RuLEs §~ 5231(a), (2). ~ E.g., C0NN. GEN. STAT. REV. § 52-361 (Supp. 1964); D.C. Cona ANN. § 16-572 (Supp. 1965); ILL. Ray. STATS. § 62-77 (1963). 10 As to who bears this cost see note 48 supra and text accompanying notes 45.49 .cupra. 71 N.Y. Civ. Pu~~c. LAws & RULES §~ 5230, 5231(g), 5240. 72 First Westchester Nat'l Bank v. Lewis, 42 Misc. 2d 1007, 249 N.Y.S. 2d 537 (Westchester County Court 1964); Seigel, Supplementary Practice Commentary following N.Y. Civ. PRAC. LAWS & Runas § 5231 (McKinney's Cons. 1964 Supp.). 7~ CONN. GEN. STAT. REV. § 52-361 (f) (Supp. 1964). 7~ CONN. CaN. STAT. REV. § 52-361(a) (Supp. 1964). The court has great flexibility: "In fixing the amounts to be paid and the manner of payment, the court or justice of the peace may take into consideration the circumstances of the defendant, including any other actions pending or judcmertts outstanding against him, the amount of the defendant's income and the amount of the claim or demand. Upon proof of change of circumstances of the PAGENO="0523" CONSUMER CREDIT PROTECTION ACT 1105 If the defendant fails to make such payments, the creditor can then oh-. tam an execution.75 Michigan provides a similar procedure: The defend- ant, at the time of judgment or later, may obtain an order permitting him to pay the judgment in installments, and the creditor cannot garnish as long as the defendant complies with the order.7° Not part of the exemption statutes, but closely related to them, are procedures in a few states, notably Ohio and Wisconsin, for the appoint- ment of a trustee by the court at the request of the debtor, amortization through the trustee of the defendant's debts, and protection of the defendant from garnishments during the functioning of the trusteeship.77 In Ohio this procedure is available to any debtor facing garnishment. In some Ohio courts the clerk serves as trustee without compensation; in others the court appoints a suitable person who receives two per cent of the debtor's payments as full compensation. The debtor lists his creditors in the application and is required to pay only the nonexempt portion of his earnings to the trustee who distributes the money to the creditors. The creditors are required to accept the trusteeship; they are barred from garnishing wages as long as the debtor regularly pays the nonexempt portion.78 The Wisconsin procedure is of less help to debtors. Only debtors with incomes of 5,000 dollars a year or less may use it.7° The trustee must determine whether an amortization plan under which creditors will be paid off within two years is feasible, and creditors may object to any proposed plan.8° Thus in Wisconsin, unlike Ohio, a debtor who can only defendant, any order for payments by the defendant may, at any time, be set aside or altered upon the motion of either party after notice and hearing." 75 Co~sn. GEN. STAT. REV. § 52-361 (b) (Supp. 1964). The court issues such execution cx ~arte. In New York, the income execution is first served on the defendant; if he defaults for 20 days it is served on the garnishee. N.Y. Civ. Pn.~c. LAWS & RULES §~ 5231(c), (d). Siegel, note 72 szipra, comments that the purpose is to enable "the judgment debtor to avoid embarrassment and possibly the more serious consequence of dismissal by making the 10% payments himself." Siegel further notes that only between 11% and 20% of judg- ment debtors have made the payments themselves, and questions whether the system should be continued. Compare Onso Rev. Coon ANN. § 1911.40 (1953). T8Micir. STAT. ANN. §~ 27A.6201-27A.6251 (1962). This procedure apparently is not widely used except in Wayne County. Even there it is not very successful; in 1957, mOre than 70% of partial payment orders were vacated because of nonpayment. FUSFELD, op. cit. supra note 55, at 17. 77 O~uo Rxv. CODE ANN. §~ 2329.70, 2329.71 (Supp. 1964); Wis. STAT. ANN: § 128.21 (1958). 78 Ou.ro REV. Coun ANN. § 2329.70 (Supp. 1964); Note, Garnishment of Wages in Ohio, 21 U. Ciuc. L. REV. 268 (1952). T9Wxs. STAT. ANN. § 128.21(1) (1958). 80Wss STAT. ANN. § 128.21(3) (1958). The Wisconsin proceeding is part of a com- prehensive system for the voluntary and involuntary administration of insolvent assets for the benefit of creditors. This system has been sustained against a claim that it is in competition with and hence superseded by the federal bankruptcy law. In the Matter of Wisconsin Builders Supply Co., 239 F.2d 649 (7th Cir. 1955), cert. den., 353 U.S. 985 (1957). PAGENO="0524" 1106 CONSUMER CREDIT PROTECTION ACT afford to pay the nonexempt portion of his wages into the plan and who has many or large debts may not be able to avail himself of the procedure. The Ohio and Wisconsin statutes provide procedures that resemble the federal wage earners' plans8' and that may, particularly in Ohio, he sim- pler and less costly to use than the federal plan, as well as more readily accessible to the average debtor. Exemptioti statutes often provide lower exemptions for single persons than for heads of families. California, in effect, makes suth a differentia- tion. Bachelors riced less money to live on, so the thinking apparently goes. This may be true, but the value of such a statutory distinction is doubtful, especially in states where the exemption is a percentage of earn- ings rather than a flat amount. The unmarried person will often be either young, starting his career and at a fairly low level of earnings, or divorced and making support payments. In either case, to maintain a minimum standard of living he is likely to need about as high a percentage of his earnings as ~t married person. * Some statutes also limit the exemption to residents, adding a com- plication of dubious value. There is substantial merit in having an exemption statute that is uniform in its operation and easily understood and administered. Illinois a few years ago changed from a dollar exemp- tion limited to heads of families to a percentage exemption applicable to everyone; the drafters took care to make clear the general applicability of the statute: "This exemption (and no other) applies irrespective of (1) the marital status of the employee, (2) the place where the com- pensation w~s earned or payable, and (3) the state where the employee resides.'~2 Other large states whose exemptions disregard marital status are Pennsylvania, Texas, New Jersey, and New York.83 By contrast, the Florida exemption applies only to resident heads of families, Ohio limits single men to one hundred dollars a month, and Michigan has an incred- ibly compli~atcd scheme, uniquely its own, that distinguishes between householders and others, first and subsequent garnishments, and weekly and other pay periods.84 S i1 FORMULATING A WAGE GARNISHMENT POLICY Should California continue to permit wage garnishments? If so, under what conditions? With what kind and amount of wage exemption? To 81 The so-called chapter 13 pcoceedings, 52 Stat. 93 (1938), as amended, 11 U.S.C. §~ 1001-86 (1964). 82 Ii~a. REV. STAT. § 62-73 (1963). The change took place in two stages, the first occurring in 1959 and making the exemption uniform. Ill. Laws 1959, Gasnishment Act § 6, at 1959; IlL Laws 1961, Wage Deduction Act, § 3, at 1470. For the pre-1959 law see Iaa. REV. STAT. § ~2-14 (1957). 83 See Appendix A infra. 84 Notes 187, 214, 201 in/ia. PAGENO="0525" CONSUMER CREDIT PROTECTION ACT 1107 help formulate answers to these questions, this section of the study con- siders several factors that may be relevant when viewed together with the considerations already discussed. A. Adequacy of the Fifty Per Cent Exemption As noted, the California wage exemption is limited to fifty per cent in most cases.85 Such a low èeiling defeats the purpose of putting needed earnings beyond the reach of process. "The basic theory of [the wage] * . . exemption is that a debtor and his family, regardless of the debtor's improvidence, will maintain enough money to retain a basic standard of living in order that the debtor may have a fair chance to remain a productive member of the community."8° What is "a basic standard of living?" No hard and fast answer can be given, but it seems fairly clear that for the bulk of 1o~.v-to-midd1e-in- come wage earners the exemption is grossly inadequate. The U. S. Depart- ment of Labor's family budget for an employee with a wife and two children is 6,859 dollars a year for a family living in San Francisco and 6,882 dollars for one in Los Angeles.87 This budget is designed to maintain a family at a "modest but adequate" standard of living.88 Even if one considers these figures high, recent average earnings in the manufacturing industry were 130.47 dollars per week in San Francisco and 119.36 dollars in Los Angeles,89 or 6,784 dollars and 6,207 dollars a year, respectively. Few would deny that a family with earnings in that range would need most of its income to maintain a living standard of some decency. Any sharp reduction in earnings, aside from causing immediate hardship, is likely to acutely aggravate the debt problems of the family, bringing ~ See text following note 15 supra. 86Perfection Paint Prod. v. Johnson, 164 Cal. App. 2d 739, 741, 330 P.2d 829, 830 (1958). In Bailey v. Superior Court, 215 Cal. 548, 554, 11 P.2d 865, 867 (1932), the court said that "the underlying purpose of the statute exempting from execution certain property is to provide for the support and welfare of the family of the person claiming exemption." See also Holmes v. Marshall, 145 Cal. 777, 778-79, 79 Pac. 534, 535 (1905). 87 Information obtained by telephone from tl~e United States Department of Labor, San Francisco office. Data applicable for March 1965 (adjusted for cost of living increase from 1959 budget); see Lamale & Stotz, The Interim Gity Worker's Family Budget, MONTHLY LABOR REV. 785, 787 (1960). The 1959 budget was approximately $6,300 for the two cities. 8S Compare reference to Heller Committee budget of $7,088 a year for a family of four, based on "a commonly accepted standard of living as the sum of those goods and services Becessary to health and reasonably comfortable living. . . . On a weekly basis the annual bud~t is equal to about $136.00." Hearings 83. 89 Information obtained by telephone from the United States Department of Labor, San Francisco office. Data applicable for March 1965; CALIFORNIA Dxv. OF LABOR STATISTICS AND RESEARCH, CALIFORNIA LABOR STATISTICS 18, 21 (Bull. No. 488-A, March 1965). For a more detailed study see U.S. DRPT. OF LABOR, OCCUPATIONAL WAGE SURVEY, SAN Fx~~ncisco- OA~IANn (Bull. No. 1430-37, Jan. 1965). PAGENO="0526" 1108 CONSUMER CREDIT PROTECTION ACT action by other creditors and a chain reaction leading to family economic disaster.9° The costs of the low exemption to the debtor, his family, and the community (including other creditors) are high. While precise data are lacking, wage garnishment is probably predominantly used against debtors in the low-to-middle-income groups; "garnishee" is one wogd that is better known among the poor than among those who are economically well off.9' If the lowness of the exemption were the only serious problem posed by wage garnishments, it could be dealt with by increasing the exemption substantially. Unfortunately there are other related problems not capable of such simple solution. These are considered next. B. Garnishment and Employment It is hardly news that an employee who gets his wages garnished runs a serious risk of being fired-at least if he permits it to happen repeatedly. The employee's fear of discharge collects at least~as much money for creditors as actual levies; it may well collect more.92 One observer, who worked in the personnel department of several plants, reports that in every case the company set a limit on the number of garnishments that it would tolerate within a given period as to any employee; some companies regard a single garnishment as grounds for discharge. He notes that "it is detested as an unmitigated nuisance by employers to such an extent that even union contracts tacitly or specifi- cally recognize the right of an employer to discharge an employee whose debts result in more than a prescribed number of garnishments within a specified period."93 While collection agencies tend to minimize the problem of discharges,°4 they recognize that the threat of garnishment "collects an awful lot of 90 For illustrative case studies see CENTER xoa CoNsUMER ATlASES, UNIVERSITY on Wes- CONSIN, UNIVERSITY EXTENSION, THE SPENmsR SYNDROME [hereinafter cited as SPENDER SYNDROME], cases 1, 6, 9, 19, 21, 31, 37, 44, 48, 51, 65, 67 (1965). Some of the families involved in that study had to receive welfare grants because. of garnishments. Id. at cases 9, 37,, 44. For data as to the substantial proportion of income which is used for repaying consumer credit, see text commencing with note 160 infra. ~` CAPLOWITZ, THE POOR PAY MORE 21 n.7 (1963). Credit merchants sell to the poor as well as to higher income groups (though they may not be the same merchants). The proportion of low income families with consumer installment dcbt is about the same as the national average. id at 101. Most poor persons use credit for some major purchases. Id. at 100. 92 See Conard, An Appraisal of Illinois Law on the Enforcement of Judgments, 1951 U. Os ILL. L.F. 96, 100. The article is written from a viewpoint favorable to creditors. 9~ Note, Garnisisinent in Kentacky-Some Defects, 45 K~. L.J. 322, 330 (1956-57). The article is written from a point of view favorable to debtors. See also Note, State Wage Exemption Lt'ntis and the New Iowa Statute--A Comparative Analysis, 43 IowA L. REV. 555, 557 (1958). ~ See Hearings 56-57. PAGENO="0527" CONSUMER CREDIT PROTECTION ACT 1109 money."95 At a recent California legislative hearing, one California legislator gave his experience: I know that there are companies that have inflexible rules ii they have so many attachments. They are discharged regardless of whether they are valuable employees or not. . . . Now this is my own experi- ence so I know what I am talking about in this respect, and you may be right that it is only a small percentage, but this is very important to these people who lose their jobs because of attachments. I've seen it done time and again and many of these people, you know we might as well admit it, they maybe don't go to their lawyer, if they do go they haven't any money to pay him.9° He said that "most of the companies have a rule, sometimes onl~ one and a maximum of three [garnishments] and they lose their job."°7 Other legislators also expressed their concern.98 The then research director of the California Labor Federation, Don Vial, gave numerous examples of discharges resulting from garnishments.90 The resulting hardship can be acute, as illustrated in a letter to Vial by a former Dow Chemical Company employee, an agricultural research assistant who was earning $5,000 a year. Marital and child custody problems required the employee to seek extensions of time to pay his bills, and one creditor, after four months' delinquency, turned the debt over to a collection agency. What happened next is graphically described by the ex-cmployee: They, (the collecting agency) immediately wrote my employer. They, (the Dow Chemical Company) told me that if the creditor at- tached, they would have to let me go. I went and talked to the people at the collection agency and explained this situation. They demanded half the amount which was $125.00 and I said I did riot even have $5.00, and they said they would attach my wages. I reasoned that they wouldn't because they could only get so much money and they knew I would get fired. Well, they attached and they got $80.00 or $90.00 and I got fired. Since last April I have not been able to get any kind of job in my field because they all checked and Dow says I was fired because of a wage attachment and the prospective employer treats me like I had ten tails and I think it is a stinking mess.'00 Nor is this an isolated case. A number of union officIals wrote of job losses by their members as a consequence of wage garnishments, C~0f the hopelessness of the situation many members found themselves in," ~ at 29 (testimony of Kenneth McGilvray, legi$lative counsel for Associated Credit Bureaus of California). 96 Id. at 59 (remarks of Assemblyman Harvey Johnson). ~ at 18-19; see id. at 71. 98E.g., comments of Assemblyman Milton Marks, id. at 7, 8. ~ at 62-64. 100 Id at 63. PAGENO="0528" 1110 CONSUMER CREDIT PROTECTION ACT and of "extreme hardship."101 Vial summed up the paradoxical effect of wage garnishments by noting that while preservation of the debtor's ability to pay is important in order to have debts paid, garnishment- induced discharges destroy ability to pay. The fear of discharge, Vial added, "is a real factor that causes a debtor to take the course of bank- ruptcy which thay be the less offensive alternative to him but the worst from a public policy point of view."02 Thus, garnishment of wages poses problems not only of actual loss of employment, but of threatened loss with its attendant temptation to use bankruptcy as a way out (discussed in detail below). Aside from bankruptcy, the question remains whether society should consider the threat of loss of employment as a legitimate debt-collecting device, We have given up imprisonment for debt; do we want to tolerate joblessness for debt? Short of abolishing wage garnishments, the possibilities for dealing with the employment problem are principally: (1) to attempt to prohibit discharges based on garnishment; (2) to utilize a trusteeship procedure, such as the Ohio one, which gives an employee protection against garnish- ments and at the same time provides for amortized payment of his debts; or (3)-possibly in conjunction with (2)--to increase the exemption and modify the garnishment procedure. Discussing these in inverse order, the third alternative is likely to have an ameliorative effect on discharges to the exfent that it decreases the use of wage garnishments. Yet in New York, whose garnishment law is relatively favorable to debtors, garnishments apparently still lead to discharges: Several bills were introduced in the 1965 session of the New York legislature designed to prohibit firings based on that ground.103 This is not to suggest, however, that such an approach may not reduce the problem. Trusteeship would benefit employees who can avail themselves of legal services and arrange for regular payment to the trustee of the non- exempt part of their wages. E~sential to the success of any such proce- dure would be the enthusiastic co-operation of the courts and a very low (if any) deduction from payments for administrative costs. Society now handsomely subsidizes the garnishment 104 the subsidy could well be shifted to trusteeships. The success of this kind of trusteeship in California is obviously uncertain. By itself, it is probably of limited value; 101 Id. at 64. For case studies see SPENDER SYNDROME passirn. 102 Hearings 62. 103 Senate Intro. 2168 (1965); Senate Intro. 2299 (1965); Senate Intro. 3061, Assembly Intro. 4920, vetoed July 19, 1965; Senate Intro. 4146 (1965); Senate Intro. 4164, Assembly Intro. 3577 (1965). 104 See note 48 supra. PAGENO="0529" CONSUMER CREDIT PROTECTION ACT 1111 bankruptcy rates in Ohio and Wisconsin are not very different from those in California.105 The most straightforward way would be to provide that an employee shall not be discharged because of wage garnishments. This was, in es- sence, the approach of the New York bills.106 The question that im- mediately arises is how such a law would be enforced. What about the employer who dislikes garnishments and looks for-and finds-other rea- sons to discharge the employee whose wages are "hit"?107 These obstacles are real but not insuperable. First, as to the problem of deciding whether an employee was "really" discharged because of garnishments or for some other reason, the National Labor Relations Board and the United States courts of appeals have for over a quarter of a century applied a provision of the Labor-Management Relations Act108 that poses an analogous problem. Under that act an employer may discharge an employee for any reason, even for no reason, as long as he doesn't do it because of the employee's union membership or activities.'09 The Labor Board and the courts frequently resolve the issue of whether an employee was discharged because he belonged to (or was active in) a union or because of other 105 If trusteeship were an effective tool against threatened loss of employment due to wage garnishments, then one would anticipate lower individual bankruptcy rates to the extent that debtors no longer need to turn to bankruptcy to safeguard their job, The measure is obviously imprecise. The following data are taken from the BANKRUPTCY STUDY COMM., AMERIcAN COLLECTOaS ASS'N, ANNUAL REPORT 14-15 (1963-64) [hereinafter cited as ACA J3ANKRTJPTCv STUDY Coats~t.]. State No. of families for each individual Same-1960 bankruptcy-1950 California 975 175 . Ohio 678 200 Wisconsin 1446 104 All U.S. 1504 377 See also Table 2 accompanying note 123 in/ra. 106 Thus, Senate Intro. 2168 would have amended the N.Y. labor law to make such discharges an unfair labor practice. Senate Intros. 2299, 3061 and 4164 would have amended the provisions with income executions to provide that "it shall be unlawful for an employer to discharge an employee against whom an income ex~cutioa . . . is served . . . solely because of such service . . . ." Two of these bills further made such a discharge a misdemeanor. Senate Intro. 4146 also would have prohibited discharge. It added the interesting provision that an employer would rethain liable on the income execution-on the continuing garnishment -as though he had not discharged the employee. The approach of Senate Intro. 2168 is not available in California because it does not have a labor law that specifies unfair labor practices. 107 See Hearings 8. 10861 Stat. 136 (1947), as amended, 29 U.S.C. §~ 141-87 (1964). 10961 Stat. 140 (1947), as amended, 29 U.S.C. §~ 158 (a)(1), 158 (a)(3) (1964). 83-340 0-67-pt. 2-34 PAGENO="0530" 1112 CONSUMER CREDIT PROTECTION ACT reasons. Presumably, whether the discharge was for garnishments is also capable of determination. However, resolution of discharge problems under the Labor-Management Relations Act often involves complex and protracted hearings. It may well be doubted whether employers should be subjected to the expense of extended trials dealing with alleged garnishment discharges. It may be doubted, too, how many employees could, as a practical matter, avail themselves of the benefits of such a law. The employee would have to turn to the courts; California has no counterpart of the NLRB. A law of this type would not, in all likelihood, be effectively enforced through criminal sanctions; district attorneys, already burdened with more pressing matters, would be less than eager to initiate prosecutions, particularly against respected companies. The individual employee could not afford the expenses of litigation, which would be several hundred dollars for the simplest case and could easily be rnan~ times that amount. However, a substantial number of employees might be aided by their unions; when the union carries the ball on behalf of a discharged member, judicial resolution would become feasible. Under some collective bargaining agreements the issue could also be submitted to arbitration, which would provide a speedier and less expensive deter- mination. Quite apart from the difficulties of litigation, employers might well object that their right to discharge for garnishments should not be im- paired: Not only does the processing of garnishments entail extra work and expense for the employers, but, the argument runs, they have a legitimate interest in the financial responsibility of their employees-an employee in deep financial trouble may not be a very productive one. There is merit in such contenti6ns, although they are not necessarily decisive. A family's financial crisis may have widespread effects: effects on the creditors, effects on the legal machinery of society, effects often enough in t~rrns of unemployment insurance, welfare payments, personal tensions, and even family break-up.11° Employers are not automatically. entitled to be exempt from these effects. In fact, a no-discharge-for-garnishments rule could well have the healthy effect of encouraging more employers to take an active interest in the debt problems of their employees. The wise use of credit is a complex skill that has to be learned; employers--at least. large ones- can do a great deal by way of providing information and counseling, as well as assistance through avenues such as credit unions. Some of this, of course, i~ being done already. 110 It is not suggested here that garnishments are the principal cause of financial crisis, but they commonly are the precipitating event. PAGENO="0531" CONSUMER CREDIT PROTECTION ACT 1113 C Gatnis/srnc,d a id BanLn'jYcy I'm not on~. to run up m~ 1)111 ii~r ~rn I one to s~iy a man shot Id not h't~#. to p~y hi~ bills Wage `~tt-tchrncnts loicul me to dccl ri. binkiu1itcy an(l ~lruost cost inc ri~ job Once, theic ~~a~n't a ~cc1 ~ passed that my check wasn't attachcd.'11 My wages \\Lre att tchcd twice. in 1959 agiinst debts incuired in a pre~ious rnairndc. I had rcrn-irried `md n~ ~~ufe ~as pregnant and so to protect my job I was forccd to file b in! iuptcy My tot ii ind~htecin~.,~ a ~oun~cd to ~2,OOO, and I ~ou1d have ghdly paid it off gi~en a dcccnt cl:i tnce 2nd \\itii no thieat to my job 112 `Ihesc statements illustrate a sc~rious effect of wage garnishments An emp1oyce who ]S threatened ~uth dischrrge as a result of a garnishment often turns to bxnkiuptc~ as his last resrnt Attorneys doing bankruptcy work are ibuiidantly familiar with the situation of a chcnt who fu.st walks in, garnishment p~ipcrs in hand, and announces "My boss says `One rnorc of tnLse and I'm through' I guess I better file bankrupt" In the words of one such attorney, who is also a legi3lator "I am counected with an office that handled a few bankruptcies, and I'd cay 95% ate for the purpose of s~vmg thur jobs, and the ernplo~er~, I think, have a rule of two or possib1y thi eu attichinents within twel~ e months then they lose their jobs "j' Garnishment is not the only factot that contributes to bankruptcies, but ei~en collection agencies agree tint they oftun trigger bankruptcies whatever the underlying causes may be 114 And bankruptcies are rising with dizrying speed In California the number of banl ruptcy petitions increased from 4,124 during the year ending June 30, 1950, to 19,404 in 111llearings 63 112 i'd. at 64. For other graphic illustrations see SPENDER SYNDROME cases 1, 6, 9, 31, 48, 51 Recent s udies of personal bankiuptues in Michi~,an and Arizona indicate a substantial concentratio~i of ban ruptucs among rnarricd blue collar workers, s%ith childien and with an income bet~ een $3 000 and $6 000 a yeir See P rsonal Bankruptcy a Class Problers 19 PERSONAL FIN. L.Q. iii (1965) ; Consumer Bankruptcies, FINANCE FACTS (Monthly newsletter of the N'stsonal Consumer Finance Association June 1965) 113 Hearings 71 (iemasks of A strnblyman }hr~ey John on) The interchange imme diately following this statement bet'a een Asseinbl) man Johnson and Mr Vial brought out that collecti'~e bargaining agre ments do not p otect employees against discharges based on garnishmen s because `the cmploye does not `a ant to negotiate on this type of an issue' Id at 71 If the union `tried to make this a collective bargaining issie they would not likely succecd becaus it dues not in olve viorking conditions specifically I am not saying that I agree with this I air saying that it is very difficult to negotiate in this area Id at 72 The NLRB does not protuct against this kind of dischaige unle s it is motivated b~, a dusiru to disurirnin.ste ag'unst a union adherent B g Michigan Lunber Fabricators Inc 111 N L R B 579 (19a5) Bardon of Hollywood 48 N L R B iOaS (1943) Chambers Corp, 21 N L RB 808 (1940) Compare Campbell Coal Co, 112 N L R B 941 (19~5) 114 Hearings 21 PAGENO="0532" 1114 CONSUMER CREDIT PROTECTION ACT 1960 and 29,651 in 1964---an increase of over fifty per cent in the past five years alone and of over six hundred per cent during the fifteen-year period.'15 More than ninety per cent of these were nonbusiness bankrupt- cies in 1964: They were filed by individuals and families whose personal debts had become too much for them.'-'6 If the overall increase in bank- ruptcies has been rapid, personal bankruptcies have been rising even faster, both in California and throughout the country.117 Today one out of every six persons who files bankruptcy does so in California.118 Why is bankruptcy a matter of concern? First, as Myers notes: "The bankruptcy problem is important because of the human distress it represents. Although uninformed people may minimize the gravity of the consumer bankruptcy pioblem by saying that only one- tenth of one per cent of the population goes bankrupt, there is a qualita- tive dimension in human distress that is understated by such statistics."° Secondly, losses from nonbusiness bankruptcies now exceed one billion dollars a year nationally.'2° Wage garnishments that precipitate bankruptcy hurt not only the debtor and his family but a good many creditors as well. * The extent to which wage garnishments contribute to bankruptcy can- not he measured precisely. We do not know in how many individual bank- ruptcies a garnishment was the last straw. Even if we knew, we could not tell how many such bankruptcies would have happened ~sooner or later in any event. We are not entirely without data: We know the number of bankruptcies on a state-by-state basis and we know the garnishment laws of the states. Any comparison between them must be treated with great 115 1950 DIRECTOR OF TUE ADMINISTRATIVE O~~ica OF THE UNITED STATES COURTS, ANNUAL REPORTS [hereinafter cited ANNUAL REPORT] `lable F-2; 1960 Id. at Table F-2; 1964 id. at Table F-2. California is not alone. Between 1947 and 1963, nonbusiness bank- ruptcies in the U.S. increased 1260% while the population grew 31.3%. Myers, Non-Business Bankruptcies, i~ PROCEEDINGS OF TENTh ANNUAL CONFERENCE, COUNCIL ON CONSUMER INFOR- MATION 2. They nearly quadrupled in the decade 1953-62. See also Countryman, The Bankruptcy Boom, 77 HARV. L. REv. 1452 (1964). 116 1964 ANNuM. REPORT Table F-3. Of the 29,651 bankruptcy petitions flIed in Califor&a in 1964, 26,980 or 91% were personal bankruptcies. The figures for nonbusiness or personal bankruptcies used throughout are the sum of the voluntary "employee" and "other non-business" bankruptcy filings shown in Table F-3. 117 Iii California, personal bankruptcies rose from 17,265 in 1960 to 26,980 in 1964, up 56%. All other bankruptcy filings rose from 2,139 to 2,671, up 25%. The U.S. figures for the same years are: personal bankruptcics~ -97,742 and 155,193, up 59%; all other bank- ruptcies-12,292 and 16,526, up 34%. 1960 ANNUAL REPORT Tables F-2, F-3; 1964 id. at Tables F-2, F~3. 118 During the year ending June 30, 1964, 26,930 nonbusiness bankruptcy petitions were filed in Califothia, 155,193 in the U.S. Note 117 supra. 119 Myers, sup;-a note 115, at 9. Myers argues that bankruptcy is at least as important as many medical and social problems whose per capita incidence is no higher and toward whose solution we contribute generoully. 120 Id. at 9-10; Countryman, supra note 115, at 1456. PAGENO="0533" CONSUMER CREDIT PROTECTION ACT 1115 caution: A correistion does not necessarily mean a cause and effect relationship. Garnishment laws may not be the only relevant factor with respect to which one state differs from another. Further, bankruptcies haye been rising in all states, even those that do not permit wage garnishments.12' There is a consensus among referees and students of bankruptcy problems that the number of individual bankruptcies in a state is sig- nificantly affected by the leniency or harshness of its garnishment laws.122 Subject to the limitations mentioned, the available data suggest that the consensus may be correct. The states with the lowest per capita bankruptcy filings ar~ mainly those that either prohibit wage garnishments or severely restrict their use. The highest filings in relation to population tend to occur in states where the garnishment remedy is freely available to creditors. The follow- ing table illustrates the point and shows dramatic differences in bank- ruptcy rates. TABLE 2 STATES HAYiNG T~E RICHEST AND LOWEST PER CAPITA BANKRUPTCY RATES, 1962123 State No. of Filings per 100,000 population * State No. of Filings per 100,000 population Alabtnla 279 ~North Carolina 1 Oregon 200 ~`Texas 2 Tennessee 184 South Carolina 3 Maine 153 Pennsylvania 4 Georgia 149 Maryland S Arizona 147 `~Florida 7 California 145 * Delaware 10 Illinois 134 South Dakota 11 Ohio 132 ./New Jersey 12 131 Alaska and the District of Columbia 13 United States as a whole: 72 Colorado Of the states in the high group only Illinois has an exemption as high as eighty-five per cent; it went into effect in 1961 and its apparent 121 ACA BANKRUPTCY STUDY Coan~r. 16-17. 122 Myers, supra note 115, at 11; Snedecor, Consumer Credit and Bankruptcy, 35 Rsa'. J. 2 (1961). The arnual report of the Bankruptcy Study Committee of the American Col- lectors Association, note 105 supra, recognizes the existence of such a consensus but dissents from it. At thc same time it states that "the per capita [bankruptcy] filings in a given state partIally reflect the strength of collection laws in given states" and that "strengthening collection laws in maoy states would increase [bankruptcy] filings." ACA BANKRUPTCY STUDY Coarar. 25. 123 Myers, supra note 115, at 5. See also Hearings App. B. PAGENO="0534" 1116 CONSUMER CREDIT PROTECTION ACT consequences will be discussed below. The states in the low group all had very high or one hundred per cent exemptions, except Maryland and in that state the use of garnishment is limited.124 Illinois raised its exemption from forty-five dollars a week to eighty- five per cent in 1961.125 Between 1961 and 1964, the number o non- business bankruptcies filed in Illinois declined nine per cent; nationally during the same period they rose eighteen per cent.125 The substantial change in exemption, one may infer, contributed to the stemming of the bankruptcy tide. As might be anticipated, the reduction in personal bankruptcies has not been overwhelming. As long as garnishments con- tinue so will the threat of losing employment and the impulse to meet the threat by fleeing toward bankruptcy. Iowa moved in the opposite direction. In 1957 it abolished its one hundred per cent wage exemption and substituted an inadequate exemp- t~on of thirty-five dollars a week plus three dollars per dependent.127 Only 431 bankruptcy petitions of all kinds were filed in Iowa during the year ending June 30, 1957.128 Since then bankruptcies in that state have been growing at a pace that is astonishing even for bankruptcy figures. Iowa bankruptcies more than quadrupled between 1957 and 1963, almost double the national rate.129 During the same period California filings went from 11,629 to 27,068.130 An increase at Iowa's rate would have brought California to over 44,000. Considering that California experi- 124 In Maryland a creditor can only garnish wages "actually due at the date of the attachment . . . ." Mn. AnN. CooN art. 9, § 31 (Supp. 1965). 125 Note 82 supra. 126 The year-by-year figures, as compiled from Tables F-3 of the Annual Reports of the Director of the Administrative Office of the United States Courts for the years 1961-1964 are: Year Illinois U.S. 1961 16,356 131,397 1962 13,705 132,118 1963 14057 139,176 1964 . 14,900 155,193 Bankruptcies have been rising in Illinois since 1962, but at a much slower rate than in the country as a whole. The ratio of Illinois nonbusiness bankruptcies to U.S. nonbusiness bankruptcies has declined steadily: 12.4% in 1961, 10.4% in 1962, 10.1% in 1963 and 9.6% in 1964. 127 See Note, State Wage Exemption Laws and the New Iowa Statute-a Comparative Analysis, 43 IowA L. Ray. 555, 560 (1958). 128 1957 ANNuAL REPORT Table F-2. The report does not include nonbusiness bank- ruptcies; hence in the discussion of Iowa, total filings ame used throughout. 120 Iowa filings were 431 in 1957, 922 in 1960, 1734 in 1963; U.S. filings were 73,761, 110,034, and 155,493 in the same respective years. 1957 ANNuAL REPORT Table F-2; 1960 Id. at Table F-2; 1963 U. at Table F-3. 130 Ibid PAGENO="0535" CONSUMER CREDIT PROTECTION ACT 1117 enced a rapid population expansion during these years, the difference is striking. It might be objected that Iowa hasso few bankruptcies that a small numerical rise produces a big percentage increase and that this limits the validity of the comparison. To test this objection, Iowa might be compared with another state having few bankruptcies. Nebraska in 1957 had the same number as Iowa~-431. Nebraska's increased to 953 in 1963, a "growth rate" close to that of the country as a whole and far below Iowa's.13' California has a per capita rate of personal bankruptcies more than five times as high as New York.'32 That again does not prove that garnishment laws account for the difference, but what does? It has been. suggested by a collection agency spokesman that the large number of newcomers to the state contribute to the difference.133 This does not rule out the role of garnishments, even if it is assumed that many of the bankrupts are recent arrivals who rush too enthusiastically to buy all the things they regard as necessary for the California way of life, or who meet economic disappointment. Recognizing that overextension of credit-to newcomers or oldtimers-may well be a key factor underlying bankruptcy, it is garnishments that often push the debtor over the edge. Even collection agencies grant that without wage garnishments there would be fewer personal bankruptcies. They argue that this would be because then there would be no way to compel a debtor to pay his debts.'3' This contention raises the important question of the need for wage garnishments as a collection device, the question considered next. 131 Nebraska filings were 431 in 1957, 511 in 1960, and 953 in 1963. ibid. The foregoing data may be summarized as follows: Between 1957 and 1963 bankruptcy filing in the United States as a whole increased 111%, in Nebraska 121%, in California 132% and in Iowa 302%. 132 During the year ending June 30, 1964, New York had 5033 nonbusiness bankruptcy filings, California 29,651. 1964 ANNuAL REPORT Table F-3. 133 Hearings 35 (testimony of Joseph L. Weissman, Counsel for the California Associ- ation of Collectors). 134 ACA BANKRUPTCY STUDY Coa~1M. 22: "Bankruptcy rates are low in states like Texas and Florida only because there is no necessity for the debtor to file since the laws are so lax he cannot be put to more than slight iaconvenicnce and never be legally forced to pay anyway." The "lax" laws are the 100% wage exemptions granted by Texas and Florida. The quoted statement is particularly enlightening in view of the publication's contention that a state's garnishment laws have nothing to do with the bankruptcy rate. See also Hearings 13: Raising the exemption "may lower the number of filings because there would he no reason to take bankruptcy if they cannot be forced to pay anyway. The number of bank- ruptcy filings would no doubt decrease in those states vihere garnishment laws were relaxed, but the number of people not paying their bills would actually increase." (testimony of Robert C. Kopriva, Legislative Chairman, Associated Credit Bureaus of California, quoting from an article by David Earl in the Collettograrn, September 1963--the official bulletin of the Oregon Collectors Association). PAGENO="0536" 1118 CONSUMER CREDIT PROTECTION ACT D. Need for Wage Garnishments The extensive use of wage levies in California has already been indicated.'35 It is further illustrated by an examination by the author of a sample of cases filed in the San Francisco Municipal. Court. The examination consisted of reviewing the action files of one hundred cases commenced in January 1964.'~° The date was selected as one reasonably likely to reflect current practices but sufficiently remote to provide fairly complete garnishment data.'37 Municipal court actions were chosen be- cause garnishments are most commonly and typically used in those actions.'38 Thirty-one of these cases resulted in levies of writs ~f attachment or execution; there were a total of sixty-eight such levies. Of them at least forty-seven, in fifteen actions, were wage levies.139 Garnishment is parti- cularly common after* judgment-four out of five execution levies were made against wages. Far and away the most frequent users of wage garnishments arc collection agencies. How effective are wage levies as a collection device? While a review of the case files shows what each levy caught, this does not give an accurate picture of their effectiveness. A garnishment may induce a defendant to pay off a debt or make payments on account; such payments are not always reflected in the files. The survey showed that wage levies caught something at least once in eleven of the fifteen cases in which they were used. About half tile execution levies on wages were successful in that sense; they collected about one quarter of the principal indebtedness in tile actions in which they were used.'4° In two of the actions the files show that wage levies satisfied the judgments in full. Purchases on credit by consumers and hospital or medical bills are the main sources of suits that give rise to wage garnishments.141 This ~ Text acCompanying note 1 suprcs. 136 San Francisco Munic. Ct. Action Nos. 27,363-27,462. 137 The examination was made in April 1965. 138 The Municipal Court jurisdiction extends to "all cases at law in which the demand, exclusive of interest . . . amounts to five thousand dollars ($5,000) or less . . . ." CAL. Cona Civ. PROC. § 89 (1)(a). Small claims court jurisdiction extends to actions up to $200. CAL. Cona Civ. Paoc. § 117. Actions claiming $200 or less may be brought in either court. How- ever, assignees-collection agencies-may not sue in small claims court. CAt, Cona Civ. PRoc. § 117f. Section ll7ha provides: "No attachment or garnishment shall issue from the small claims cOurt, but execution may issue . . . 130 See Appendix B lu/re. In a few instances the flIes did not disclose whether the levies Were on wages or other property. 140 By contrast, four out of five hank levies were successful, producing sufficient money to pay off two~thirds of the principal indebtedness in all cases where execution was levied on bank accounts. 141 The author's survey disclosed that 60% of the garnishment-producing debts resulted PAGENO="0537" CONSUMER CREDIT PROTECTION ACT 1119 leads to the contention of collection agencies that garnishments are CSsen- tial to the economy. Current earnings, they argue, are often the only asset that a debtor has and that a creditor can reach. Without garnish- ment, the argument continues, fewer debts would be collected. This in turn, it is claimed, would lead to a tremendous drop in the granting of consumer credit, thus adversely affecting the economy as well as those families to whom credit would no longer be available.142 A spokesman for Collection agencies illustrated his viewpoint by arguing that it is much harder for a person to buy on credit in New York than it is in California.1~~ These contentions are important, if correct. However, estimates made by the collection agencies and other available data indi,cate that consumer credit is as readily available in New York as in California and that the extension of consumer credit is unrelated to garnishment laws. Data given a California legislative committee by the Associated Credit Bureaus of California show that in 1963, 6.621 billion dollars of installment credit was extended in California and 6.124 bii1i~~ dollars in New York.14'1 This amounts to 24.6 per cent of total retail sales in California during 1963 and 25.5 per cent of New York sales.14° The Associated Credit Bureaus also covered five other states: Colorado, Texas, Florida, North Carolina, and Alabama. ~f ratio of installment credit to retail sales varies vcry little among them or, for that niatter, from the ratio in New York or California.146 This is particularly interesting because Texas, from purchases, 26.7% from hospital and medical services, 6.7% from loans and 6.7% from rent. Purchases included a used car, furniture, jewelry, clothing, and several items merely listed as `~goods, wares and merchandise".-a catchall designation often used in complaints. `42llearngs 29-30, 37-38. 143Id. at 37. 144 Id. at App. A (letter from Robert C. Kopriva, Legislative Chairman, Associated Credit Bureaus of California). These are unofficial estimates; there appear to be no official data showing retail installment credit by states. See also note 148 in/re. 145 In dollars the respective retail sales figures are $26839 billion and $23977 billion. BUREAU OF TIUS CENSUS, CENSUS or BusiNEss, 1963 RETAil. TRADE, California 6-5 (1965); Id. at New York 34-5. The percentages given in the Kopriva letter, note 144 supra, are incor- rectly identified as showing installment credit as a percentage of retail sales. Rather, the letter shows the ratio of installment credit in California and New York to all such credit extended in the U.S. in 1963. (California's was 10.9% of the rsational total; New York's, 10.1%.) In 1963, California and New York were also close in personal income, $52,419 billion and $53120 billion, respectively; per capita personal income was $2,980 in California and $3,000 in New York. U.S. DEP'T OF COMMERCE, SURVEY or CURRENT BUSINESS 13 (April 1964). 146 The data for the seven states are as follows: (installment credit data from Kopriva letter, note 144 supra; rctail sales figures from CENSUS OF BUSINESS, 1963, note 145 supra PAGENO="0538" 1120 CONSUMER CREDIT PROTECTION ACT Florida, and North Carolina exempt the entire earnings of a family from garnishment, while wage garnishment is freely available in Colorado and Alabama. In short, the correlation of installment credit to retail sales does not appear to vary in accordance with garnishment laws.147 Nor is the volume of retail sales or installment credit lower in states that do not permit garnishments, at least when measured against personal income;148 again there is no correlation to garnishment laws.14° Finally, it bears noting that per capita personal income does not vary in accordance with whether a state has tough or lenient garnishment laws-precisely the opposite of what might be expected if contentions that abolition of wage garnish- at Alabama 2-5, California 6-5, Colorado 7-5, Florida 11-5, New York 34-5, North Carolina 35-5, Texas 45-5). State Installment CredIt Extended in 1963 Retail Sales in 1963 Ratio of Installment Credit to Retail Sales Alabama (In billion 0.794 dollars) 3.253 24.4 California 6.621 26.889 24.6 Colorado 0.665 2.649 25.1 Florida 1.905 7.610 25.0 New York 6.124 23.977 25.5 North Carolina 1.212 4.975 24.4 Texas 3.222 12.715 25.3 147 This is corroborated by comparing retail sales and outstanding bank consumer credit (including consumer paper bought by banks) in the ten most populous states for 1964. The ratio is 19.9% io New York, 17.1% in Pennsylvania, 14% in California, and between 13 and 15.2% in Florida, Illinois, Massachusetts, Michigar~ New Jersey, Ohio, and Texas. U.S. OF COMMERCE, Mox'rsrr.y RETAIL. TRADE 9-11 (March 16, 1965). Data on bank con- sumner credit outstanding on June 30, 1964, by state, supplied by Federal Reserve Bank of San Francisco in a letter to author, April 20, 1965, includes bank automobile loans (plus automobile paper purchased from dealers), installment loans for purchases of other retail consumer goods (including paper bought by banks), repair and modernization loans for residences, and loans for miscellaneous personal expenditures. 148 Total personal income in the states listed in note 146 was as follows in 1963 (in billion dollars): Alabama-5.542, California-~S2.419, Colorado-4.678, Florida---11.933, New York--S3~i2O, North Carolina-8.630, Texas-21.11S. SURVEY OF CURRENI Busexass, OP. cit. su~ra nOte 145, at 13. 149 Thus, the ratio of installment credit to total personal income is 14.3% in Alabama, 12.6% in California, 14.2% in Colorado, 16.0% in Florida, 11.5% in New York, 14.0% in North Carolina and 15.3% in Texas. The ratio of retail sales to total personal income is between 56% and 60% in Alabama, Colorado, Florida, North Carolina and Texas, and again lower in both New York and California. Ratios are computed from data in notes 146 and 148 supra. PAGENO="0539" CONSUMER CREDIT PROTECTION ACT 1121 rnents would seriously harm the economy of the state were true.'5° For example, the Southeastern states all have per capita incomes well below the national average regardless of what their garnishment laws are. Among them Florida, which does not allow wage garnishments, happens to rank highest, while Mississippi, which not only allows them but has a low exemption, ranks lowest.'5' And each of the following pairs. of states has nearly the same per capita income, but radically different garnish- ment laws: California and New York, Pennsylvania and Ohio, Washing- ton and Hawaii, Vermont and Florida.'52 There is some evidence to back one contention made by, collection agencies. The percentage of recovery on accounts assigned to them tends to be lower in states where wage garnishments cannot be freely used.'53 But it is higher in New York than in California, and the correlation is far from perfect.154 The same data strongly suggest that an exemption as high as ninety per cent would not interfere with recoveries, for not only New York but New Jersey and Nebraska have a higher percentage of recoveries than California.'55 In any event, variations in collection agency recovery rates have no observable influence on the extension of consumer credit. There is no evidence to support a claim that wage garnishment laws contribute to the extension of credit, to the volume of retail trade, or to the level of per capita income. One probable reason for this is that wage garnishment is only one tool in a creditor's kit. It is a full kit, including prelitigation collection procedures, skip tracing, repossession of articles sold (a par- tictilarly powerful weapon for many credit sellers), attachment and execution levies against cars, bank accounts, and homes, liens of various 150 SURVEY OF CURRENT BUSIieESS, op. cit. suprcs note 145, at 13. ~ Ibid. Florida per capita income is 86% of tile national average, Mississippi 56%. North Carolina (which~ has a 100% wage exemption) is 74%--the exact average of the Southeastern states. A state's relative prosperity obviously hinges on many factors; what the per capita income figures show is only that there is no observable relation between a state's prosperity and its garnishment laws. 152 Ibid. 153 hearings App. B. (Data supplied by Associated Credit Bureaus of California; the year is not indicated and the data only cover an unknown fraction of collection agencies. Not all states are covered.) 154 The data referred to in note 153 suprci indicate a 36.3% recovery rate in New York as against 32.7% in California. Rates are below 20% in Arkansas (17.8%), Texas (13.2%), and North Carolina (12.3%). They are `also below 20% in Missouri (16.1%) and West -Virginia (18.9%) where wage garnishments are available. Missouri, West Virginia, and Alabama (21.9%) have a lower recovery rate than Pennsylvania (23.1%), a state that does not permit wage garnishments. 155 Nebraska, 39.3%; New Jersey, 33.4%. Illinois also ranks above California in recoveries. Hearings App. B. PAGENO="0540" 1122 CONSUMER CREDIT PROTECTION ACT kinds, judicial examination of judgment debtors, and other tools.15° Over the years "creditors have gained a vast arsenal of remedies."57 E. Garnishment and the Changing Pattern of Debt Garnishment statutes originated in an era when consumer credit was all but unknown. Until recently, debt was something devoutly to be avoided; to "commit" debt was faintly, or not so faintly, immoral. To let creditors jeopardize a man's job by garnishing his wages is a mani- festation of this attitude. The fifty per cent wage exemption is a sort of rough compromise between regarding the debtor as sinful and his family as unfortunate.158 The time when a family had few, if any, debts except perhaps a home purchase mortgage may be remembered nostalgically, but it has passed. rfhe years following the end of World War II saw the develop- ment of what might be called the American way of debt. A trend toward the use of consumer credit, which started before the war, accelerated rapidly during the past two decades. To cite a few more numbers: in 1945, outstanding consumer credit totalled 5.7 billion dollars; in 1956, 42.3 billion dollars; in 1960, 56 billion dollars; and in December 1964, 76.8 billion dollars.'59 These figures do not include mortgage indebtedness. Consumer credit has become a major industry and consumer debt con- sumes a major slice of many a family's income. Repayment of install- ment debt alone equalled fourteen per cent of disposable personal income in 1964.160 Installment credit makes up a large part, but not all, of 156 See generally CONTINuiNG EDucATIoN OF THE BAR, CALTIORNIA REMEDIES TOR UN- SECURED CRrDIToas (1957). 157 Riescnf~ld, Collection of Money Judgments in American Law, 42 IowA L. REV. 155, 181 (1957). 158 This picture should no~ be drawn too broadly. Debtors, too, have had their -innings in state legislatures; for instance in the enactment of anti-deficiency legislation governing mortgages. And states that have a 100% wage exemption have generally had it for a long time. 159 51 FED. RESERVE BuLL. 304 (February 1965). `601d. at 306, 319. . (In billions) 1962 Year 1963 1964 Disposable personal income 384.6 402.5 431.8 Installment credit extended 55.1 60.8 66.1 Installment credit repaid 50.6 55.1 60.4 Installment credit does not include home p~urchase loans or noninstaliment debts such as 30-day charge accounts. If the amount of installment credit repaid is viewed in relation to compensation received by employees-a relation which may be more meaningful in case of lower and PAGENO="0541" CONSUMER CREDIT PROTECTION ACT 1123 consumer credit, which also includes charge accounts, service credit, and single payment loans.16' rfotal consumer credit repayments are probably running at a level close to twenty per cent of disposable personal income and well over twenty per cent of employees' earnings.'62 Individual debt, not so long ago discouraged and regarded with sus- picion, is now encouraged. More than encouraged, debt today is mer- chandised as intensively and skillfully as any commodity, notwithstand- ing occasional pious reminders to "never borrow money needlessly." The communications media that touch a family's life constantly urge it to buy on "easy" terms, to open charge accounts with "nominal" monthly service charges, to get a ncw car at "bank" terms, to travel now and pay later-whether the family can afford it or not. The following report from The Wail Street Journal is illustrative: Consider the case of the 24-year-old factory worker who last week walked into Courtesy Motors, a Chicago Ford dealership, just to look around. A salesman quickly-and politely-offered to help the un- shaven young man but was met with what seemed to be a definitely negative reply. He had bought a new Rambler only 10 months ago and he still owed ~1,8O0 on it, the worker explained. But two hours later, the young man purchased a new Galaxie two door hardtop. "I really didn't expect to get a car today," he said somewhat bewildered, "but the salesman made it easy so I figured why not." Carl Shelby, the salesman, didn't find it so easy, though. "He owed too much on the Rambler to be a good credit risk," Mr. Shelby says. The fact that the debt-laden factory worker was eventually ap- proved points up another reason which many think plays a major role in the auto boom: Easy credit. Financing funds are so plentiful that it's a rare person who isn't able to work out some sort of installment arrangement, dealers say. Some buyers now can even get terms which allow them 42 months to pay for their new car. "There's way too much credit," remarks Kenneth Grantharn, owner of Kenray Ford, a Dallas car dealership. Then he adds quickly: "But I'm not complaining." For good reason, perhaps. Mr. Grantham's sales manager, Jesse James, estimates that "90% of our customers are buying cars that they really can't afford. But credit ~s easy and people don't feel they're in the swing of things if they're not paying off a new car."163 middle income wage earners-we find that repayments are 17% of such compensation. Ibid. Compensation to employees (in billions): 1962-$323.1, 1963-$340.3, 1964-$361.7. 161 These items totaled $17.4 billion in December 1964 and together with $59.4 billion in installment credit made up the $76.8 billion figure of outstanding consumer credit. Id. at 304. 162 Disposable personal income includes income from sources other than employment. Compensation to employees was $361.7 billion in 1964. Id. at 318. 163 Wall Street Journal, May 14, 1965, p. 1, col. S. PAGENO="0542" 1124 CONSUMER CREDIT PROTECTION ACT Even with sales managers named Jesse James, one may giant that the contribution of consumer credit to the economy and to the standard of living of many families is substantial. But when personal debt is rio longer unusual, no longer a sign of improvidence, when debt has instead become a mass production, hard-sell item that citizens are widely en- couraged to ccbuy,~~ one may doubt the continued appropriateness of a device such as wage garnishment. Even when debt was a sin not all states allowed creditors to go after a man's wages. Today this harsh remedy, humiliating at best, disastrous to the debtor and his family at worst, seems far leSs justifiable than in an age when personal debt was un- common and disfavored. It is time that our attitude toward wage gar- nishment--which is, after all, a drastic form of intervention by govern- ment on behalf of creditors--caught up with our attitude toward debt.'" Not all garnishments result from the purchase of goods anti services on credit, but the great bulk do.'65 There are still deadbeats who merit no sympathy. Happily they appear to be few in number.'66 In any event, weapons to pursue deadbeats should not be fashioned in a way that permits injury to others. III CONCLUSIONS AND RECOMMENDATIONS Garnishment is a common collection tool in California. The tool is statutory. Its main-almost its exclusive-users are collection agencies. The great majority of debts that eventually lead to garnishments arises from the purchase of goods and services. In recent decades there has been a dramatic and thoroughly promoted move toward credit buying. 164 Along with the debt explosion there have been other changes. While in an earlier period consumer credit, such as it was, mainly took the form of credit temporarily extended by the neighborhood store at little or no interest, much of consumer credit today involves large institutions, complex terms that the debtor cannot negotiate and often does not fully understand, and high interest. Of course, not every credit transaction is of this kind. There is also a good deal of selling to poor credit risks, see text accompanying note 163 supra, and to persons whose ~redit is not checked. See, e.g., FUSaTLD, o~. cit. supra note 55, at 7. 165 See note 141 su~ra. The principal service that leads to garnishment-producing debts is medical and hospital care. It might be argued that doctors and hospitals are entitled to greater consideration-better collection remedies-than sellers of goods, because of the important humanitarian nature of their service and because unlike many sellers a doctor or a hospital has nothing to repossess. It can also be argued that users of medical and hospital care are entitled to more consideration than credit buyers of many goods. Medical credit is, of course, not a new development, but even in this area the trend has been toward more formalized and institutionalized credit arrangements. Credit institu- tions have become an increasingly important source of medical credit. 166 The delinquency rate on installment credit is between I and 2% of the amount of credit extended and the net loss rate is below that by an undetermined amount. These figures appear to be national averages. Not all losses are attributable to deadbeats or "credit. criminals" as the collection industry sometimes calls them. See Hearings App. B. PAGENO="0543" CONSUMER CREDIT PROTECTION ACT 1125 Collection agencies find wage garnishment a useful tool, not only because of the debtor's earnings actually reached by levies, but because the threat of garrlishlrLent encourages the debtor to make payments. Whether one views this effect as persuasive or coercive depends to some extent on one's point of view. In any event, the encouragement is due to the debtor's fear that he will lose his job if there are more garnish- ments. The fear is real. Discharges because of repeated wage levies are not uncommon. Employers dislike the added work and expense brought by levies and often limit the number of levies they will permit without discharge. Labor organizations have apparently not been able to bargain effectively on this issue. The employee who is threatened with discharge, and who cannot pay, sometimes chooses bankruptcy as a means of saving his job. The expan- sion of consumer credit in the postwar years has been accompanied by a sharp rise in bankruptcies, particularly in nonbusiness bankruptcies. Bankruptcy rates tend to be lower in states that do not permit wage gar- nishment or that sharply restrict its use. Abolition of wage garnishment would not eliininate personal bankruptcies, hut it could contribute sig- nificantly to stemming their rising tide. Wage garnishment is costly. Its immediate costs include official fees --chargeable to debtors-expense to employers, and the community's subsidy of the garnishment process. There are other costs in terms of distress and economic hardship when the family whose earnings are garnished spirals into bankruptcy or unemployment. And there are losses to creditors from garnishment-triggered no-asset bankruptcies. Hard- ship is not limited to bankruptcy and unemployment; a debtor who avoids both is faced with a fifty per cent wage exemption, an amount that in the great bulk of cases is grossly inadequate. Wage ga,rnishment does not produce benefits to match these disadvan- tages. There is no evidence that the granting of credit depends on the availability of this tool. Economic data, even data supplied by collection agencies, show that the ratio of instalhnent credit to retail trade is as high in states that do not permit garnishment as in states that do. The data show further that a state's volume of retail trade and its level of per capita income is unrelated to garnishment laws. This is not surprising in view of the creditor's full kit of tools, in which wage garnishment is only one of many. There are some data indicating that collection agencies tend to collect more of their claims in states that have wage garnishment than in states that do not. But the available information indicates more strongly that consum~er credit and retail trade in a state are unrelated to these collection rates. Further, collection data show that several states PAGENO="0544" 1126 CONSUMER CREDIT PROTECTION ACT with a iiinety per cent wage exemption have higher percentage recoveries by collection agencies than California. A. Legislative Proposals for Changes in California Wage Garnishment Statutes A number of bills designed to ameliorate the garnishment problem have been introduced in recent sessions of the California. legislature. A measure introduced in 1965 would have raised the basic exemption from fifty to ~ighty per cent.'°7 One 1963 proposal sought to exempt all earnings from garnishment; an amended version would have provided a one hundred per cent exemption from attachment and a seventy-five per cent exemption from execution with a maximum c~empt~on of two hundred dollars a week.'68 A second would have exempted forty dollars a week and seventy-five per cent of the balance for he~ads of families and ten dollars a week less for others.'6° A third aimed at a one hundred per cent exemption from attachment without changing the execution provi- sions.'~° This was also the objective of a fourth proposal, together with a barring of wage garnishments for two weeks after entry of judgment.'71 While these measures were not enacted, the legislature adopted a resolu- tion calling for a study of the existing California laws exempting per- sonal property from attachment and execution of judgment and of the changes in the state's population and ~redit structure which could have a bearing on revision of the law.'72 The Assembly Interim Judiciary Committee studied the subject and concluded: [A] revision of the law which will increase the debtor's protection by way of exemption and which will make that protection more modern and equal will be of benefit to both debtors and creditors. This con- clusion reflects the underlying fact that neither debtor nor creditor 167Assembly Bill 2901 (1965) (introduced by Assemblyman Dymally). Two other bills were concerned only with attachment, one raising the minimum amount of a claim on which attachment can issue from $75 to $125, Assembly Bill 1127 (1965) (introduced by Assemblyman Danielson), the other requiring a second affidavit for attachment and a hearing within 72 hours to determine whether the property shall remain attached or be released, Assembly Bill 3220 (1965) (introduced by Assemblyman Chapel). A.B. 1127 was enacted. Cal. Sta~ts. 1965, ch. 668, § 1. Neither it nor AB. 3220 significantly affect the wage garnishment problem. A.B. 2901 and 3220 were not reported out by the committee to which they had been referred. 168 Assembly Bill 482 (1963) (introduced by Assemblyman Foran). The bill also would* have provided a 50% exemption from w~ge levies based on alimony and child support obligations. At present there is no exemption at all in such situations. See note 20 .supra. 1~ Assembly Bill 2278 (1963) (introduced by Assemblyman Foran), later amended by the author in a manncr~similar to Assembly Bill 482, note 168 supìa. 170 Assembly Bill 2332 (1963) (introduced by Assemblyman Foran). 111 Assembly Bill 2808 (1963) (introduced by Assemblyman Ferrell). 172H Re5. 268 (1963). PAGENO="0545" CONSUMER CREDIT PROTECTION ACT 1127 benefits when the debtor is financially crippled. A more powerful exemption law will help keel) the debtor from sinking fui tlier into a financial abyss and losing his job. At the same time it will protect the creditors to the extent that it allows the debtor to keep going and to avoid bankruptcy. Incidental credit grantors such as doctors, law- yers and small businessmen lose when a small loan company garnishes wages and causes the debtor to he fired or run for bankruptcy. A law with more exemption Protection will encourage the commercial credit grantors to be more careful in choosing their credit risks. If the creditor will do this, he will reduce his bad debt losses. This induced care may result in some reduction of overall credit granted, but the reduction will probably be small and will be justified by the decrease in human misery caused by extreme credit problems. Finally, an exemption law can be tailored to encourage the debtor to find a program which will help him to find his way out of a bad financial situation and into a better one.'~ The Judiciary Committee report made no specific proposals. B. Recommendations Wage garnishment should be abolished as a harmful and unnecessary collection device. II a more conservative approach is preferred, the ex- emption should be made adequate and the use of garnishment carefully restricted so as to minimize its undesirable consequences. Specifically: (1) Wage garnishment should not be permitted prior to judgment, that i~, under writs of attachment. Evemi collection agencies agree that garnishment before judgment is unfair.'74 How much the defendant owes and, indeed, whether he owes anything is undetermined until judgment is entered. * (2) After judgment, ninety per cent of earnings should be automati- cally exempt. A debtor in average circumstances needs at least that much of his wages to avoid undue hardship and to stay relatively current on his obligations. The income of debtors varies and it is tempting to scale the exemption to income (for example, one hundred per cent of the first four hundred dollars per month, ninety per cent of the next two hundred dollars and seventy-five per cent of the excess). This is not recommended because such a provision is likely to require frequent revision as the cost o living rises; without revision it will tend to give less and less protection. Also, as already noted, it is more complex to administer and can involve uncertainties of computation; the employers' interests are entitled to con- sideration here. (3) The remaining ten per cent should be garnishable after judgment under the following conditions: (a) No garnishment would be permitted where the underlying indebtedness arose from installment credit, whether 173 Assn~rsay Ixn~ii~r COMM. ON JUDIcIARy, FrNAL REPoRT 50 (Jan. 1965). 174 Note 43 supra. 83-340 0 - 67 - pt. 2 - 35 PAGENO="0546" 1128 CONSUMER CREDIT PROTECTION ACT in the form of a loan or purchase.175 It is the occasional, small creditor-- if anyone-~who might need the garnishment remedy. (b) Garnishment on other obligations could be had only after notice and a hearing. (c) At tlie hearing the court would consider the debtor's financial circum-~ stances as well as the nature of the indebtedness involved. (d) The co~trt would have discretion to order up to (and including) ten per cent of the defendant's earnings applied oa the judgment. This would introduce a desirable measure of fie~ibility into the garnishment i~rocedure. The court would retaii~ jurisdiction and. power to modify its order. (e) An execution levied against earnings pursuant to such an order would remain in ~effect until the judgment is paid. In other words, a single levy would suffice, thereby greatly reducing the expenses involved. Only one such execution would be allowed to he in effect at one time, otherwise the exemption could be defeated. It is anticipated that the recommended changes would reduce the number of garnishments sufficiently so as to obviate the need for pro- hibiting discliarges based on garnishments. However, that would be the case only if the substance of the recommendations were to be enacted. Particularly important is the proposed limitation of garnishment to obli- gations that do not arise from installment credit transactions. Without such a limitation garnishments are likely to continue in substantial num- bers, and serious consideration of steps to provide direct protection against garnishment-caused discharge would be necessary. (4) If it is desired, as the Judiciary Committee report suggests,176 to help debtors work out a program of paying off their debts, provisions similar to the Ohio trusteeship statute could be enacted.'77 However, we should proceed cautiously before putting the State into the debt pooling business. The desirability of trusteeship depends at least in part on whether private facilities are adequate (and, if not, whether the develop- ment of more adequate ones can be encouraged) and whether the Bank- ruptcy Act's chapter 13 proceedings can be made more available to the average person in financial `difficulties. It depends, too, on whether the California courts would welcome such a function-their wholehearted co-operation would be essential-and on whether society is willing to sub- sidize the expense of operating trusteeships to a sufficient extent to en- courage its use. The answers to these questions are debatable. Trustee- ship may merit further thoughtful consideration, but that should not delay moving ahead on the other recommendations. 175 Compare the Delaware and South Carolina provisions, text accompanying notes 36, 37 suprci. These have substantially the same effect and their wording could be adapted for Californi~ use. 176 Note 173 supr& 177 Note 77 su~ra and accompanying text. But see note 103 supra. As to the Michigan conciliation procedure, see note 76 supra and accompanying teat. PAGENO="0547" CONSUMER CREDIT PROTECTION ACT 1129 APPENI)1\ A AMOUN1 Oi~ WAGES LXFMPII 1) 1 RO\1 GA~ NISHMI NT, BY STATFS Alabama 7c%l78 Alaska $350 (eained within 30 days) if married, $200 if single'79 Auzona 50% (30 days)1 0 Arkan~ts 100% (60 days)' ` California 50% (30 days), 100% v~hcre debt not for necessaric~ and needed to sepport debtor's fdmily182 Colorado 70% for heads of families, 35% for single persons'83 Co mecticut 100% fion-i attichment, posi judgment exemption set by couit (minimum $25 per ~ek)'8' Delaware 90% (New Castle County); 60% (Kent and Sussex Counties) 185 District of Columbia 90% of fist $200 per month, 80% of next $300, 50% of balance~ Florida 100%'~t-2 Georgia $3 per thy plus 50% of excess'88 Hawaii 95% of first $100 per month, 90% of next $100, 80% of balance'89 Idaho 50%, 75% where debt not for necessarie~ and needed to support debtor's family (30 days), maximum exemption $100 per month'°° Ill'nois 85% or $45 per ~s eel , whichever is mm e, maximum $200 pet week'9' Indiana $15 per weLL. plus 90% of excess192 Iowa $35 per week for head of family plus $3 for cich de pendent child under 18'~~ 178 ALA CODE tit 7, § 630 (1960) 179ALiSE~ STiI § 09 35 OsO (1962) l8O~i.jj~ Rrv ST~T Ama §~ 12 1594 33 1126 (19.6) 1i~l If the iv~ges plus pcrsonal pro1ert> owned do not exceed $500 for married residents or heads of families or $200 fom single residents A~iK CO'.,T art 9, §~ 1 2, ARK STAT § 30.207 (1962). 182 CAL. CODE Cxv. Paoc. § 690.11. 18i Coao REV STAT § 77 2 4 (1963) 184 CONN. Gaxr. STAT. REV. § 52-361 (Supp. 1964). 185 DEL CODE ANN tit 10 §~ 4913(b) (c) (1953) In New Castle County wages in excess of 90% can only be reached fo n cess'tries S~.e tc'~t at note 36 .suprcm 186 D.C. Coox ANN. § 16-572 (Supp. 1965). 187 Limited to resident be~tds of families l~ia SlAT § 222 11 (1963) A number of states limit the e~.mpcion to resid~nLs or to heads of fanulies or to cases where there is a showing that the portion claimed ete apt is nec ssary for the support of the debtor s family or to combinations of these factors. E.g., Iowa and Kansas, notes 193, 194 ni/re Such Lmitations ill not genual y b no ed 188 GA Cooc Axx § 46 208 (Supp 1963) 189}IA'i~II REV L'i\ s § 237 1 (Supp 1963) 190IDiDO CODE ~%JN § 11 20~(7) (1947) 191 ILL Ri~ STAT § 62 73 (1963) ~or garn.rs'lmcnt procedure see ILL Rmw SrAT § 11-21 (1963). l°2~mn Axx. STAT. § 2-3501 (1946). Thit cf. 1mm. Axx. STAT. § 3-505 (1946); see Pomemoy v Beach 149 Ind 511, 49 1\.E 370 (1898) 193 IowA CODE § 627.10 (1958). No creditor may garnish for more than $150 plus costs. PAGENO="0548" 1130 CONSUMER CREDIT PROTECTION ACT Kansas 90% (3 months); 100% from garnishment by collection agencies~ Kentucky .90% of first $75 per month; maximum $67.50'°~ Louisiana 80~%; minimum $100 per month'°6 Maine $3~ (one month); minimum $10'~ Maryland 75% in some counties; $100 in others'°8 Massachusetts 100% prior to judgment; $50 per week after judgment199 Michigan 100% prior to judgment;20° after judgment 60% for householders having a family, 40% for others, with cer- tain minima and maxima20' Minnesota 50%; 100% (30 days) where necessary* for use of family202 Mississippi $100 for heads of families; $50 for single persons203 Missouri 90% for heads of families204 Montana 50% (45 days); 100% where debt not for necessaries and needed for use of debtor's family201 Nebraska 90% for heads of families206 Nevada 50% (30 days); 100% where debt not for necessaries and needed for use of debtor's family207 New Hampshire $20 per week208 104KAN. GEN. STAT. ANN. § 6O~231O (1964). 193 Ky. REV. STAT. §~ 427.010 (2), (3) (1962). 196LA. Ray. STAT. tit. 13, § 3881 (1964). , 19~Ma. REV. STAT. lit. 14, ch. 501 § 2602(6) (Supp. 1965). 198Mo. ANN. CODE art. 9, §~ 31, 31A, 31B; art. 83, § 8 (Supp, 1965). 199 MAss. GEN. LAWS ch. 246, §~ 28, 32 Eighth (Supp. 1964). 200MIcH. STAT. ANN. § 27A.4011(3) (1962). But see note 55 supra. 201 The Michigan wage exemption is the most complex of any state: Householders Others Percent Dollars Percent Dollars Exempt Max. Mm. Exempt Max. Mm. First garnishment: Wages for one week or less 60% $50 $30 40% $50 $20 Wages for more than one week 60 90 60 40 50 20 Subsequent garnishments: Wages for One week or less 60 30 12 30 20 10 Wages for one week to 16 days 60 60 24 30 20 10 Wages for snore than 16 days 60 60 30 30 20 10 See MIcH. STAT. ANN. §~ 27A.7511 (2), (3), 27A.4031 (1962). Higher amounts may be exempted by the court where the defendant is making support payments. MIcH. STAT. ANN. § 27A.7511(4) (1962). 202M1NN. STAT. ANN. §~ 550.37(13), 575.05 (Supp. 1964). 203 Miss. Coox ANN. § 307 (Tenth) (Supp. 1964). 204Mo REV. STAT. § 525.030 (1949). 205 MON1~. REV. CODES ANN. § 93-5816 (1964). 208NEB REV. STAT. § 25-1558 (1964). 20~Nay REV. STAT. § 21.090(h) (1963). 208 N.H. Rxv. STAT. ANN. § 512:21 II (Supp. 1963). PAGENO="0549" CONSUMER CREDIT PROTECTION ACT 1131 90%; minimum $18 per week209 75% for heads of families210 90%2h1 100% (60 days) where needed for use of debtor's family212 $35 per week or, if head of family, $50 plus $5 for each dependent, but no more than $25, per week213 80% of first $300 per month and 60% of balance for heads of families (minimum $150); $100 (30 days) for others214 75% (90 days); 100% where needed to support family215 $175 (30 days)216 100%217 $3Q218 100% (60 days) where needed for use of debtor's family219 100% (60 days) where needed for use of debtor's family220 $17 per week for head of family plus $2.50 per week for each dependent under 16; $12 per week for others22' (f~%222 50% (30 days); minimum $50 i~f married or head of family223 50% or $25, whichever is less224 75%; minimum $100 per month, maximum $150, for heads of families; for others 50% of the above225 209N.J. Rxv. STAT. §5 2A:17-56, 17-50 (1951). Where the debtor's annual income exceeds $2,500 the exemption may be reduced. N.J. REV. STAT. § 2A: 17-56 (1951). 210 30% if the earnings for the past 30 days are less than $100. N.M. STAT. ANN. § 26-2-27 (1965). 211 No income execution is permitted if the debtor's income is $30 a week or less. N.Y. Cxv. PRAc. LAwS & RULES §5 5231(e), 6202. See Morris Plan Industrial Bank v. Gunning, 295 N.Y. 324, 67 N.E.2d 510 (1946). 212NC GEN. STAT. § 1-362 (1953). 213N.D. Laws 1965, ch. 231, § 1, at 449. 2140uxo Rxv. CODE ANN. §5 2329.66 (F), 2329.62 (C), 2329.69 (Supp. 1964). 215 OKLA. STAT. ANN. tit. 31, §5 1 (16) (Supp. 1964), 4 (Fifth) (1955); tit. 12, §5 850, 851 ~1960). 216 "[Ejxcept that when the debt is incurred for family expenses 50 per cent of such earnings shall be subject to such execution or other process." Oar. Ray. STAT. 5 23.180 (1961). 21742 PA. STAT. fit. 42, § 886 (1930); see Lowe v. Jones, 414 Pa. 466, 200 A.2d 880 (1964); Right Lumber Co. v. Kretchmar, 200 Pa. Super. 335, 189 A.2d 302 (1963). 218R1 GEN. LAWS ANN. § 9-26-4 (12c) (1956). 219 S.C. Coor § 10-1731 (1962). But see text at note 37 supra. 220 S.D. CODE § 33.2404 (Supp. 1960). Total exemption is apparently limited to $1,500. 221 TERN. CODE ANN. §5 26-207, 208, 209 (Supp. 1965). 222 Tax. CONST. art. 16, § 28. 223 UTAH Coox ANN., § 78-23-1 (7) (1953); UTAH Rxv. Civ. PROC. rule 64c (a) (1953). 224VT. STAT. ANN. fit. 12, § 3020(5) (1958). 225 VA. CODE Ax~N. § 34-29 (Supp. 1964). The section adjusts the maxima and minima according to whether the debtor is paid weekly, biweekly, semimonthly or monthly. The New jersey New Mexico New York North Carolina North Dakota Ohio Oklahoma Oregon Pennsylvaria Rhode Island South Carolina South Dakota Tennessee Texas Utah Vermont Virginia PAGENO="0550" 1132 CONSUMER CREDIT PROTECTION ACT Washington West Virginia Wisconsin Wyoming $35 per week and $5 for each dependent; maximum $50 per week, for persons who have families dependent on them; $25 per week for others226 80%; minimum $20 per week227 60% (30 days) with certain minima and maxima228 50% (60 days)229 APPENDIX B TYPE AND FREQUENCY OF ATTACHMENT AND EXECUTION LEVIES IN 100 MUNICIPAL COURT CASES Thirty-one of the cases resulted in levies of writs of attachment or execution; there were attachments in 17, execution in 21. (The total exceeds 31 because in several cases there were both attachments and executions.) Altogether these cases produced a total of 68 levies, at least 47 of them wage garnishments (with respect to some levies the file did not disclose whether it was a levy on wages or other property.) The follows: types and frequency of levies may be summarized as Type of Property Levied on Atta No. of cases chment No. of levies Execut No. of cases ion230 No. of levies Totals Levies Wages 7 8 13 39 47 Bank accounts 4 4 5 5 9 Cars or trucks 1 1 1 2 3 Other personal prop- erty and debts 1 2 0 0 2 Real property 1 1 1 1 2 * IJxiknown 3 3 2 2 5 TOTALS 17 19 22* 49 68 * In one Case there were both wage levies and exceeds by one the figure previously given. a levy on realty. Hence this total In five cases both writs of attachment and execution were used for wage levies. Thus, the total number of cases in which wage levies pursuant to either type of writ were made is 15. The above figures are conservative since the files do not always fully refie~t all writs issued and levied. section also makes it clear the 25% which may be garnished is 25% of the wages between the minimum and the maximum; therefore, the exemption is more accurately stated as $100 per month pIus 75% of the next $50. The Virginia provision illustrates the problems that arise when dollar figures are used in exemption statutes: The section was amended in 1952, 1954, 1958, and 1960 in an effort to update the minima and maxima; it is still woefully out of date. 226 WASH Ray. Coax § 732.280 (1964). 227W. VA. Coax § 3834(3) (1961). West Virginia uses the term "suggest execution" for post-judgment wage levies. W. VA. Coax § 3834(1) (1961). 228W~ ~TAT. ANN. § 272.18 (15) (1958). 229 \Vyo. STAT. ANN. § 1-422 (1957). 230 Includes wage levies pursuant to California Code of Civil Procedure § 710, which provides a procedure similar to execution for reaching the pay of employees of the state and its po~itical subdivisions. PAGENO="0551" CONSUMER CREDIT PROTECTION ACT 1133 (Hon. Frank Aimunzio, member of the Subcommittee on Consumer Affairs, submitted the following study of credit litigation in the Circuit Court of Cook County for inclusion in the record:) CITY OF CHICAGO, DEPARTMENT OF LAW. Hon. RICHARD J. DALEY, Mayor of Chicago, City Hall, Chicago, Ill. Hon. JOHN S. BOYLE, Chief Judge of the Circuit Court or Cook County, Chicago Civic Center, Chicago, Ill. DEAR MAYOR DALEY AND CHIEF JUDGE BOYLE: I am pleased to submit to you a study of credit litigation in the Circuit Court of Cook County. This study should be helpful in understanding current credit practices, in analysing court pro- cedures, and in framing and evaluating proposed legislation. I would like to thank each of you for the wonderful cooperation I have received from you in this and in other endeavors. I would also like to thank the Court personnel and Corporation Counsel Simon and his staff. Specifically my thanks are due to the following people for their assistance in the arduous work of collecting, tabulating, and analysing the material used in this report: Allan Nathan, Ann Lousin, and La Donna Tittle. Very truly yours, JEROME SCHUR, E~peciai Assistant to Chief Judge Boyle for Consumer Credit. A STUDY OF CONSUMER CREDIT LITIGATION It is believed that this study is the first Intensive analysis of consumer credit litigation undertaken in a major metropolitan center. SCOPE OF STUDY The study included every confession of judgment complaint filed in the Municipal Division of the Circuit Court of Cook County for the two week period from June 20, 1966 through July 1, 1966, inclusive. This period was chosen at random. The total number of suits studied was 1305. This caseload is about average for the first months of 1966, since confession suits were filed at a rate of 646 per week through June 30, 1966. In the suits studied, the total amount claimed for principal, interest, and at- torney's fees was $848,338.44, of which $743,970.15 was principal. DEFINITION OF TERMS The suits studied were all confession of judgment suits. This means that each suit was based upon a note or contract containing a confession of judgment clause similar to the following: "I hereby irrevocably appoint any attorney of any court of record attorney for me and in my name from time to time to waive the issuance of process and service thereof, to waive trial by jury, to confess judgment in favor of seller his heirs or assigns, and against me for the amount which may be then due by virtue of the terms hereof together with costs and reasonable at- torney's fees and to waive and release all errors which may intervene in such proceeding, hereby ratifying and confirming all that said attorney may do by virtue hereof". Such a clause appears in almost every contract, lease or mortgage executed in Cook County. Since there is no notice of filing to the defendant, the study is based solely on the complaint and accompanying documents filed by the plaintiff. Unless there is some gross irregularity, judgment is normally entered for the plaintiff as a matter of course. In confession suits the plaintiff is asked to state the principal amount claimed, which is the amount still owing on the debt. Interest and attorney's fees are normally provided for in the confession instrument and are often included in the judgment. Court costs are also added to the judgment, but are not itemized in the complaint and were not included in the study. PAGENO="0552" 1134 CONSUMER CREDIT PROTECTION ACT To compare finance charges. the standard of simple annual interest (SAT) was chosen. There are many ways of computing simple annual interest. The method used here was to compute the stated finance charge as a percentage of the principal balance unpaid at the time of the purchase. This percentage was then doubled in all cases where repayment of the amount due was to be made in equal periodic installments. For example, if $100 were borrowed and $120 were repaid in a sinigle payment, at the end of the year this would be considered 20% simple interest. However, if $100 were borrowed to be repaid with interest in twelve monthly installments of $10 each, this would be considered double the previous amoufit or 40% simple interest, since the borrower does not have the use of the principal borrowed for the full year term. Where the prospective period of repayment was more or less than one year, an appropriate adjustment was made to obtain simple annual interest. - NATURE OF OBLIGATION Here is a description of the types of transactions which gave rise to these suits: Nature of obligation Number of suits Principal claimed Used carpurchase 164 Radio, TV, hi.fi 117 Loans by loan company 103 Furniture and rugs 100 Leases 86 Clothing 82 Financing of insurance premiums 80 New car purchase 50 Attorney's fees 47 Business deals 46 Loans by credit unions 44 Jewelry 34 Loans by individuals 32 Real estate, improvements, and purchase 31 Wigs 23 Loans by banks.~.. 2~ Other appliances 20 Health club enrollm~nt 1? Medical bills 17 Modeling and trade school tuition 14 Bonds 13 Automobile miscellaneous (repair, loan, or accessory purchase) 13 Furniture covers 12 Employment service 9 Pots and pans 8 Debt consolidators 7 $121,114.00 26, 199. 00 93,884.00 34, 361.00 43, 874. 00 9,625. 00 7,328. 00 55,635.00 18, 726. 00 94, 829. 00 13,077. 00 4,722.00 33, 540. 00 36, 780.00 3,223. 00 31,902.00 5, 952. 00 4,628. 00 4, 701. 00 3, 842. 00 3,287.00 4,008. 00 1,353.00 852. 00 1, 146. 00 473.00 Whirlpool bath attachments 5 Musical instruments 5 Not identified, including refinancing of earlier transactions 87 Miscellaneous including utility, food freezer plan, chinaware, swimming pool, ency- clopedia, coal, food, meat, department store, etc 17 1, 604. 00 3, 382. 00 70, 215. 00 8, 514. 00 Total 1,305 743,970.15 IDENTITY OF PLAINTIFF The identity of the plaintiffs is shown by Table No. 1. The significance of this table relates to the legal doctrine of negotiability. Most defenses which a pur- chaser could raise against a suit for the price brought by the original seller (e.g. that the property purchased is defective) may not be raised against a "holder in due course" who has purchased the contract or other negotiable instrument. Legislation passed the House of Representatives in the last session of the General Assembly providing that a holder in due course would be reç~uired to notify the original purchaser before these defenses could be cut off. The study indicates that a substantial number of sellers in certain areas, e.g. clothing, do not sell their accouats to finance companies. The stud~ would also indicate that banks are a dominant factor in the financing of new care and a substantial factor in the financing of used automobiles. PAGENO="0553" CONSUMER CREDIT PROTECTION ACT 1135 FINANCE CHARGES While Illinois regulates interest payments, there is no legal limit to finance charges. Our courts have followed the "time sale price doctrine," holding that a dealer can charge any time sale price he wants, and that it need have no relation to the cash sale price. At the levels shown by Table No. 2, finance charges are probably considerably higher than most people believe. These charges were figured only in cases where a retail installment sales contract was attached to the complaint. It should be noted that many installment credit sales are made outside the purview of the Retail Installment Sales Act. (See later section on use of retail installment sales contracts). It is noteworthy that the average finance rate for clothing and particularly for pots and pans is relatively low. The explanation for this would appear to be that the finance charge is added into the cash price. Thus, the purchaser is overcharged, but he is everpaying because of an inflated cash price. It would be fair to speculate that if finance charges are regulated by the legislature, many unscrupulous credit sellers will merely inflate the cash price to continue their present profit margin. The finance charges disclosed by these suits ~bould be compared to the prime interest rate, the rate at which the most sought after bor- rower may obtain bank money. Prime rate is now approximately 6% simple annual interest. Illinois does require disclosure of the dollar amount of finance charges in all transactions under the Retail Installment Sales Act. However, the study shows that many purchasers apparently do not shop for credit. The wide variation of finance rates imposed would seem to indicate a break down of the theoretical concept of a competitive market place. Given such a theoretical market and given a sophisticated purchaser capable of making an intelligent choice, it is difficult to see why anyone would pay some of the rates found here, such as 283%, 144%, 104%, 155%, and 135% (all for used cars). As noted above, all finance rates are converted into simple annual interest. The most dangerous deals for the purchaser are generally the short-term deals. The highest annual percentage rates obtain where the debt is to be repaid In less than a year. PRINCIPAL AMOUNT CLAIMED The principal amounts claimed in the studied suits are tabulated in Table No. 3. The number of suits, 53 (6.7%) in which the principal claimed is under $50 is of significance. This indicates the ease with which creditors gain access to the courts. Since the Ohioago Bar Association recommends a minimum fee of $30.00 per hour for attorneys, a suit for a sum of under $50M0 would be puzzling in any single ease. However, a volume plaintiff may easily secure counsel in such cases. On the other hand, when a defendant wishes to engage an attorney to protect himself from such a claim, he immediately finds that payment of fair legal fees for defense of the individual suit is normally not feasible since the amount in dispute is small. 65.5% of these suits were brought for a principal amount of less than $400.00. Most attorneys would either avoid getting involved in such a suit, or would be disposed to enter into a settlement, since the legal costs for a full trial would be entirely disproportionate to the dollar amount in dispute. As a consequence, defendants are poorly represented in these suits. The eases in which there is a good defense are therefore almost never appealed, and, un- fortunately, appeal is the only method of obtaining debtor-oriented case law. Knowing this, creditors tend to be aggressive, even with dubious cases, their attitude is often, "prove me wrong." NUMBER OF SIGNERS The use of co-signers is widespread where the seller feel's that the credit stand- ing of the principal purchaser is too poor to justify the sale. There is no legis~ lation in Illinois to protect or warn co-signers. A creditor may proceed against a co-signer before exbausting or even attempting any remedy against the prim cipal purchaser. Legislation to warn eo-stgiiers of their possible liability passed the House, but was defeated in the Senate during the last session of the legis- lature. Oredit unions and automobile dealers were the chief users of co-signers, according to the results of the study. Much attention has been given to the sug- gestion that certain types of contracts be made unenforceable unless they are PAGENO="0554" 1136 CONSUMER CREDIT PROTECTION ACT signed by both spouses. In this connection Table No. 4 shows a significant per- centage of contracts co-signed by the spouse in some areas. INSURANCE PREMIUMS A substantial amount of litigation is based upon contracts for the financing of automobile lthbfflty insurance. Approximately 2500 such suits were filed in the Municipal Divi~ion in 1965. During the period under study, 80 such suits were filed. The total ~rincipa1 claimed for the studied suits was $7,328.48. To this sum, $1,556.96 in attorney's fees and interest was added (an additional 21%). There is no statutory regulation of the financing of automobile insurance premiums. Consequently, there are great fluctuations from suit to suit as to down payments required and finance or service charge exacted. The average finance or service charge for all such suits was 15.8%. The average charge in those suits where a finance charge was made (i. e. excluding those which did not expressly state any charge) was 32.4%. The highest finance charge made was 97% simple annual Interest. In 24 of the 80 suits a down payment was required, the average down pay- ment being 13.8% of the cash premium. The average down payment for all suits including those where the insured merely signed a contract and did not pay anything was 4.1%. In 28 of thesO suits the principal claimed was $49 or under. In 44 of these suits it was between $50 and $100. The insurance is almost always placed with a marginal insurance company. (Generally the company is a mutual, and in the event of liquidation of the company, an assessment will be made against the insured.) When the insured misses a payment, or when the policy is canceled for other reasons, the payment schedule is such that the insured still owes money. Then suits such as these are brought. Because such contracts are not regulated, they are often filled out in a manner whieh gives the purchaser a minimum of information. For instance, 12 of the contracts did not describe the policy being purchased! 9 of the contracts had other blanks which were not filled in. Other important information which was not stated in some of the contracts was: the number of payments, the amount of each payment, the address of the purchaser (important if notice of cancel- lation of the iusurance policy is to be given), schedule of payments, address of insurance agency-seller. The State Director of Insurance has prepared legislation which would allow him to regulate contracts for the financing of insurance premiums. Such regula- tion is urgently needed. Until some governmental protection is provided, people will be buying undisclosed amounts of insurance with undisclosed insurance carriers and will be paying finance charges which range from zero to exorbitant, depending, apparently, only on how fast the salesman can talk. NEW CARS New and u~ed car purchases accounted for a substantial portion of the studied litigation. Sp4~cial payments were required by the seller in 14 of the 50 or 28% of the new car purchases. A special payment is one made after the down pay- ment and in addition to the regularly scheduled monthly payments. The sig- nificance of the special payment is that the dealer is apparently dissatisfied with the amount of the down payment, but the purchaser is financially unable to in- crease the down payment at the time of sale; therefore, the extra or special payment is agreed upon. This puts an additional burden on the purchaser during the first month or two of the contract when the special payments are required. Many automobile contract forms have a blank for the amount and due date of these special payments. In an automobile purchase, the Retail Installment Sales Act permits the dealer to state the combined cost of insurance and finance charges as a singled gross sum. Such contracts were segregated in our study and the costs attributable to insurance were approximated assuming the car to be an Oldsmobile or its equivalent. `Eaking the suits where finance charges were separately stated, the highest finance rate for a new automobile was 22.2% and the average rate was 12.6% simple annual interest. The highest rate for all suits including those where finance charges and insurance premiums were combined was 24.5% and the average was 13.1% simple annual interest. Thus, there were extreme differences between new car and used car finance rates (see below). PAGENO="0555" CONSUMER CREDIT PROTECTION ACT 1137 Th highest down payment for a new car was 27.6% of the cash price and the average down payment in suits where the~ information was given was 15.6%. There was no down payment in 2 of the 50 new car suits and other down payments were 4.8%, 5% and 6% of the cash price. In 11 purchases the down payment was 10% of the cash price or less. In 22 purchases the down payment was between 10% and 20% and in the balance be- tween 20% and 30% of the cash price. Every new car contract ran for 36 months. In general, contracts for new cars are carefully filled out. This may be because of the substantial value of each transaction. However, in this group 2 contracts did not state the time sale price which would constitute a violation of the Retail Installment Sales Act. One contract did not state whether the car was new or used. In one contract $794.34 was charged for a 12 month insurance policy which is stated to include collision insurance ($100.00 deductible), credit life, and health and accident. This is apparently a gross overcharge. In another contract the charge for insurance-collision ($100.00 deductible), credit life, and health and accident-- was $978.00 for three years. Thus the annual rate was $326,000 per year, a star- tling high rate for the protection purchased. USED CAES The 104 used car suits were studied as a group with no classification as to the age of the car. The highest finance rate found was 283% simple annual Interest. The average was 30.7%. These figures include instances where insurance and finance charges were lumped together, but the approximate cost of the insurance was deducted before arriving at a finance rate. Taking those contracts where in- surance was not included with the finance charge, the average finance rate was 27.9% simple annual interest. In 5 of the suits, the finance charge rate exceeded 100% simple annual interest. In 24 of the suits (about 1 cut of 7) the rate was between 50 and 100%. Of course, exorbitant finance charges are only one way of consummating an unfair transaction. In one suit an eight-year-old Mercury was sold without finance charges, but the selling price was $832.00. The actual cash value of such a car is probably nil. Examples of other contracts where the cash sale price appeared to exceed the market value were: A five year old Chevrolet priced at $1128.25; a five year old Rambler priced at $1138.80; a seven year old Oldsmobile priced at $728.00; an eleven year old Mercury, $395.00. The highest down payment on a used car amounted to 48% of the cash price and the average for those suits where some down payment was made was 21.4%. The principal amount claimed in the suits was compared to the original cash price of the used cars. The lowest suit was brought i~or 5% of the cash price, the highest was brought for 142% and the average was for 55% of the cash price. It should be borne in mind that the usual automobile suit is brought after repossession and resale of the car. Proceeds of the repossession sale are to be credited to the purchaser. However, there is no way of determining from court documents whether there was repossession or the amount realized from a repos- session sale. These figures mean that after the down payment, monthly payments, and repossession sale proceeds have been credited to the car buyer, the average buyer still owes 55% of the cash price. In other words, he has paid only the finance charges and 45% of the cash sale price. These figures imply that the amounts realized at repossession sales are extremely slight. While a new car depreciates sharply and automatically after purchase, the same should not be true of a used car. Statistics regarding amounts realized at repossession sales, compared to original purchase price, are in the sole possession of the banks and the finance companies and are not obtainable from court files. The contracts attached to these complaints contained a number of defects including mathematical errors; 4 of the contracts -were filled out in different colored ink giving rise to the suspicion that changes were made in the contract after the purchaser signed. A. number of these contracts contained violations of the Retail Installment Sales Act: ten contained omission or misstatement of the time sale price (down PAGENO="0556" 1138 CONSUMER CREDIT PROTECTION ACT payment plus time balance); three omitted the amount of the monthly pay- ments; three omitted the finance charges; one omitted the number of payments; and one omitted the time balance. USE OF RETAIL INSTALLMENT SALES CONTRACTS The Retail Ii~stallment Sales Act of 1957 provides' the chief statutory protec- tion for Illinois consumers. It is largely a disclosure act requiring the itemiza- tion of certain information such as the cash price, down payment, finance charge, time balazice, etc. The Act applies only to contracts in which the time sale price is payable in installments and in which the seller retains title to the commodity. Since both these requirements must be met in order to be subject to the Act, a seller who surrenders his full interest in title at the time of sale need not comply with the Act. Thu~s free from its regulations, he need not itemize the down payment, finance charge, cash price, etc., nor need he' give the purchaser a completely filled-in c'ontraç~t or follow the other requirements of the Act such as giving a rebate of finance charges in the event of prepayment. On the othei~ hand, if a seller wishes to retain the right to repossession, he must retain the title. While repossession, or the threat of repossession, is often a collection todi its theoretical purpose is to provide a source of funds for repay- ment of the debt. Consequently, retail installment contracts would be most used in connection with the sale of "hard goods" which might be repossessed, for example, automobiles. It is curious that 25% of the clothing sales were based on such contracts, since repossession of clothing is unlikely to yield significant income to the seller. Most clothing installment sales are made by a simple judgment note with title passing immediately to the purchaser. Such sales are then beyond the protection of the Act. Some sellers ask the purchaser to sign both a retail installment sales contract and a judgment note. They then file suit based solely upon the note, keeping the contract in their file. Since my appointment, I have requested attorneys to attach the contract to the complaint if one was signed, so it is believed that these figures are substantially accurate. Table No. 5 describes the use of retail install- ment sales contracts. INTERIM BETWEEN DATE OF CONTRACT' AND DATE OF FILING The study also examined the period of time between the date when the con- tract was signed and the date when the suit was filed. A summary of this infor- mation is given in Table No. 6. The twelve suits which were filed within two months after the contract was signed did seem to indicate great haste. Types of sales where the majority of suits signed were filed within one year include employment service, insurance premiums, modeling and trade schools, wigs, jewelry, furniture covers, and debt poolers. The shortest period found between the date of the contract and the filing of suit was seveli days. (One suit was brought before the first payment was due.) MISCELLANEOUS ITEMS OF INTEREST 1. Wigs. As noted above, there were 23 suits based on purchases of wigs. The average price of these wigs was $166.45. 2. Attorney's fees. Attorneys occasionally ask a client who is unable to pay their fee in cash to sign a judgment note. There is no description of the type of legal services granted in the note, but a substantial percentage of the suits filed in this category appear to be for attorneys fees incurred in handling bankruptcies. 3. TV. 41 of the 117 television sets were identified in the contract as used or reconditioned. The average cash price of the used sets was $173.72. 52 of the 117 radio, TV, and hi fi suits were brought by a single seller located in the 4300 block on West Madison. This same seller is also the defendant in a suit brought by the attorney general because of over charges for TV repairs. An identification of the location of TV sellers who filed these suits discloses there were 55 in postal zone 44, 8 in (postal) zone 24, 5 in (postal) zone 12, 4 in zone 22, and 3 in zone 10. 4. Lease With Blanks. There were many instances of contracts or notes signed In blank, including one lease which did not state the address of the apartment to be rented. PAGENO="0557" CONSUMER CREDIT PROTECTION ACT 1139 5. Defen4ant~' Attorney& In many cases the plaintiff's attorney and the at- torney who confessed judgment for the defendant have the same address and phone number. This is not clearly illegal. RESIDENCE OF DEFENDANTS The suits were studied to determine the residence of the defendants. This in- formation was obtained from the contract, if stated there. If not stated there, reference was made to the summons or military affidavit. In some suits no street address was given on any of these documents. All suburban residents were ar- bitrarily excluded from this analysis. For ease of analysis, the defendants were grouped according to postal zone. A map appended to this report shows the areas of concentration of these defend- ants. Since our concern was primarily with consumer credit, we did not consider business deals, leases, and other real estate transactions in drawing this map. The map shows a contiguous inner belt of serious credit over-e~tension. While some types of obligations, such as health club contracts, do not appear to fol- low the overall pattern, most types of obligation do. Of the 50 postal zones in Chicago, zone number 24 had the heaviest concentra- tion of defendants, 87, which was l0.G% of the entire total. This zone is on the West Side and was the site of some disorders this summer. Table No. 7 lists zones by the order of density of defendants. IRREQULARITIES IN SUITS The technical aspects of filing a confession suit were also examined with these findings: Number Plaintiff's Attorney: of suits No signature (name typed) 314 Facsimile signature by rubber stamp 59 No address for plaintiff's attorney 6 Name of plaintiff stamped in place of plaintiff's attorney 1, There is no requirement that a complaint be signed by an attorney, but this is the usual practice in other types of cases. The failure to sign and the use of stamps perhaps indicates that in the high-volume collection practices there is an assembly line technique which stresses speed rather than exactness. Number Plaintiff's attorneys fees and interest: of suits Interest claimed higher than allowable 5 Attorney's fees claimed in suit, but not allowed by contract 5 Attorney's fees claimed exceed court schedule of allowable fees 4 Notary (confession suits must be filed under oath) Not notarized 25 Not signed, but a blank line was notarized anyway 5 Stamped signature notarized 1 Miscellaneous defect 1 Number Defendant: of suits No signature by defendant's attorney 42 No address for defendant's attorney 24 Name of defendant in suit differs from signature on contract 19 Defendant sued under another name (also known as) 4 Stamped facsimile signature 10 Miscellaneous: Contract not assigned to plaintiff 4 No military affidavit 3 No clause allowing confession 1 These suit deficiencies should be viewed in the light of the usual confession clause under which the defendant waives and releases all errors in the proceed- ing. As a consequence, if the court does not discover the defect in the suit before judgment, the judgment stands. This puts a heavy burden on the court to ex- amine carefully over 600 confession suits per week. PAGENO="0558" 1140 CONSUMER CREDIT PROTECTION ACT COMPLIANCE WITH RETAIL INSTALLMENT SALES ACT AND OTHER LAWS The retail inStallment sales contracts which were attached to the complaints, were carefully scrutinized. These departures from the strict terms of the Retail Installment Sali~s Act of 1957 were found: Purchased goods not clearly described 15 Principal balance not stated 8 Time balance not stated 9 Amount of each payment not stated Time sale price not stated 40 Number of payments not stated 20 No blank in printed contract form for number of installments 9 Schedule of payments blank or illegible 7 Due date for first payment not stated 3 Miscellaneous defects 9 The above fIgures contain some duplication, but they do indicate a considerable number of contracts which disregard the Retail Installment Sales Act. That Act has both civil and criminal penalties, but its observance by many credit sellers leaves much to be desired. Many of the contracts sued on were not within the purview of the Retail Installment Sales Act. Departures from sound business practice which may or may not affect the legality of the contract were noted. For instance, in 10 of the contracts addresses for the buyers or sellers were not stated. 8 contracts were undated. In 4 contracts the number of payments multiplied by the amount of each payment, equalled a sum in excess of the balance due. In 7 there were other mathematical errors. In 29 cases, there were blanks found in the judgment note where the suit was based upon a note rather than a retail installment contract. There were other findings which might give rise to the suspicion that contracts were altered Or alterable. In 34 cases the contract was completed in more than one color ink. In 4 cases the contract was completed with both print and script. In 26 cases, the contract was filled out in pencil. CONCLUSION No specific recommendations are made in this report. My purpose was to re- duce to useable form some of the mass of information available from court rec- ords. In some instances merely setting forth the facts gives voice to a clear and compelling call for action. In other instances, a subsequent report will set forth my specific recommendations. Respectfully submitted. JEROME SCHUR, special Assist ant to Chief Judge Boyle for Consumer Credit. TABLE i-IDENTITY OF PLAiNTIFFS Type of suit Plaintiff Bank-holder or assignee Original seller Finance corn- pany-holder Used car 41 71 40 New car 3 18 29 Radio, TV hi-fl Other appliances Furniture and rugs Furniture cover_ 48 14 67 10 68 6 27 3 Clothing Jewelry Wigs Health club 73 28 20 17 4 2 2 Modeling school Pots and pans Insurance premiums Employment service Debt consolidators * 11 7 34 9 7 2 2 45 Total 389 256 69 PAGENO="0559" CONSUMER CREDIT PROTECTION ACT 1141 TABLE 2.-FINANCE CHARGES, SIMPLE ANNUAL INTEREST RATE Average percent, SAl Average percent-SAl Type of transaction Highest percent-SAl (all suits) (only suits charging finance charges) Used car 283. 9 30. 7 36. 0 New car 24.5 13.1 13.1 Radio, TV, hi-fl 235. 0 37. 1 43. 4 Furniture 105.2 23.0 30.5 Clothing 199.6 16.9 72.2 Jewelry 46.2 11.5 28.0 Wigs 38. 4 8. 7 33. 6 Other appliances 57. 6 26. 0 26. 0 Furniture covers 50.0 31.2 41.6 Pots and pans 25.6 4.8 19.5 PAGENO="0560" 1142 CONSUMER CREDIT PROTECTION ACT ~ C~4Lfl 0)0)0)00)0)0)0) 0)0)00)0)0) 0O 000000)- 0)0)0)0)0)0) C~J C~3 0)0)0)0) oo - o ~ c~ ono o 0) oo~ ° *~J 2o ~ C.) 0) ~ ~ `4 2 (F) ~ -~ ~-o ~ ~ - ~C*.40 OOcF)0 0) oO~ - o o~ `4 0) 2 2 °` ~" a'"' ~ C~J0) - c0~JL~ 0) ~ C) - C) 00) C~J C0)~ 00) C~4~ C'4'~ (~J C'J z no'~-~~ C~J 2 `4 0)00)0)000)0') C')0)~ - .-~-o~ C') 0000 C~) 20) - 044 - 00 OOC%JC'~0 U) ~oc~ 00) O~ 0') HHH~MWH I-. ~ ~,I! I~ 0 0 ~ ~0 ~ - PAGENO="0561" CONSUMER CREDIT PROTECTION ACT 1143 TABLE 4-NUMBER OF SIGNERS ON CONTRACT Number of signers Percent Order by Type of suit with Percent percent of 1 2 3 4 Spouse cosigner cosigned contracts other than by spouse cosigned spouse by spouse Used car 109 16 4 3 32 14.0 19.5 8 New car 35 1 2 2 10 10.0 20.0 7 Radio, TV, hi-fl 95 5 15 43 13.0 10 Furniture 56 8 32 8.3 33,3 4 Clothing 70 5 6.5 2.6 11 Jewelry 27 3 2 10.0 0 13 Loan by loancompany 44 5 2 48 7.1 48.5 2 Loan bycreditunion 34 5 3 1 18.6 2.3 12 Loan by bank 11 1 11 4.3 47.8 3 Other appliances 15 1 4 5. 0 20.0 6 Potsand pans 3 5 0 62.5 1 Furniture covers 9 3 0 25. 0 5 Wigs 19 3 0 13.6 9 TABLE 5.-USE OF RETAIL INSTALLMENT SALES CONTRACTS Number using Number not Percent using contract usingcontract contract New car 48 2 96.0 Radio, TV, hi-fl 111 4 96. 5 Furniture 78 18 81.3 Clothing 19 57 25.0 Jewelry 16 14 53.3 Wigs 10 12 45.5 Other appliances 19 1 95. 0 Used car 133 17 88.7 Furniture covers 9 3 75.0 Pots and pans 7 1 87. 5 Note: Cases considered to be using contracts include instances where both a contract and a separable note were used TABLE 6.-INTERIM BETWEEN DATE OF CONTRACT AND DATE SUIT FILED BY NUMBER OF MONTHS Number of suits Type of suit Less than 2 2 to 6 7 to 12 13 to 24 25 to 36 37 Newcar 0 3 13 21 6 6 Used car 1 23 37 53 22 24 Furniture and rugs Furniture covers 1 6 24 22 0 7 1 4 22 22 10 0 Radio, TV, hifl 1 13 28 33 Other appliances 0 2 6 8 Clothing 2 15 13 26 Jewelry 0 10 10 8 Wigs 0 2 12 9 Potsand pans 0 2 2 3 Loan by loan company 1 4 25 20 Loan bycreditunion 0 4 16 9 Loan by bank 1 1 9 6 Health club 0 2 7 8 15 21 2 1 2 15 3 3 0 0 2 0 19 33 5 8 1 4 0 0 Model and trade school 3 4 6 1 0 0 Employment service 0 5 3 Debt poolers 0 0 4 Insurance premium 2 29 41 0 3 4 1 0 1 0 0 1 83-340 0-67-pt. 2-3~ PAGENO="0562" 1144 CONSUMER CREDIT PROTECTION ACT TABLE 7-POSTAL ZONES IN ORDER OF CONCENTRATION OF DEFENDANTS Number of Postal zone resident defendants Postal zone Number of resident defendants 24 90 23 78 37 76 53 57 12 55 21 54 15 37 19 36 49 27 22 24 9 23 20 21 47 21 10 20 40 19 8 18 36 17 57 16 13 15 14 15 28 15 18 13 25 12 44 12 12 11 10 10 9 9 8 8 7 32 16 26 43 51 45 17 29 39 34 30 27 41 38 56 11 46 52 55 - 58 50 35 PAGENO="0563" r5~ 48 0. 46 45 26\ 31 Bryn Ma~ ~ ~y%.Mawr ..7.~th. St. Number of Defendants ~th ~ 0.10 ~ 11.20 : .L_... 43 . . .. :do~: ~ J 817 cases analysed i~:III~ii-~ ~ ~ CONSUMER CREDIT PROTECTION ACT 1145 RESIDENCE OF CONEUMFE CREDITfiEFENDANTS BY POSTAL ZONE (All suits except leases, business deals, and real estate transactions) * 156 * .130 ~ 1~' PAGENO="0564" 1146 CONSUMER CREDIT PROTECTION ACT (Hon. Abraham J. Multer, ranking member of the Committee on Banking and Currency and sponsor of H.R. 11806, submitted the fol- lowing article from the September 1967 issue of Consumer Reports magazine, published by Consumers Union, Inc., for inclusion in the record of the hearings.) [From Consumer Reports, Mount Vernon, N.Y., September 1967] THE BIG HOLE IN TRUTH-IN-LENDING The bill passed by the ~Senate would allow comparative costs of revolving credit to remain obscure; other weaknesses in the bill are small by comparison Senate passage of the Truth-in-Lending Bill last July represented a 92-to-0 vote of confidetice in the ability of consumers to shop wisely for credit when given the essential facts. Those facts concern the true price of money, whether borrowed directly from a lending institution or indirectly through the purchase of goods and services on the installment plan. Except in the realm of consumer credit, the price of money is everywhere expressed as an annual interest rate-the percent of principal the borrower must pay for a year's use of someone else's money. Truth-in-Lending legisla- tion would simply give consumers the same information that has always formed the basis for nonconsumer borrowing. For the first time in the history of this buy-now-pay-later economy, consumers would be able to make accurate price comparisons 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. THE RELATIVE TRUTH The marked differential between the true annual interest rate and the actual number of dollars charged per $100 of initial installment credit has long been a source of hopeless confusion. A "price" of $6 for $100 of credit, to be repaid in 12 monthly installments, is not equivalent to an annual interest rate of 6%. I~ would be 6% if you kept the whole $100 for a full year and repaid it in one lump sum. But you usually repay it in regular installments, and thereby lose the use of a progressively larger fraction of $100 during the year. The true annual installment interest rate is thus usually about twice the dollars-per-hubdred figure. If you borrow $100 for one year and pay back $106 in equal monthly installments, the true annual rate is not 6% but 10.9%. If you borrow $100, immediately pay $6 interest, and pay off $100 in one year's installations, the rate is 11.6%. Defining the annual interest rate on consumer credit is the Senate's major contribution to truth in lending. Truth, in lending as in everything else, is rela- tive, and writing the definition of true annual interest has not been an easy exer- cise in standards-making. Several different ways of calculating installment interest rates have been in common use. Each produces a somewhat different rate from the same set of terms, because each makes a different assumption about how the interest is being paid. For example, does all the interest come out of the first payment? Does it all come out of the final payment? Is it divided equally among all payments? Is it a decreasing portion of each payment? In recent editions of the Buying Guide Issue of CONSUMER REPORTS, we have published an equation for calculating annual interest. It is based on the con- stant-ratio n~ethod-each payment is assumed to consist of a fixed portion of interest and principal, equaling the total of each divided by the number of installments. Most credit sellers, it tui~ns out, use another method giving slightly different rates. It is a decreasing-interest method, which applies the interest rate each month to the unpaid balance. This method has been explained simply and clearly in the "Financial Rate Translater," a publication of rate tables for use by the credit industry: "Traditionally the return on money invested is stated as an annual interest rate on the funds actually in use. For monthly payment loans the interest rate per month is i/12 of the annual interest rate. In these tables we shall call this annual interest rate the actuarial rate. It is exactly the same rate you talk about for a G.I. mortgage, or an FHA mortgage or any other direct reduction loan. The actuarial rate ecopresses the true return on an investment; any other is at best an approccinvation." PAGENO="0565" CONSUMER CREDIT PROTECTION ACT 1147 The last sentence, which we have emphasized, tells the story. From the con- sumer's view, the lender's true (gross) return equals the true annual interest rate. The Senate has taken its definition straight from the horse's mouth. Its draft of the bill calls for use of the actuarial method, and would instruct the Federal Reserve Board to describe methods for computing actuarial interest rates for almost any conceivable installment credit arrangement now in common use. Credit contracts would have to state, additionally, the rest of the payment terms: the purchase price, the size of the down payment, the balance to be financed as a loan, the number, size and frequency of payments and the total finance charge. Some states already require disclosure of some or all of those items. Only one, Massachusetts, requires disclosure of the annual interest rate (as figured by the constant-ratio method). There is every indication that the House of Representatives will also pass a Truth-in-Lending Bill this session. House hearings were scheduled for August on a bill much more sweeping in scope than the Senate's. President Johnson will almost certainly sign the bill that emerges from Congress. He has put the full force of his influence behind compulsory disclosure of true annual interest. LEGISLATIVE PURPOSE 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. To be sure, poli- ticians are as much in favor of truth as they are against sin. But truth as such is not the basic objective. 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 arithme- tic 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 of 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. Installment debt alone, plus its interest, is generally estimated as laying prior claim to one dollar of every four in an average debtor's pay. Some economists 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 Government has come out against the fast-growing consumer installment debt as such. It's the turbulent fluctuations in credit expansion 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 gets so little that there's none of it at all. The pattern of sharp rises and falls over the past 15 years is shown in the graph below. It traces three periods of extraor- dinary 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 borrowing very nearly equaled the total of repayments. Do purchasing intentions normally fluctuate so wildly? Or does some outside force radically change them? Looking back from the vantage point of the recession year 1958, CU saw signs of the lender's hand at work. "Seven million high-priced autos were moved out of dealers' inventories [in 1955j in one of the biggest sales blitzes of all time," we noted, "and some 60% or better of those cars were sold on the cuff. Moreover, one of the tools of the blitz was an extension of installment contracts to 36 months. Other sellers, competing with autos for their share of the consumer dollars, also offered terms of nothing down and 36 months to pay for rugs, furniture, etc. PAGENO="0566" 1148 CONSUMER CREDIT PROTECTION ACT The chief symptom of recession is a slackening of economic growth. Thus, in 1958 there was no increase in the Gross National Product. Credit expansion hit another new high in 1959, followed by almost no credit expansion in 1961. THE GROWTH PATTERN OF CONSUMER INSTALLMENT DEBT I I Wild waves of growth on the rising sea of installment traces only the growth; the debt itself quadrupled debt have been economic storm signals. The graph line from $18.7 billion In 1962 to $74.6 billion in 1966 Again, the trough on the graph was accompanied by a sharp tapering off of economic growth. To put it mildly, more orderly use of credit might have a less unsettling effect on the general economy. The Senate Truth-in-Lending Bill makes no bones about it. The first-mentioned purpose of the bill is "economic stabilization." Underlying full disclosure of credit costs is a two-part theory to which CU has long subscribed. First, disclo- sure 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 National Bureau of Economic Research on recent credit deals, only a minority of them said they had an idea of the interest rate they had paid. Within that minority, the average rate they thought they had paid was about 8%. The rate they had actually paid averaged about 23% (CONSUMER REPORTS, October 1964). The second part of the theory holds that people who are conscious of the price of credit will 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 who were able to report the true rate of interest on their loans paid an average, for loans of under $500, of about 12%. Those who had no idea of the rate paid a startling average of about 37%. In its report on the Truth-in-Lending Bill, the Senate Banking and Currency Committee took cognizance of that and other evidence. The Senate's vote of confidence in the consumer says, in so many words, "Here is the information you need. Now don't make waves." SPECIAL TREATMENT FOR REVOLVING CREDIT The Senate bill falls short, however, of requiring all the information consum- ers will need if they are to compare credit costs. That is not surprising, con- sidering the tortuous course of the legislation. Senator William Proxmire, the bill's chief sponsor, succeeded in getting a bill to a vote-where his predecessor, former Senator Paul H. Douglas, had failed-partly because Senator Proxmire was prepared to compromise. When it became quite evident early this year that some kind of Truth-in-Lending Bill would be passed, one of its old-line oppo- nents, The National Retail Merchants Association, sent out this advisory to its members: "With . . - the prospect of more intensive pressures for credit con- trols during 1967, it is becoming increasingly evident that fiat opposition to credit legislation may be doomed to failure. A. wiser course might be to work for legislation and regulations that can be lived with." (Italics supplied by the NRMA.) PAGENO="0567" CONSUMER CREDIT PROTECTION ACT 1149 At Senate hearings last spring, witnesses for the NRMA and a number of other strong opponents of the bill concentrated their fire on one provision in particular. They sought to knock out any requirement for annual rate disclosure on revolving credit charge accounts. And they largely succeeded. Under the Senate bill, revolving credit as applied to most department store accounts 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 percentage 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 buy at all regularly in most department stores or from big mail order houses usually open charge accounts. It's convenient to pay the bill once a month, and, besides, there's usually no credit charge if you pay the bill within 30 days. Every cus- tomer, whether he pays cash over the counter or says charge it, foots the costs of 30-day credit as part of the overhead 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 is 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 11/2% per month, and stores almost invariably charge the maximum. A rate of 1%% a month equals an annual interest rate of 11/2 times 12, or 18%. The balance due on the nation's charge accounts has been running at $10.5 billion. About $3.5 billion is revolving credit. That's not much next to the total installment credit outstanding. But it is probably not an accurate figure at pres- ent, and it certainly won't be an accurate one in the future, because it omits, 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 at least since 1950. But in only the past year or two, according to the Federal Reserve Board, the number of banks issuing credit cards or operating open-end check credit plans reached 627, plus several hundred local banks acting as agents for large city banks' credit plans. "The enthutiasm with which the supposedly conservative banking profession has greeted this relatively new consumer service is unparalleled in the pages of modern banking history," the American Bankers Association was told by a Chi- cago banker. And he explained why: "We are beginning with this first step to recapture a larger share of the credit business which heretofore conceivably could have fallen into nonbanking hands by default." The bank credit 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- soring bank. It is the poor man's version of the American Express or Diners' Club card. As The Wa~i street Jmtrnal has reported, "Bank cards are issued largely 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 fami- lies in all," the Journai said. C. A. Agemian, vice president of the Chase Manhat- tan Bank, told why in a recent speech: "If you want to get cardholders, your card has to have value. The cardholder needs 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 cardholding shoppers. What comes first, the chicken or the egg? To choke off competition, you must flood the market with cards. 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 re- ceiveci cards from various banks that could permit them to charge up to $3000 or $4000 !" Were the final Truth-in-Lending law to exempt bank, department store and mail-order charge accounts from annual rate disclosure, it would quite obviously withhold from the consumer an important tool he needs to shop wisely for credit. Yet the Senate bill exempts those accounts, in most instances. If the exemption is allowed to stand, only the monthly rate will he 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 generally charged by credit unions. There is thus some likelihood that the exemption would help accelerate the growth of revolving credit. PAGENO="0568" 1150 CONSUMER CREDPT PROTECTION ACT To escape anntial rate disclosure for revolving credit, merchants and bankers used a shrewd argument on the Senate subcommittee considering Truth-in-Lend- ing. A charge account customer, they saicl, often gets the use of their money at 11/2% for more than one month. Someone who buys ~ouiething shortly after his monthly bill has been made out, for instance, would have as long as 59 days of free time before incurring a service charge, because he would not receive his next bill, with the new item posted on it, for up to 29 days and would have 30 addi- tional clays 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 has a cute premise: Up to 59 days of credit time are available interest-free, bi~t only on condition that the bill is paid in full on the 59th day. (In practice, you'd better pay it sooner or it might not be credited to your account in time to escape interest.) If you don't pay in full, time runs backward to the date of purchase. Well, maybe an accountant can really make the calendar x~un in reverse. But one name for that sort of magic is account juggling. The only reason for mentioning it here is that there are many different sets of rules for juggling revolving credit. Different stores use different rules, and they are not just playing games. A revolving charge account can cost considerably more at one store or bank than another, though both seem to be charging 18% annual interest. Professor Richard L. D. Morse of Kansas State University has illustrated the situation dramatically in a recent pamphlet (see page 473). He demonstrates six different revolving credit billing systems, all of them examples of systems in use, and be s~iowed how 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 comparisons. Their solution is to require each revolving credit con- tract and monthly statement to explain its billing system. The Federal Reserve Board, which will have to write the necessary regulations, has its work cut out. Here are excerpts from the contract applications of three mail-order houses explaining their billing systems: ~Sears, Roebeok and Co.: "an amount of time price differential computed at 11/2% of the balance at the beginning of each month billing period until the full amount of all purchases and time price differentials thereon are paid in full." Montgomery Ward: "a time price differential or service charge of 1%% per month on the opening monthly balance of my account on amounts up to $500 and 1% per monl~h on amounts in excess of $500." J. C. Penney Co.: "a time price differential (`service charge') computed by applying the rate of 11/2% to the unpaid balance of the cash `sale price and any unpaid service charge on each of my monthly billing dates (pursuant to your then current billing schedule) commencing with the second monthly billing date following the date of purchase. If you knew as much about the subject as Professor Morse, you might be able to figure out (but not from statements like these) 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 professor of eco- nomics and a professor of philosophy, have written to us 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 of paying such a high rate of interest." The point, of course, is that hardly anyone can fathom the billing methods of revolving charge accounts. Help is needed, and the need will become more and more pressing as banks and stores, spurred on by the availability of com- puterized billing systems, contend for revolving credit business. As this is written, time remains for the House Banking and Currency Committee to rectify the situation. The House bill, sponsored by Rep. Leonor K. Sullivan, would put revolving credit back under full-disclosure provisions. With slight amending, it could assign the Federal Reserve Board to tackle the billing problem. PAGENO="0569" CONSUMER CREDIT PROTECTION ACT 1151 OTHER LOOPHOLES The Sullivan bill seeks to close other loopholes in the Senate bill as well, for revolving credit exemption is not its only weak spot. Some others are worth noting here. 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 appraisal 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 points on conventional new- home mortgages are now averaging almost 1% of the amount of the loan. In effect, the interest rate is higher than you think. It should be fully disclosed. 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 protection. Unless the option to buy is the borrower's, credit life insurance premiums should be counted as part of the interest rate. Insurance commissions earned by used car dealers when they sell an accident policy as part of the credit package on a car sale would not be counted in the interest rate. Some dealers have close ties with insurance 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. There is no regulation of credit advertising. Familiar and phony slogans like "low bank rates" and "no money down-easy monthly payments" would continue to gull the unwary. Massachusetts law requires credit merchants to post the true annual rate in any advertisement making reference to credit terms. Federal law should follow suit. If the finance charge is $10 or less, the lender doesn't have to disclose his annual interest rate. Example: A vacuum cleaner salesman 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 of one-year installment credit. The well-concealed true annual interest is 25%. Truth-in-Lending should apply to small deals as well as big ones. The Senate bill would not go into effect until July 1, 1969. There is no reason, according to testimony at the Senate hearings, why the effective date could not be set for one year after enactment. Credit sellers could fudge their rate disclosure by stating it as dollars per hundred rather than as a percentage until January 1, 1972. Confidence in the consumer will be rewarded best if he is given a good yard- stick, if all credit sellers must adhere to its standard of measurement, and if the standard is invoked as soon as possible. This requires a Federal Truth-in- Lending Bill without holes. A Dizzxixa LOOK AT REvoLvING CREDIT Service charges on revolving credit accounts vary widely from store to store and from bank to bank, even though the stated interest rate is usually the same. The explanation for this apparent contradiction is fairly simple. The service charge is the product of the balance due times the monthly interest rate. But different department stores, mail-order houses and credit-card banks have dif- ferent methods of determining the part of your monthly balance against which a service charge is assessed. A recent survey conducted by Richard L. D. Morse, professor of family eco- nomics at Kansas State University, makes two things quite clear. First, it is next to impossible to tell which revolving credit account offers the best deal. "Methods of figuring service charges were too complex not only for the local management to understand and relay to customers who wanted to know bow it would work in practice, but for national [store chain] offices to interpret in terms of an annual percentage rate of service charge," Professor Morse wrote. Second, store-to-store differences in credit costs can be quite significant. The Morse survey isolated six billing methods, each arriving at a different total of service charges for a given series of hypothetical transactions. The customer PAGENO="0570" 1152 CONSUMER CREDIT PROTECTION ACT began with a clean slat-no balance due-on the first of the year. He then did business with the store as follows: Purchases Returns Payments January $30 $10 February 120 30 $20 March 90 40 80 April 10 10 May 10 10 JUne 10 10 Here, from lowest to highest, is the total of service charges, at 11/2% per month, depending on which of the six billing methods is applied: Method: Option to pay in full within 30 days of the billing date without incurring any service charge. Interest rate is applied to the previous month's closing balance, less any payment and returns. rrotal service charge-$2.28. Method: Same as preceding except returns are credited before the interest rate is applied. Total service cbarge-$2.43. Method: Same is preceding except neither returns nor a payment is credited before interest rate is applied, unless 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 returns are never credited to the previous month's closing balance. Total service charge-$4.16. Method: No 30-day option to pay in full without incurring a service charge. Interest rate is applied to the previous month's closing balance. Total service charge-$4.47. Method: Same as preceding, except interest rate is applied to the balance at the end of the current month. Total service charge-$5.44. Although typical, the six billing methods 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 account unless you understand its billing system thoroughly. But. as Professor Morse found, the essential facts cannot readily be obtained. A more complete summary of the Morse survey is found in a pamphlet called "Truth in Lending," available from the Council on Consumer Information, 15 Gwynn Hall, University of Missouri, Columbia, Mo. 65201. CoNGRESs OF THE UNITED STATES, HousE OF REPRESENTATIVES, Washington, D.C., August 2~t, 1967. Hon. LEONOR K. SULLIVAN, Chairman, Consumer Affairs subcommittee, House Banking and Currency Com- mittee, Raybstrn House O~Ttee Building, Washington. D.C. Dear MRS. SULLIVAN: Please find enclosed copies of correspondence concerning a New Jersey family who have become involved with a debt-pooling outfit operating out of the States of Rhode Island and Nevada. It appears to me that the facts alleged in the correspondence demonstrate the need for Title III of our bill, HR. 11601, callinr for the establishment of a bipartisan National Commission on Consumer Finance. The information devel- oped by the proposed commission could provide the Congress with facts it needs to evaluate thc' effectiveness of existing State regulation of this type of consumer finance operation. I will he most appreciative if this letter, as well as the attached correspond- ence, is incorporated in the Subcommittee's hearings on HR. 11601, the Con- sumer Credit Protection Act. Sincerely yours, JOSEPH G. MINISH, Member of Congress. PAGENO="0571" CONSUMER CREDIT PROTECTION ACT 1153 NEW JERSEY STATE AFL-CIO, Newark, N.J., August 16, 1967. Hon. JOSEPH G. MINISH, House of Representatives, Washington, D.C. DEAR JOE: In connection with the bill that you have introduced to prevent frauds may I provide you with the following information which I am sure will assist you. Mr. and Mrs. Anthony Catananzi of 93 Tennyson Street, Carteret, New Jersey saw an advertisement in "True Confessions" magazine, a copy of which ap- pears on Page 78 of the September, 1967 issue of that magazine. I am enclosing two copies of it herewith. Mr. and Mrs. Catananzi being harassed by a number of debts, contacted Automatic Acceptance, Inc. and received in the mail a form of contract by which they agree to pay $25 a week and the Automatic Ac- ceptance, Inc. would pay their bills and charge them an alleged 6% interest. As required by the contract, they sent all their bills including their payment receipt books, to Automatic Acceptance, and at present do not have copies, and cannot figure the total amount of the bills. The only record they have is the receipt card referred to below. It seems obvious to me, however, that the amounts payable cannot possibly be met by payments of only $25.00 a week. This is evidenced by the fact that one creditor alone, the Queens City Finance Co., has a claim of $23 a month. They thereupon started paying the $25 and have paid $100 to date. Not- withstanding this, Mr. Catananzi's employer has just been served with a garnish- ment notice from Queens City Finance Co. as a result of which Mr. Catananzi has been released from his employment. When Catananzi was told he was released from employment because of the garnishment, which amounts to $23, he telephoned Automatic Acceptance. They refused to do anything or give him any information. They simply repeated several times, "We can't do anything about it." Automatic Acceptance, Inc. has already received $100 from the Catananzis. I am enclosing herewith copy of letter from that company dated July 26 and also copy of receipt card showing the payment of $100. I am sure that if you investigated this you would find that the charges in- stead of being 6% are substantially higher and you would probably find that very little of the money already received has been paid out by the company against Catananzis' bills. It seems to me that this will serve as a rich source of investigation and would substantially help in the passage of your bill. With best reg~ rds, I am Sincerely yours, VINCENT J. MURPHY, President. AUTOMATIC ACCEPTANCE INC NATIONWIDE S~'RVICE Providence, R.I., July 26,1967. ANTHONY CATANANZI Carteret NJ DEAR Mn CATANANZI In reference to your recent letter please be advised that on July 6 1967 you engaged my company to handle your bills on a budget basis at which time, you agreed to~ pay this company $25.00 each and every week. In turn we would handle all of the bills that you had listed on your application based of course on the money that we received from you We feel confident at this time that if you continue to remit your weekly pay ments we anticipate no pioblem in handling your account Should there be any questions, please feel free to contact my office. Very truly yours, P. L. CERALDI. PAGENO="0572" 1154 CONSUMER CREDIT PROTECTION ACT Za) < UI U ~ 2 4 [Advertisement from True Confessions, September 1967] BILL PROBLEMS? CAN'T MAKE ENES MEET? Nobody refused up to $10,000.00 POOR CREDIT, No Trouble. NOT A LOAN CO. Send Your Name for FREE APPLICATION. AUTOMATIC ACCEPTANCE. Dept. 10 307 Pocasset Ave., Providence, R.I. or 318 Broadway Blvd., Reno, Nevada Automatic Acceptance, Inc. Financial Consultants Nationwide Service NOT A LOAN Co. ** . * PAGENO="0573" CONSUMER CREDIT PROTECTION ACT 1155 COMPLETE SERVICE CHARGE IS 6 PER CENT PER YEAR ON TOTAL AMOUNT PAYMENT ~ PER WEEK-BEGINNING......~.:(~c~.? PLEASE DO NOT SEND PERSONAL CHECKS DATE AMT. PAID__TOTAL REC.' INT. 1 ~ ~ DATE AMT. PAID TOTAL REC. INT.. `23.1_* ~iJ - ~ PAGENO="0574" PAGENO="0575" APPENDIX B TRUTH IN LENDING INQUIRY CITY HALL NEW YORK NY AUGUST 28 1967 10 A M Present Congressman 3onathan B Bingham (Presiding) and Congressman Seymour Halpern PROCEEDINGS The CHAIRMAN Will the meeting please come to order We have a heavy schedule and we want to try to stick to it First of all as the organizer of this hearing I would like to extend a welcome to all of those who will be participating with us today as witnesses and also to welcome our guests This hearing is being conducted by the representatives from the New York Metropolitan Area who are members of the Subcommittee on Consumer Affairs of the House Banking and Currency Committee The statements made here today and the testimony will be incorporated in the formal record of the hearings that have been conducted and are still open the hearings by the Consumer Affairs Subcommittee of which Representative Leonor Sullivan of Missouri is Chairman We are grateful to those who are participating here today to shed some light on these very crucial Issues in the field of consumer protection The basic issue before us is the issue of Truth in Lending and bow effectively through 1~edera1 legislation, we can prevent the deception of buyers and of borrowers to make sure that they know the exact terms under which they are borrowing money and buying goods on time and also to consider certain pro visions that have been added to the legislation in the House and in the bill introduced by Chairman Leonor Sullivan and others of the Subcommittee in cluding myself provisions such as prohibition of garnishments among others I would like to proceed immediately to the first witness I know that he has a busy schedule We have with us representing the City administration the Honorable Deputy Mayor Timothy Costello who is chairman of a committee in this field for the City administration We are very happy to have you with us Dr Costello STATEMENT OF HON TIMOTHY W CosTELLo DEPUTY MAYOR Crrv ADMINISTRATOR OF THE CITY OF NEW YORK AND CHAIRMAN OF MAYOR LINDsAY s CoUNcIL ON CONSUMER AFFAIRS Dr CosTELLo Mrs Sullivan Congressman Bingham Congressman Halpern distinguished members of the subcommittee I am delighted to appear before you and testify in support of the Consumer Credit Protection Bill introduced by Mrs Sullivan for herself Mr Gonzalez Mr Minish Mr Annunzio Mr Bingham and Mr Halpern The fact that two of the six sponsors of the bill Mr Bingham and Mr Halpern represents districts within the City of New York and the fact that they are nominees of three parties Mr Bingham having won election as a Democrat Liberal and Mr Halpern as a Republican Liberal indicate the wide support here iii New York for this legislation I am delighted too that this hearing is being held here in New York City in our own legislative chambers It is gratifying that at least some members of the congress are beginning to learn where the action is right here in the city It is especially appropriate that this bill H R 11601 be discussed publicly here where we have demonstrated a concern and a determination to act on the problems of consumers with a sense of priority and urgency not often demonstrated by mum cipal government nor indeed by the congress itself On April 23 of this year Mayor Lindsay established a Council on Consumer Affairs composed of every agency whose functions have impact on the consumer As chairman of the Mayor s Consumer Council I report daily on radio to the people on food prices in the neighborhoods of the city on sharp selling practices and smart buying tactics-telling the consumer what to look for and what to 1157 PAGENO="0576" 1158 CONSUMER CREDIT PROTECTION ACT look out for. En almost every field we have surveyed, whether it is food, furniture, sales in the home, the problems of credit, its uses and abuses figure most promi- 1e~t,~y ULLU oiat is why I consider the legislation you have proposed of vital im- portance to this city. Indeed, tue protection of tue consumer is of such direct interest to the city that we nave been strongly considering the introduction of local legislation along the very lines that you are now proposing nationally. I am pleased that we are now, in a sense, able to join forces. I have seen the list of witnesses who have testified before your committee in Washington, and I will not repe~t the evidence presented on the national need for this legislation. I will cite rather the special problems of New York City the nation's largest city, the city with the largest numbers of poor people the city with the largest number of non-English speaking consumers who need special protection in seeking goods and credit. We live in an ever expanding credit economy. The rich and powerful buy, sell, and control vast corpoi~ate enterprises on credit. The middle class buy homes, autos, major appliances-on credit. The poor live on credit, often meeting their daily needs on the basis of money to come, to be earned, or to be hoped for. We are discovering in New lork City, as we survey every field of consumer activity that, With some exceptions, the poor generally pay more. They pay more for food at a lOcal grocer because thç~y can't afford to shop for cash at the super- market. They pay more for household furnishings because they don't have the cash with which to shop for true bargah~s. They pay more for money as well, because bank credit is not often available to them, few belong to credit unions, and fewer still have developed the basic economic and social institutions through which the lending and borrowing of money becomes a routine and available service rather than a profitable, or in sonie instances, as your bill states it, a predatory enterprise. The poor not only pay more but in a real dollar sense, they often pay more for the privilege of paying more. Here's bow it works: The local merchant in a poor neighborhood needs a higher profit margin than the big department store. His volume is less, his risks are greater. Above all his cash flow is much narrower, for his chief ~tttraction to the neighborhood customer is credit. Now, in order to meet the pride, the customer enters into a credit transaction. He often doesn't realize that his signature at the store or in his home means more cash out of his pocket, from his family income or even his future earnings. Our Consumer Coun- cil and our Markets Department, every week receive scores of complaints from such consumers who realize that their $300 bedroom set comes to $1000 when they are through paying; and, indeed, that they might even be forced to continue to pay even though the furniture already has been repossessed. Many of these operations are within the present law-for sharp pyactice is not always illegal or fraudulent. I am, therefore, most gratified that the bill you have proposed, differ- ent from the Senate version, would require full, true meaningful disclosure of interest rates in every credit transaction, including the revolving credit system practiced by retailers in the ghetto market. Under this system, the unwary consumer can pay interest-on-interest for a succession o~ goods, with a retailer almost absolved of responsibility because the contracts of sale have in turn been sold to a finance company. This is how the customer who suddenly cannot pyy any more, or realizes that he has been bilked and refuses to pay more, can suddenly find himself with goods repossessed by the store and his w~jges garnisheed by the finance company. Full disclosure, while by no means a bar to such transactions or a cure for their tragic consequences, sets up an important warning system for the consumer. But the disclosure must be not only in dollars, but as an annual rate of interest by percentage. I therefore regard Title II of your Bill, Sec. 202, paragraphs i and j, which would require disclosure of interest by annual percentage rates as a key provision for consumer protection. If a customer knows that he is required to pay 30, 50, or even above 100 percent of his purchase price in interest over a period, he is far more likely to think twice before giving his signature so freely. The provision of paragraph K of the same section limits the credit rate to 18 percent a year (which is the common bank rate for personal loans or credit cards such as thO new "Everything Card" put out by a major bank in New York) would have some interesting effects. Eighteen percent is below the maximum rate allowed by the New York State Banking Department, which regulates the credit industry here. The small personal loan or finance companies who operate at high risks, generally demand and receive higher interest rates. Would imposing a PAGENO="0577" CONSUMER CREDIT PROTECTION ACT 1159 maximum of 18 percent serve to encourage a wider bootleg money market? Would it intensify the activities of loan sharks in ghettos? Most importantly, would it leave the poor, who already pay more, with no legal alternative but not to buy at all except for cash? A national credit maximum is a worthy goal but I do not believe it can be imposed by legislation alone. What we need to develop are alternative credit systems, resourceful outlets through which the poor, or might I say, the unmoneyed, the people who do not ordinarily live on cash, can buy, par- ticipate and act as full-fledged consumers in the economy. Through the Mayor's Consumer Council, we are now fostering such alternative credit systems, We are trying to develop credit unions in poor communities, helping them organize and pool resources which, if spent individually are pitifully meager, but if conserved jointly can command more resources as well-such as an initial investment in a credit union until a revolving fund can be established. We are helping to sponsor buying cooperatives which help the consumer to make cash transactions which his individual purchasing power would not allow but which cooperatively can command a fair share of the market. We are en- couraging and helping major financial institutions and retail organizations to extend credit creatively and economically in those communities where they do not now operate. In short, if we are going to take any measures that would have the effect of cutting off credit-however exorbitant-from the poor-we have a parallel duty to provide better alternatives for the poor to get credit. Our Consumer Council has also taken up the question of garnishment of wages, which would be prohibited by your bill. As you know, in New York State garnish- ment is limited to 10 percent of wages, and furthermore we have now effectively barred the vicious practice of dismissal from employment for reason of a single garnishment within a given year. On the one hand, wages are the only collateral the working man or woman can put up under present credit systems. On the other hand, the garnishee, which attaches wages at the source can be seen as the ultimate weapon of the creditor against the wage earner. As your bill states, correctly, garnishment frequently constitutes a burden on Interstate Commerce. Isn't it proper to ask whether its prohibition would constitute an equal burden on commerce, particularly by removing the only collateral the non-moneyed wage earner can offer to a prospective creditor. In effect, can we make such a prohibi- tion without, at the same time, providing alternative systems of credit, alterna- tive means of meeting the limited credit needs of the poor. We are not talking of the poor alone. On the contrary, we are talking now about a national phenomenon that affects all people-the credit economy. I am struck by the fantastic and alarming growth of bankruptcy in New York City. In the Southern District Court, which includes Manhattan and the Bronx, a total of 2,009 personal bankruptcies were filed in 1966; interestingly that same year there were 1,435 business bankruptcies filed-just a little more than half of the personal bankruptcies. The rate of Business bankruptcies has declined fairly steadily from 2200 in 1961 to 1435 in 1966. The rise in personal petitions reflects the national figures as well. In 1961 there were 15,241 business petitions filed in bankruptcies across the country. In 1966 the figure rose, but only to 16,430. For the same years, personal petitions in bankruptcies, including wage earners, rose from 153,125 to 204,185 last year. I think this says something about our economy and our society. We are paying the price of greed. With our society so oriented towards the production, acquisition and accumulation of material goods, it is hard to turn around and tell people to reorient their own lives and own spend- ing patterns. It is particularly difficult to tell the poor, who are already at a dis- advantage, to impose upon themselves the further disadvantage of not buying be- ca;ise they lack the ca~h. Of all commodities, credit is probably the most un- democratically distributed. Those who require it most have least protection. is the poor family that longs for a television set as its only means of recreation, to have less opportunity to buy one, than the middle class family that routinely buys a car on monthly terms or a home on a 30-year mortgage? While we cannot legislate against greed-the greed of those who profit by the acquisitive urge of others must be curbed. These measures therefore, stringent as they may be, merit our support not only for the protection they afford the consumer of credit, but for the values they can help to instill in the American economy and society. If this measure helps curb the acquisitiveness of Amen- cans who buy at rates they really cannot afford, and more importantly would punish the greed of those who prey on that acquisitiveness that affects us all- rich, poor and middle class alike-it merits our complete support. 83-340 0-67-pt. 2-37 PAGENO="0578" 1160 CONSUMER CREDIT PROTECTION ACT Finally a word about the Commission on Consumer Finances. As you may know, in my role as City Administrator I am actively opposed to the proliferation of government agencies. In fact, this administration is deeply engaged in a major reorganization that would consolidate our own municipal agencies into more ra- tional, simplifi~d and above all fewer, administrative structures. On the other hand, I am aware of the need to focus substantive national attention on the prob- lems of consumers and to build an official body of ififormation, expertise and authority on this vital subject. When a prominent business executive can publicly decry before the Congress, the growing interest in "consumerism," I think it is high time for all of us to respond with a resounding "Yes," we are interested in the consumer. We are concerned, we are determined, we will act. To the extent that the proposed commission would be set up to accomplish such goals that re- suit in real action, we would welcome its establishment `as we would the pas- sage of this entire legislation. May I say in summary that countless studies have demonstrated that the poor pay more. There is no area in which they pay more than in the area of credit. Any steps that we can take, beginning steps, strong steps, such as represented in your legislath~n, are steps that we must take in order to rectify a situation which imposes a heavy burden of inequity on those who can least afford it. Thank you very much. The CHAIRMAN. Thank you very much, Dr. Costello. We are most grateful to you for a very comprehensive and thoughtful statement. I would like to be in a position to ask you questions, but in the interests of your time and our heavy schedule here today, I just want to ask one question, and that is whether you feel that Federal legislation in the area of garnishments, if perhaps adjusted to meet some of the concerns that you have, would be helpful in supporting local legislation in the area? Dr. CosTELLo. Yes, it would. I have great concern about the use of garnishment in a way that jeopardizes the livelihoods of those who live very, very close to the poverty level. In general, I am in favor of the banishment of the garnishment privilege. I am oonc~rned, however, that in doing so, we make it impossible for the poor to share fully in our credit society, and so my testimony has emphasized that if we do banish garnishment, then we have a very heavy responsibility to develop alternative means for the poor to obtain credit; such as, in a modified credit union where only a part of the lending money would come from investment by the mem- bers themselves. The CHAIRMAN. Thank you very much. I am very happy that you took a full part in this meeting today. Congressman Halpern is from Queens, and is one of the co-sponsors of the 11601 Bill. I would like to say that this is a panel and we are all operating as equals and we are very happy to have taken part today with one who has con- tributed a great deal in the consumer-protection field. Congressipan HALPERN. Thank you. I would like to commend our distinguished witness who has presented forth- right and informative testimony this morning and I am sure that his testimony will prove to be most helpful to us in shaping meaningful and effective legis- lation in this field, legislation that is long overdue and certainly much needed. Now, Mr. Deputy Mayor, as you know, the bill that passed the Senate covers only full disclosure of certain interest and finance charges. Now, the House bill, which Mr. Bingham and I joined Mrs. Sullivan in spon- soring, is much stronger. We include revolving credit; we include all financial charges of ten ddllars and more; we include a strict disclosure of all advertis- ing of credit purchases and borrowing and, of course, we include garnishments. Do you prefer the stronger House bill to the Senate bill? Dr. COSTELLO. I certainly do, particularly in its inclusion of revolving credit. Phe recent authorization of the Everything Credit Card with its full-scale of advertising suggesting that practically everything can be bought on credit is, of course, of the revolving sort and it probably suggests that increasingly we are going to be living on revolving credit. In the advertising that promotes this credit card, if it is at all indicated, it is indicated that the purchaser, the borrower, pays one and a half percent per month. Now, if you add this figure up, it comes to a minimum of eighteen percent interest per year, and it would seem to me that if the average borrower were to realize that for the use of $100 for a year, he was being requested to pay PAGENO="0579" CONSUMER CREDIT PROTECTION ACT 1161 $18, it might curb unwise impulse, buying, so that I am certainly in favor of the House bill over the Senate bill. In this regard, I am also concer~ned that something be done about garnish- ments, which is proposed to be done in your bill and which the Senate bill does not consider. I indicated in my response to Congressman Bingbam that I am concerned, however, lest the 18 percent limitation and the garnishment dry up wnatever credit resources there are for the poor. rl\h15 point neeus to be emphasized. We have created a credit economy whether we approve of it or disapprove of it. It's a fact of life that most of the people who have a sense of belonging to our society measure to some extent that sense of belonging by their ability to buy, for instance, a television set when they can't immediately pay cash for it. As I tried to point out in my testimony, it is even more necessary that the poor who may not have immediate cash be able to obtain certain basic possessions, such as television, such as some household appliances that could reduce sharply the burden of household work. If we dry up the credit resources that are available to them, we cut them out of this credit society. Now, of course, some of us may feel that no one should borrow to buy anything less than a necessity, but unfortunately, this is not the society we have created, and I think we reduce the poor to second-class member- ship in that society if we make it absolutely impossible for them to find some means of borrowing. Control that means of borrowing carefully; inform them of exactly what is involved, provided if you do banish the garnishment and limit rates of 18 per- cent; provide alternative means to a modified credit union so credit continues to be available to those who would not have it. Congressman HALPERN. I would like to correct the record from $10 or more. I meant to say $10 or less. Mr. Deputy Mayor, in what ways do you see the City Government complement- ing programs at the Federal level? Dr. COSTELLO, Well, the Senate bill passed. Of course, we were interested in blocking up what we considered to be the loopholes. I think the House bill goes a considerable distance in blocking up those loopholes. The important thing the House bill does is include revolving credit, which is a rapidly expanding field of credit. It does get at credit charges of less than $10, which are frequently those involved in purchases by the poor. It opens a door for consideration of the garnishment issue which ought to be examined. I want to emphasize that, and it does set up a Commission on Con- sumer Affairs. It does provide an opportunity to bring sharp focus to bear on the problems of the consumer. Congressman HALPERN. In what way do you see the City government comple- menting the program on a Federal level? What programs does the City have and are foreseen for consumer protection? Dr. COSTELLO. The City, as I mentioned before, has been thinking about legis- lation in this field which perhaps would be made unnecessary if a strong House bill were passed. But, in addition, the City sees as its responsibility organizing the poor in co-operatives so that through cash buying on a cooperative basis, lower prices might be obtained. We have also been working with community groups to develop credit unions which would meet one of the problems you raised. I think the City would have, through the Mayor's Council on Consumer Affairs, a heavy responsibility in informing the average consumer and poor consumer what his legislative rights are. One of the things we have discovered in our work is that to pass a law is one thing and to educate the consumer in what his rights are under the law and to encourage him to command those rights is quite another thing. And at the local level, we think acquainting the people with what their rights are is one of our responsibilities. The CHAIRMAN. That is all. Thank you. Congressman HALPERN. I want to thank the distinguished Deputy Mayor for his very enlightening testimony. The CHAIRMAN. Thank you very much. The next witness, who has to leave for Albany, is the Hon. Guy R. Brewer, Assistant to the Borough President of Queens, but be is here representing the Borough President Badillo of the Bronx. He is Chairman of the Subcommittee of Consumer Protection of the New York Constitutional Convention. PAGENO="0580" 1162 CONSUMER CREDIT PROTECTION ACT STATEMENT OF HON. Gu~ R. BREwER Mr. BREWER~ I don't have a prepared statement, Congressman, because the call came to me when I was down in the country, and I was told on my way to Albany to stbp by here and share a few of the things we are trying to do there with your Committee, in the hope that it might be helpful. Let me say, first of all, sir, that I am very happy to be here with you and, of course, Congressman Halpern, from my own borough. In further identification of myself, in addition to being Chairman of the Sub- committee on Consumer Protection at the New York State Constitutional Con- vention, I have for a number of years been a Director of the Congressional Educational Institute, and I regret to say that over the years I have developed some cynicism as to whether the consumer can ever be educated. It seems to me that it is almost impossible in our type of society to educate people to be smart consumers and not to rush out and buy every sort of trivia. Mention has been made by Deputy Mayor Costello concerning the great dis- advantage suffered by the poor and the fears that he had of cutting off sources of credit for the poor, thereby keeping them from sharing in all of these gadgets of our so-called affluent society. I share that same concern, but I think that also he might concern himself with these people further out on the Island from us, Congressman Halpern, the people who live out in Nassau and Suffolk Counties in these split levels and the people who have rushed out and bought everything under the sun in addition to the split levels, and they are up to their necks in debt and three weeks off of a payroll will make them candidates for welfare. But that's the society-as Mr. Costello pointed out-in which we live. It's a vast problem. Now, here's the way we tried to attack it-and I simply want to share this with you in the belief that it must be attacked on every level, National, State and local, as they are trying to do in New York City. We held hearings, the Subcommittee held hearings all over the State. We held hearings from Brook- lyn to Buffalo, and we accumulated reams of testimony. We had Congressman Lester Wolff who came before us. We had Deputy Mayor Costello. We had many, many persons from unions, and we had a cross-section of the entire population of New York State who came before us, and out of all that testimony one fact emerged, and that is that the consumer in this State and in every state des- perately needs protection. And you are to be commended on your projection of this Bill 11601 that you are projecting. We think it is much better and it is much more desitable than the Senate bill. It offers more protection to the con- sumer and we have found that we have got to have a new approach to this thing. Now, it might be asked what can a Constitutional Convention do in this hearing? As you gentlemen know, being lawyers, a Constitutional Convention cannot write laws. It is not the purpose of a Constitutional Convention to legis- late, but it c4~n enumerate in broad principles certain things 1~or the welfare of the people of our State. For instance, we have reiterated that the forests of our State shall be forever wild. That is a protection of the forests of our State. Now, we also had the proposition coining out that will say that the days of caveat emptor have outlived their usefulness, and that it is the duty of the State and it is the legislative con- cern of the State to see that its citizens are not victimized by unscrupulous practices and by all these sort of things to which your Committee is directing itself. That will be the broad scope of what we hope will be voted on and ac- cepted favorably by the Convention and will be incorporated into the Consti- tution. A simple terse statement, stating that it is the concern of the State of New York to protect its citizens who are consumers-and God knows that means all of us, we ar~ all consumers. And frankly, I can't see how you are going to get much opposition to it, but you never can tell, and this seems to be the sort of thing everybody as a consumer should want, and it should be a bi-partisan propo- sition when it hits the floor of the Convention. We certainly hope it will be bi- partisan and the State of New York will write into its Constitution that the consumer must be protected. `~Ve have found that it is not enough. For instance, mention has been made by Mr. Costello of the prices, the higher prices, that people pay in ghetto areas. Now, that is very true, and the thing that is most shocking is-and this has PAGENO="0581" CONSUMER CREDIT PROTECTION ACT 1163 something to do with the unrest in our cities, gentlemen, this very thing is one of the causes of it, but unlike that, here is something that many people don't realize which is that it is not the small business man, the small entrepreneur operating in the ghetto that takes advantage of the ghetto dwellers by these unscrupulous prices, but it is also your largest chains in America that do it. We have one of these chains that are constantly on the radio saying "We care about you," and testimony was brought our right here in the City of New York that in a certain section of East Harlem they charge more for a can of beans and for various other things in that chain store here than they charge in the stores in the west of Manhattan, and there is no reason for that. I went up to Massachusetts and Boston to see how they are working up `there on the matter protecting the consumer, and I was told up there of the reforms they are initiating, and as Mrs. Eichler up there said to me, "It is net only the small credit company or the fly-by-night credit company, but the old, established financial institutions in the State of Massachusetts that are also guilty of these practices where the consumer is concerned." Some of the ancestors of these people who came over on the Mayflower who run the big banks and trust companies in Boston are just as guilty in these practices as the little finance officer. One of the things that we need is something in the law, whether at the State level or municipal level, where the finance com- pany could not, after the person who sold this machine which is something that is going to cure arthritis, and be sells it for $300 and puts the paper in the bank and then leaves going on to greener pastures, and his machine breaks down because it never was any good in the first place, and the machine breaks down and the person misses the payment and the bank starts a garnishee or sues them or forecloses on their home, and the bank says, "We are not responsible for the person who sold it to you." There has got to be some responsibility for the sale to be followed, and we certainly wanted to inform you of what we are trying to do on the State level, at the -Constitutional level, in putting this into the Constitution. And we wanted to tell you that certainly our Committee, the Committee on Health, Housing and Social Services, is very, very happy that your Committee is working as diligently as possible and we wish you God speed in your efforts. The CHAIRMAN. Thank you very much, Mr. Brewer. Congressman HALPERN. I just have one very brief question. My very distinguished friend, the witness, is a dear friend and a fine public servant. He has been a credit as a public servant and it's a pleasure to welcome him to this hearing, and I wish to commend him. We are constantly reminded by Congressman Gonzalez of Texas, who is on this Subcommittee and is also a sponsor of H.It. 11601, that Texas and its Con- stitution prohibits garnishment, and Pennsylvania has prohibited it for 120 years. Are you considering such a provision in our new State Constitution? Mr. BREWER. Probably no place. The details are the subject of legislation. The details have no place in the Constitution, but we do want to give the Legislature, by our proposition, we want to give them, if not a mandate, we want to give them a broad umbrella under which to produce this kind of legislation. And let me tell you, gentlemen, when the Constitutional Convention is over and we hope to meet by the September 26th deadline, we won't need it if everything is down here instead of in Albany. We try to meet it and even after we close, I can continue my efforts in January when the Legislature meets. Let me say I want to disagree with Mr. Costello. I am not so concerned about this garnishment provision, that it will dry up credit for the poor. This thing that everybody has got to have credit and everybody has got to live on borrowed money, and all that sort of thing, we have got to come to grips with it one day, and it seems to me the sooner the better. I don't mean for the essentials of credit, but for all of these trivia, like electric can openers, when you can buy a can opener for twenty-five cents why do you have to go out and buy one for $10 that goes on the wall and that's electric. All of that sort of stuff, credit for that should be made hard. I am not trying to be concerned with drying up credit for the poor and middle class. I think we ought to be concerned with the middle class out on the Island, Congressman. One of these days they are going to be in a bad way. Congressman ITALPERN. Thank you. PAGENO="0582" 1164 CONSUMER CREDIT PROTECTION ACT The CHAIRMAN. Thank you very much. We are most grateful for your inter- rupting your seh~dule and giving this very helpful statement. Mr. BREwna. It~was a pleasure. The CHAIRMAN. Is Mr. Leon Quinn here yet? If not, we would like very much to have a word from Mrs. Evelyn Dubrow, who is one of the leaders in this field and has been for a long time, representing the International Ladies Garment Workers Union, and she is constantly pressing in Washington for effective consumer legislation. She is a good friend, going back a number of years. STATEMENT OF Mus. EVELYN DUBROW Mrs. EVELYN DUBROW. Thank you very much, Congressman Bingham. I am representing the International Ladies Garment Workers Union and I want to make a very brief statement indicating the support of the International Ladies Garment Workers Union for the Truth in Lending Bill and supporting the AFL-CIO's position on which we testified some time ago. I would like to point out that in New York Oity we have 200,000 members and in the State we have 250,000 members who work in the many garment plants in this City and in this State, and I suspect if there is any union that has had experience with the need for full disclosure in Truth in Lending, I would like to guggest the International Ladies Garment Workers Union. This is not a new complaint with us. When Senator Paul Douglas introduced Truth in Lending seven years ago we supported it then. We have worked very hard, and, as a matter of fact, testified at great length at hearings held by Senator Douglas several years ago, indicating the need for full annual disclosure in terms of interest rates on any kind of credit transac- tion that takes place, and while we were dismayed when Senator Douglas was not returned to the Senate, we were delighted to know that Senator Proxmire took up the fight for the Truth in Lending Bill, which passed in the Senate very recently. We were very disappointed in S. 5, and I would like to say II.R. 11601 makes up some of those short-comings introduced by Congresswoman Sullivan and supported by the two Congressmen here today. One section, of course, is revolving credit. I am sure that the Congressmen know, as I do, that more and more revolving credit has been the way of life for people on all economic levels, and that eventually, I think, the Undersecretary of the Treasury testified to this effect, that revolving credit would make it not necessary for people to carry cash with them before long. So we certflinly feel that any Truth in Lending Bill that gets passed by the Congress, we hope it will be passed, should certainly include revolving credit. The second large hole in S. 5, which H.R. 11601 attempts to clear up, is the fact of credit advertising and credit life insurance, both of which take ad- vantage not only of the poor who borrow money or buy things on installments, but for people on all levels, because it does not take into consideration the amount of money one has to pay when borrowing money on credit life insurance. Certainly the advertising that goes on to sell money in this country is incredible. If you look in the newspapers in New York or elsewhere you will find the grand kind of lures that are made to people who don't understand what it is they are getting into, and we feel there is no harm in truth. I would like to pay my tribute in this respect to the honest bankers, the honest financiers, t~ie honest creditors, the honest advertisers who understand this is not the way to do legitimate business. Of course~ we were appalled when the Senate passed a bill which excluded all finance charges under $10. Our union will have some testimony later which Mrs. Rolon of Local 40 will read, will be presented with actual witnesses who suffered from the lack of a Truth In Lending Bill and, I think, they will testify, among other things, that finance charges under $10 do mount up when you buy a number of things in a number of places on which you have to pay an interest rate. So, Congressman Bingham and Congressman Ilalpern, I can assure you that we will be very concerned with the Truth in Lending aspect of this legislation. Let me mention garnishees for a minute, because while the AFL-CIO's posi- tion and, therefore, our position, is not necessarily calling for garnishment in PAGENO="0583" CONSUMER CREDIT PROTECTION ACT 1165 this particular piece of legislation, I am sure that we understand the evils that are connected with garnishment, and that whatever comes out of the Bill, if you are fortunate enough to put it in, I can assure you we will be happy to have legislation on the books. The ~necessity is great. We have about, I would say, forty locals in New York City and maybe twenty more in New York State, and I would think that in those local unions, I can say without any doubt in my mind, that the kind of problems that come to us from our individual members, both to their business agents, to our educational directors, to our managers, that one of the largest percentages of problems we have is the matter of garnishees. Our people don't understand it. They don't know this is happening to them, they often are the victims of people who sell them not only damaged goods, but who charge them hundreds of dollars and much, much more than the regular percentage in the kind of goods they buy, and all I can say is that garnishment is a problem. Garnishment certainly belongs in front of the Banking and Currency Committee. We hope that if it isn't taken care of in this bill that certainly you will put your minds to making sure there is legislation. So I would like to say, Mr. Chairman, on behalf of the ILGWU and for the AFL-CIO's Subcommittee on Consumer Affairs, of which I am Chairman, we are delighted you are having these hearings. We think New York is a logical place to have such hearings. We think that people on all levels ought to be protected. This is a matter certainly for the poor, but I would say that even the middle class and certainly the rich do not like to be bilked. When people know what they are paying percentage-wise in dollars and cents on an annual basis for borrowing money, buying things on installments, or getting things through revolving credit, then you will be serving your constituencies well, and I wish you good luck in this hearing. The CHAIRMAN. Thank you very much, Evelyn Dubrow, for a wonderful statement and we thank you for being here. Congressman HALPERN. I don't have any statements, but I don't often get the opportunity to compliment Miss Dubrow, so I would like to extend my compli- ments to you, Miss Dubrow, for your spirited and direct testimony. You have been constantly in the forefront for the fight for consumer legislation and for bettering the plight of the consumer. In fact, I recall Miss Dubrow at the hearings at Foley Square here right across the street, before Senator Douglas, in which I participated seven years ago. Since then the consumer debt rose from forty billion in 1960 to almost seventy-four billion in 1963. Mortgages rose from $201 billion to $227 billion. Consumer bankruptcies rose faster than consumer debts. I cite this because if it was ever timely for remedial legislation it is now. I would like to thank you, Miss Dubrow. The CHAIRMAN. Our next witness is the Hon. Percy Sutton, President of the Borough of Manhattan. Mr. President, we are delighted to have you here today. We know how tight your schedule is and we know how deeply you feel the need for this. I notice you have a formal speech for us. I wonder if you would like to summarize it? Hon. PERCY SUTTON. I think you are quite right. It is rather long. I have no intention of reading the entire statement. I shall attempt to summarize. Let me thank you very much, however, for bringing this hearing, your Com- mittee, in bringing this hearing to New York, and especially am I thankful that you located in the Borough of Manhattan, where there are problems unlike Congressman Halpern's County of Queens. We have rather more acute problems here in the Borough of Manhattan with regard to the evil of the fraud problem in the area of consumer goods purchases. Legislation for the protection of consumers such as that now before the House Committee of Banking and Currency is long overdue. I believe that the interests of American consumers, who are the foundation of the American economic miracle, have been unrepresented in the halls of Congress for too long. PAGENO="0584" 1166 CONSUMER CREDIT PROTECTION ACT Therefore, I wish at the outset to make clear my support for the kind of legislation now being considered by this Committee. I need not supp'y you with a battery of facts and figures to prove the obvious. Consumers credit has assumed tremendous importance in the lives of virtually all Americans. They see it as the vehicle by which they can attain the material advantages brought within their reach by the technological revolution. STATEMENT BY HON. PERCY E. SUTTON, PRESIDENT OF THE BOROUGH OF MANHATTAN President SUTTON. Legislation for the protection of consumers such as that now before the House Committee on Banking and Currency is long overdue. I believe that the interests of American consumers, who are the foundation of the American eConomic miracle, have been unrepresented in the hails of Congress for too kong. Therefore, I wish at the outset to make clear my support for the kind of l~gisiation now being considered by this Committee. It is particularly praiseworthy tuat rerorni in tue field of consumer credit at last appears to be nearing realizatiOn. 1 need not supply you with a battery of facts and figures to prove the obvious: consumer credit has assumed tremen- dous importance in the lives of virtually all Americans. They see it as the vehicle by which they can attain the material advantages brought within their reach by the technological revolution. What they seldom realize, however, is that credit itself is a commodity for it has a price just as the automobiles, washing machines, and television sets. Few consumers of credit understand the price of the credit they receive because it is hidden in a maze of figures and esoteric terminology that fills the typical retail installment contract, revolving credit agreement, or loan application. This obfuscatiOn and confusion makes it impossible for the average con- sumer to compare the price and quality of the various credit arrangements offered to him. The result has been an intolerable lack of the true competition that should exist between the many commercial institutions that extend credit to the consumer. I am convinced that the first step toward ameliorating these abuses is to re- quire, by law, tile clear disclosure of all credit costs ii~ both dollars-per-hundred and an annual percentage rate. Thus, I must applaud the strong full-disclosure provisions of the Consumer Credit Protection Act-provisions which will return to the consumer the bargaining power that current credit practices prevents him from exercising. However, I want to emphasize as strongly as possible this morn- ing that this full disclosure reform will be of greatest significance for the millions of Americans who live below the poverty line-those for whom credit has been the source of their exploitation and oppression, rather than the short cut to the good life that the popular mythology would have them believe. Before elaborating on this point, however, I want to point out that there is a falacy in the common supposition that low-income people are precluded by their circumstances from enjoying middle-class goods and "luxuries", such as stereo phonographs and color television sets. In truth, the poor have constituted a highly lucrative market for the cornucopia of consumer goods which are such an important part of the American way of life. The reason for this apparent paradox-(that the poor can afford these fruits of a moderate income ) -lieS in a second paradox; credit today is readily ex- tended to those who can least afford it and therefore would seem to be the greatest risks. I invite anyonb who doubts the accuracy of this statement to come to East Harlem's Third 4venue and Central Harlem's West 125th Street, where furniture and appliance stores offer easy credit to virtually anyone who walks in off the street, including those on welfare. And yet, it is these low-income people who are often worst equipped in terms of education and experience to cope effectively with the mysteries of the credit system and to choose rationally between the various sources of credit offered to them. The evils of this situation are compounded by tragedy that is repeated over and over among the urban poor. When the poor consumer, who is usually tied to a number of retail installment contracts, falls behind in his payments- (not unlikely for one whose income is by definition, marginal)- he very often finds himself caught in a downward spiral of events from which he will be lucky to PAGENO="0585" CONSUMER CREDIT PROTECTION ACT 1167 recover; the finance company, which has purchased the contract from the re- tailer, files suit to collect the debt; the debtor-defendant is not served with sum- mons and the undefended action results in a default judgment; the merchandise purchased under the contract is repossessed; a deficiency judgment for the amount left outstanding is rendered; the debtor's salary is garnisheed to pay off the deficiency; the debtor is fired from his job as a result of the garnishment; now unemployed, he is without a job, without the purchased commodity, and in debt. The sad truth is that this story-and the economic exploitation that leads to it-is all too common in the nation's slums. Indeed, more than a little of the smouldering resentment that has exploded in cities across the country can honestly be attributed to the victimization of the comsumer poor. Therefore, I must implore you to remember that while the middle-income consumer will no doubt benefit from the reforms embodied in the Consumer Credit Protection Act, which you have initiated, these reforms are much more crucial to the poor of the nation's slums and ghettos. It is the poor consumers who have suffered the worst from these credit abuses. With these thoughts in mind, I would like to turn my attention to two important features of the Consumer Credit Protection Act which I feel merit some specific comment. The first is Section 203(K), which, unfortunately, is not included in the Truth-in-Lending Act. This section requires full disclosure of interest rates on revolving credit accounts. I want to state that both as an individual and as one who comes from the ghetto to this high position as President of the Borough of Manhattan, I unequivocally support this provision and feel that its deletion from the Senate version substantially emasculates the bill. I am sure other witnesses have and will demonstrate to this Committee, that the revolving credit accounts have come to play an extremely important role in credit operations in this country. As former Senator Paul Douglas testified before you, to omit revolving credit accounts from the coverage of this bill is to create an enormous loophole in the law, especially in view of the fact that this kind of credit arrangement is becoming more and more prevalent. Moreover, it is my impression that the revolving account is one of the more devious and misleading varieties of credit schemes. I therefore feel little sym- pathy for those banks, department stores, and other institutions who piously claim that it would be too time consuming and too difficult to in each account pierce the complexities of this accounting device in order to arrive at the true interest rate. What they pass off as "complexities" I look upon as a kind of flagrant chicanery from which we must rescue the consumer if we are going to make any headway against the injustices the credit system presently perpetuates. One particularly insidious aspect of the revolving credit account is that until the account is completely paid off, the creditor continues to hold a chattel mortgage on each item that has been purchased on the account. Thus it is that if the debtor defaults, the creditor can repossess all of the items bought on the account, even though the debtor may have already made enough payments to cover the cost of one or more of the items. In practical terms, the result for the poor debtor who purchases all his furniture, appliances, and equipment on such an account is that he will lose everything he has purchased; not having paid for all of the goods, he owns none of them. Title II of the Consumer Credit Protection Act, the Prohibition of Garnish- ment of Wages, represents a second important addition to consumer protection. Wage gurnishmenf~ have had a profound effect in continuing the instability of the low-income community. Without garnishments unscrupulous merchants would not be able to offer credit to customers without concern for the bor- rower's ability to pay. Instead of investigating the credit rating of the' perspec- tive consumer, merchants frequently ask only one question: "Do you have a job?" If the answer is "yes", no further questions are asked~ because the unscrupulous creditor is not interested in the welfare of his customer, and he knows that the account can be collected through the use of wage garnishment if the buyer defaults. The prohibition against wage garnishments will force credit merchants to look more carefully at the ability of the individual consumer to pay for the PAGENO="0586" 1168 CONSUMER CREDIT PROTECTION ACT goods that he wishes to buy, and will increase the financial stability of the individual low-income consumers. Wage garnishments have become an overwhelming burden on the working class. Low income families are the ones who are continually exposed to wage garnishments and are also the ones who suffer the most when their take-home pay is reduced by even a few dollars. A worker who buys a $66 set of kitchen- ware from a door-to-door salesman may find that his debt has skyrocketed to $122 after a default. The new amount includes court éosts, attorney's fees, and interest charges. tie may also find that a crucial $6 is being taken out of his $60 gross weekly earnings to pay off the $122. The worker, burdened by a garnishment for a much greater amount than he had originally expected to pay on that debt, may be forced to default on the other time contracts he has made. Several more judgments are piled up against him, and each creditor waits his turli to garnishee the defaulter. The worker's employer, annoyed by the bother of extra bookkeeping, may discharge the worker, leaving him to join the anonymous mass of unemployed. No one will want to hire him, because no one wants the inconvenience of having an employee who has a wage garnishment against him. The debtor is entrapped in a modern form of debtor's prison! Workers trapped in this situation have few paths open to them. Frequently, low income workers faced by the burden of garnishments find that the income they are able to take home from work is so meager that it is easier to stop work- ing altogether, apply for public welfare, and leave the burden of debts behind. Unfortunately, the garnishments do not disappear when the worker goes on relief; they continue to collect interest and will be placed on his wages if he ever starts to work again. The prospect of having to encounter old debts serves as an incentive to remain on the relief rolls rather than to seek work. The second escape to which the financially oppressed are driven is bankruptcy. More and more low income wage earners are learning that bankruptcy is an instrument that the government has provided to discharge debts which are over- burdening. The poor people who use bankruptcy as a remedy usually owe rela- tively small amounts, but are under wage garnishees which take such a large proportion of their income that they can not afford to continue to support their families and pay their debts. I believe a federal prohibition of wage garnishments would be an important step in the consumer protection of the poor. However, if wage garnishments are not entirely eliminated, the present law should be changed. The use of garnish- ment and the percentage of a debtor's inconie to be garnisheed in a given case should be at the discretion of the court. Once the percentage of income to be garnisheed is established, it should be subject to change at the discretion of the court. This type bf individualized decision can take into consideration the needs of the individual debtor and his family. In this way the debtor will be able to support his family and gradually relieve his indebtedness~ Three reforms not included in this legislation should accompany the prohibition wage garnishments. In order to insure maximum protection to consumers who buy on installment sales contracts: 1) limitation of the number of co-signers, 2) prohibition of deficiency judgments after repossession, 3) removal of the ten day limit for the exercise of claims against the seller after notice of the assign- ment of the contract to a credit company has been made. Each of these three practices shares responsibility for the continuation of the precarious economic conditions of the poor. A prevalent practice in low-income areas is for merchants to insist upon several co-signers for each installment contract. Each co-signer ogrees to be personally responsible if the recipient of the goods defaults in payment of the contract. This practice is used by merchants as an alternative to investigating the consumer's ability to pay. The merchant does not have to find out if the con- templated purchase will overburden the buyer, because if the buyer defaults the merchant can bring an action against each of the co-signers in order to collect the outstanding balance. As long as wage garnishments are permitted the merchant will be able to garnishee the wages of each of the co-signers. This spurious practice of gaining security through signatures, rather than through investigation of the consumer's ability to pay, can be controlled if the number of co-signers is limited by law. If merchants give credit discretely, there should be no need to have more than two signatures on any installment contract; and PAGENO="0587" CONSUMER CREDIT PROTECTION ACT 1169 there is no reason why we should continue to protect merchants whose lack of concern for their customers' welfare is manifest in their extending credit to people who can not afford credit and in their requiring multiple signatures on contracts as security. The second reform I would like to see included in consumer protection legisla- tion is the proscription of deficiency judgments after a repossession. An inter- view in The Poor Pay More, a book on consumer fraud by David Caplovitz, gives an excellent example of this abuse: "The first thing (my husband) bought on time was a car in a used car lot. The original price of the car was $500, the downpayment $10. He bad the car about two months and had paid about $80. Then he missed payments for about three weeks and the car was towed away without notice. Payments had been made to a discount company which was handling credit. I telephoned the com- pany, and they told me that if I sent $50 they'd return the car. I did, and then received a notice in the mail saying the car was going to be auctioned. They kept the $50 and said nothing about it. My husband didn't go to the auction since he couldu t have bought the car back anyway. Then we received a notice saying the car was sold for $35. "The company told us we owed $800 in all on the car that cost $500, because of interest and legal fees." (pp. 165-466) In this case the husband still owes $800 less the $90 that he paid and the $35 auction price., even though he coes not have the car! The fact that the car was taken away from the family makes no legal difference; $675 is still owed. The lady is giving this interview end by saying: "I went to Legal Aid which said nothing could be done. Since my husband was out of work, they garnisheed my brother-in-law's salary." (pp. 165-466) "Nothing could be done," and these low income consumers were forced to pay for a car that they did not have. Consumer abuse of this kind must be ended. Prohibition of deficiency judgments after repossession would protect consumers against having to pay for merchandise that has been legally taken from them. If consumers are forced to continue to pay for goods they have bought, they should be entitled to keep those goods. The final consumer protection reform that I would like to propose for your consideration is the removal of the ten day period or any period provided by state law after the notice of assignment, in which the consumer must make all his claims for defects in merchandise against the seller. This practice is most heineous because it disarms the installment buyer of his most effective weapon against poor service or shoddy merchandise-refusal to pay! The usual procedure in low income neighborhoods is for a merchant to sell goods to the consumer under an installment contract and then to sell the install- ment contract to a company that specializes in payment collectidn. The consumer has only ten days to object to the sale of his installment contract. Usually there are no apparent defects in the merchandise for the first ten days. If the customer does complain during that time he is stalled and not told of the necessity to object to the assignment of his contract in writing. After the assignment is complete defects may begin to appear. Fabrics begin to shred at the seams. Heat dries out the glue that held the furniture together-couches and tables fall apart. The customer returns to the store to complain. There he is told that his contract has been assigned to a credit company and the store no longer has any responsibility for it. Next the consumer contacts the credit company, usually located quite far from the neighborhood store. The credit company tells him that they are a col- lection agency only and the quality of the goods is the responsibility of the store. The confused consumer has no place to turn. He can not stop his payments, because the credit company will get a judgment and wage garnishment against him; and all complaints to the merchant fall on deaf ears. The frequency of the repetition of this fact-pattern is astounding. Consumers must be better protected in a world in which knowledgeable merchants face un- experienced buyers. In order to right this situation, we must pass legislation to allow the consumer to bring a claim against the seller within a reasonable time after the sale or to allow the consumer to hold the credit company responsible for the merchantability of the goods. It is important for use to have legislation that will encompass all of these reforms: the prohibition of garnishments of wages. the limitation of the number of co-signers to an installment contract, the prohibition of deficiency judgments after repossession of goods bought on an installment contract, and the removal of PAGENO="0588" 1170 CONSUMER CREDIT PROTECTION ACT the time limit for the exercise of claims against the seller after notice of assign- ment of an installment contract. The present system of consumer credit is in need of reform; it is archaic: it is the primary cause of the economic chaos of our low- income families; and it is greatly responsible for the frustration of the low- income Americans who live in ghetto areas. This committee must consider the needs of these people in drafting and acting on new legislation. It is now the time for Congress to take action to protect the con.s~trnerS in our society. Congressman Bingham, I salute you and your colleagues for conducting these very important hearings and I thank you for indulging my appearance. I have read to you, gentlemen, in great detail my views. It is my understanding that what I should do here is summarize my views. I have not done so in detail, but you will get it from that which I am reading. The CHAIRMAN. I notice in your statement that you do express a very strong support for the Federal prohibition of wage garnishment. It has been suggeste(l here earlier today, and at the hearings we have had at Washington, that stopping garnishment would reduce the availability for credit, particularly for the poor. As you undoubtedly know, there are three states that don't have garnishments, Pennsylvania, Florida and Texas, and they apparently suffer no such trouble. Borough President SUTTON. Exactly. Those are states that don't have garnish- ment. I introduced similar legislation in the State Legislature in 1962 and `66. The argument is if we restrict garnishments we would not have free lending for the public. Let me say there are persons who should not have credit, and I am for this for persons who are t~nable to pay. Let me say this: In any other state it does not prove a restriction on credit The CHAIRMAN. We are grateful for your suggestion for additional protection, that there should not be repossession. I think this is the first time we have had this kind of prohibition. Do you feel that this is something that should be undertaken on the Federal level or is it better on the State and local level? Borough President SUTTON. I think it would be much easier for you to do this at the Federal level, than it would be for us to do it on a state by state level. I believe there is ample Federal involvement for our doing this at the Fed- eral level. The CHAIRMAN. Thank you, very much, Borough President Sutton. Congressman I~ta1pern? Congresman I~ALrERN. First I would like to commend our very distinguished witness, the Borough President of Manhattan. You have given excellent testimony, and I have had occasion to look over your prepared presentation, as I have sat here, and it contains some of the soundest arguments I have seen for this bill, and I am certain it will be a valu- able addition to our Committee's record, and hopefully for the shaping of a very effective bill. We have heard that deceptive credit factors have been a significant contributor to unrest and ultimately to violence in the low-income areas of our City. Would you say that is so? Borough President SUTTON. Yes. I don't go with those that say riots are caused by- Congressman jIALPERN. Yes, I know. Borough President SUTTON. I am sure of this, sir, that a short survey has shown that those cities where riots have occurred, that in those stores that were thought to be gouging by credit or cheats, those are the stores to be the first victims of the rioters. I can say this, first, that while it may not be one of the major contributors, that is a part of the creating of the timing of apathy and depression that exists in a ghetto. The high interest rates, the gouging, and too often the gouging and cheating that occurs in the low income communities, is a fact that contributes to the alien- ation that comes. Congressman HALPERN. Do you feel that consumer ignorance has played a more significant role in deceptive practices? Borough President SUTTON. I think I should tell you, sir, I come from the ghetto, and I practiced law all of the years I practiced law on 125th Street. PAGENO="0589" CONSUMER CREDIT PROTECTION ACT 1171 More than one half of my practice dealt with people in local problems; land- lord-tenant problems, consumer protection problems. Not only is there ignorance, but there is downright cheating. Not just ignorance or being cheated, but even if they were not ignorant or being cheated, the con- sumer credit machinery is such as to deplete their income. So it is a combination of the two. Congressman HALPERN. Thank you very much, Borough President Sutton. The CIrAIR~IAN. If I could ask you one more question. I notice also you have given strong support for control of the revolving ac- count as a form of credit subject to abuse. We have heard again and again in Washington, where they charge one and a half percent monthly as a finance charge, but that is not the same as eighteen percent a year. This seems hard to believe, but it really doesn't work o~it that way. They don't like to put on there that it is really eighteen percent a year. Borough President SUTTON. Yes. Right now this is an awful thing, because it exists with our biggest department stores as well as our corner department store. One and a half percent interest on the balance that is left, and they say this is not eighteen percent a year, because the balance fluctuates, and they say also because the balance fluctuates it would be much too expensive to tell each month the purchaser what his actual carrying charges are. Well, I don't yet understand their mathematics. First they say this is not eigh- teen percent per year, I don't understand how they say that. What is wrong with specifying it is one and a half percent a month, at eighteen percent a year, and x number of dollars owed every month. I think the carrying charges ought to be clearly stated and, I think, if you do nothing else, any attempt ought to clearly state the requirements of the depart- ~ment store or any other store, it should state what the carrying charges actually ar~ The CHAIRMAN. Thank you very much, indeed, Mr. Borough President, and we would like to thank you for taking time out of your heavy schedule for help- ing out in this field. The CHAIRMAN. The next witnesses will be a group of three witnesses from the ILGWU, Mr. Gerel Rubien, Mrs. Carmen Rolon, Mrs. Anna Zayas. Do you want to take the stand together? STATEMENTS OF WITNESSES FOR INTERNATIONAL LADIES GARMENT WORKERS UNION Mr. RUBIEN. Mr. Chairman, with your permission, I will introduce the next two witnesses. I am Gerel Rubien, the Education Director of Local 82 of the ILGWU, and the head of our steering committee who has been working many years, as Miss Dubrow told you, in order to effectuate the Truth in Lending law. `~ Before I introduce to you Mrs. Rolon, I would like to state a few other words, something that Mr. Brewer and Mr. Sutton said, and that is the fear, the anger, the unfair, oppressive instalinient practices, the effect they have upon the working people of this City. You see, they come to us in our union, they come in with these problems and many times we cannot rescue them. They are furious at our economic system. They are distraught with our Gov- ernment and they are in despair about their ability to get along in the world be- cause of the unfair practices that have been practiced against them; surely they ~uay, but that is our entire economy, the door-to-door salesman then. These things worry us not only in terms of finance, but in terms of morale and citizenship and the contributing citizenship of our workers in this City. Now permit me to introdu~e to you Mrs. Carmen Rolon, who is the Educational Director of Local 42, which has a large number of Spanish-speaking members, and Mrs. Rolon deals very much with many of the parties in consumer practices. Mrs. Rolon. Mrs. CARMEN ROLON. Local 42 ha~ had mo~t of the problems we have here, the consumer and buyer. Many of our members are really cheated, I can say, be- cause they pay double the price, and if the merchandise is not good for one reason or the other, if they cannot continue to pay on time their salaries are garnished and many of them have lost their jobs on account of the misunderstandings that they can bring in the office of their employer. PAGENO="0590" 1172 CONSUMER CREDIT PROTECTION ACT They don't want to carry that tremendous burden of work. For example, we have Dominica Valin. She bought a sectional living room set, a lamp and table, from Stanton Furniture Company for $517. Two months later it started to rip apart and ~he complained many times, but not until she came to the union did we get matters settled for repairs on this. There is Hilda Ortiz. She bought a radio combination from Sears Company for $400. It didn't work properly. After many, many ~complaints to no avail, she came to the union. We called the manager and got prompt action in the matter. Then there wits Primitivo Nieves. His wife bought an encyclopedia from a door-to-door salesman for $285, and then he couldn't afford the payments. He could not carry the account. Being threatened with garnishment he came to the union and we broke the contract. Justino Garcia bad such a difficult case that I referred him to the Legal Aid Society. I couldn't help him. Then we had Angel Vargas. Angel Vargas bought a camera from Prospect Appliance Corp. for $173. After making three payments, they promised his camera would be delivered. It never came and he came to the union for help. Margarita Diaz was given a garnishment on the balance and cost after the firm moved without notice. The union arranged payment with a discount. Carmen Melendez bought a bracelet from Remay Jewelry Company for $55 on the layaway plan. She paid $35 and the firm went out of business, and that was the end of it. William Garcia, someone used his name at Ace Furniture Company and the union referred him to our lawyer for assistance. Anna Torres, her salary was garnisheed for the unpaid balanëe of $273 while she was paying to the firm. Six payments had not been credited to her. The union is working on her case. I think that is about all I have to say. Thank you. The CHAIRMAN. Thank you very much, Mrs. Rolon. We are very glad to have you here and I notice you referred to the Legal Aid Society as one that you referred very difficult cases to, and we are going to hear later from Miss Mary Tarcher of the Legal Aid Society. We thank y~u very much for coming here. Mrs. ROLON. I forgot another item. I wonder if this is of finy importance. I shop very often in the supermarkets, and when they come to the labels with five cents off, they will never mark it correct. People still pay the regular price until someone comes over to call their attention to it. So the special offers never go to the consumer, the special offers stay in the market. The CHAIRMAN. Thank you. Congressman HALPERN. I haven't any questions, but I wish to thank you for a fine presentation. The CHAIRMAN. Would Mrs. Zayas like to speak? Mrs. ZAYA$. No. The CHAIRMAN. Congressman Halpern? Congressman HALPERN. We have a telegram from our distinguished Senator Jacob Javit~. Our other Senator from New York will attend the hearing and we expect hi~n to appear very soon. Unfortunately, it was just physically impossible for Senator Javits to be here, but he did send this wire, and I would like to note it for the record. STATEMENT OF Miss SHIRLEY KRONBERG, Hor~t, MOTEL, AND CLUB EMPLOYEES UNION The CHAIRMAN. Thank you, Congressman Halpern. Our next witness is going to be Miss Shirley Kronberg, Director of the Neighborhood Services Council of Hotel, Motel and Club Employees Union. Miss Kronberg was very active in securing passage of garnishment provisions in New York which prohibit firing of employees because of being garnished once in twelve months. She is f~rther working for future legislation which will bar garnishments which will leave the employee less than a minimum wage. PAGENO="0591" CONSUMER CREDIT PROTECTION ACT 1173 We are very happy to have you here, Miss Kronberg. Miss KRONBERG. Congressmen, it is really a pleasure to be able to address you on the matters we have been dealing actively in for years. The Council of Hotel, Motel and Club Employees Union, was set up primarily by our union for the purposes of assisting and servicing the 30,000 people and families hi the area primarily with consumer protection, garnishees and other areas like housing and things not covered by the union contract. In other words, anything in the life of our member and his family that is not related to his work. We have found in the six years of our existence that the biggest problems of our member~. parti'ularly the lower paid cotegory, forty percent of our inem- bership, which I guess we can consider in the low economic section of our society. I am not talking now of the poverty stricken, I am not talking now of people on welfare or people without jobs, but that section of our population which does work and still are poor people earning from $60 to $80 a week, who still have to live with large families on this kind of an income. Their biggest problem is the problem of consumer protection. Their biggest problem is the problem of being able to provide for their families, for necessities. I am not talking of luxuries, I am talking of necessities, furniture, a bed for a child to sleep in, or other household goods with which a family must provide itself. The pitfall into which our members and people like them fall is in the simplest purchase which becomes a major problem in the lives of these people, and the largest cause for impoverishment. It has been our experience that consumer education by itself, telling people how to shop and where to shop and where to save money is not doing much good. We have gone to great lengths to educate our membership about shopping for cash, about comparison shopping, about testing the quality of the materials that they are purchasing and so on. We find that people know what is right, but they are not able to pursue a course which will give them the best purchase. The largest single reason is that they cannot get credit in a creditable establishment. There are other persuasive reasons for shopping in what we call the schlock store, the fly-by-night furniture operation or the other firm that operates with the deliberate intent to sell shoddy merchandise at high prices to the poor. The CHAIRMAN. What is the name of that store? Miss KRONBERG. Schlock. S-c-h-1-o-c-k. It means shoddy. There are some they call the dirty dozen. If you like, I could name them. These operations operate for the purpose of making their money from the sales. This is not where the money lays. The money is in the garnishees. They are established for the purpose of getting a garnishee. It is a whole op- eration which employs a legal firm, Marshal's office, affidavit signers-you know, the fellow that serves a summons at 12:00 o'clock in the Bronx and 12 :03 in Brooklyn. All of this is tied together in one big effort to swindle the poor working person. I am specifying working person, because they don't like to deal and they don't deal with somebody that doesn't have a job, it is not worthwhile, it is hard to collect. But somebody that has a job is easy prey for this kind of merchant who is looking forward to the day that this worker will default on his payments and then the legal machinery sets in, which puts this worker in intensive slavery, because for years he is compelled to pay for this default. I recognize the value of the Truth in Lending Bill and the good it will do for the literate, the educated, the people who now know what it is they are paying credit for, and I think it is admirable and I am for it. But the section of your Bill that I like best is the section that will outlaw garnishees, because essentially the people who are literate and who are educated and who can shop and compare by and large will know what they are paying in interest rates. It is the people who walk into a store and whose entire transaction is oral, who believe what the salesmen tell them, who believe the salesman when he PAGENO="0592" 1174 CONSUMER CREDIT PROTECTION ACT tells them "This will cost you $2.00 a week." That is all be can calculate, how much will it be a week. He doesn't know bow many months, how many years, how much the service charges, how much he is paying for financing, nor will lie ever understand what the garnishee will cost him and we can't explain it. If we try to explain the garnishee and the cost involved in the garnishee, then we are part of that vast machinery that is bilking him, because how can you make a statement that when he bought something that originally cost $200~ that now we should have a garnishee for $400. It is impossible to explain that amount of interest, that the financing, that the initial fees, t~ie legal fees, that all this has doubled the price of what he has bought and t1~e price that he has paid in the first place has be~n exorbitant. The price he Ms paid for the merchandise which be has purcMsed is far in excess of the true value of the merchandise that he has purchased. The CHAIRMAN. You go right ahead, Miss Kronberg. Senator Kennedy will wait a minute, I think. Miss KRONBERG. The garnishee as originally instituted was instituted as a humane method of keeping people out of debtor's prison, but that has long since outlived its usefulness and has become a terrible burden for the poor and only the poor. The garnishee which was instituted in order to give the working person an opportunity of paying ten percent of his salary instead of having the entire salary attached has long since led to the greatest amount of cheating against the poor, the poor that work. Outlaw the ga~nisbee, I think, and it will make it unprofitable to maintain this entire establishn~eflt that sells in the first place to people who cannot afford what they are bttying. In the second place, it would outlaw-and I think this is the most significant part of the entire piece of legislation, it will outlaw the door-to-door salesman. These persuasive salesmen that take particularly housewives, lonely house- wives, who have the opportunity to talk to somebody who flatters her, who per- suades her that she can afford $400 worth of encyclopedias or a $60 laminated Bible, or some other piece of merchandise which she doesn't need, she cannot pay for, which is overpriced and which is going to lead her family into im- poverishment, for a family of five or six or seven that has never even been led to the public library. It will do away with this kind of salesman, because this salesman is a garnishee. If this is the only thing, the threat of garnishee or the garnishee itself is the only thing that makes it feasible reasonable for him to ring doorbells an~l get contracts signed. I had an interesting experience. We have bad hundreds of people over the years who on the day after they signed the contract for something they didn't need and wouldn't pay for, they realized, once the salesman had left, that this was a mistake, and they came running to us to see if we could cancel this con- tract, and every contract clearly states no cancellation of this contract once it is signed. Well, we go through all of the motions to try to cancel the contract. Sometimes we are lucky and we can buy them back, we can buy them back. We pay, that is the person pays $20 or $10, or more, depending on the size of the purchase. No delivery has yet been made, no machinery booking or anything has yet taken place. But in order to get a contract cancelled, when it is possible, the person has to pay something in order to get it back. But I have one interesting experience. I got a contract cancelled a counle of weeks ago with great ease, and when I got through I wondered what I had said that was different this time from what I bad said all the other times to the company I had tried to get the contracts cancelled with. It was an encyclopedia book company. I made the same pleas, the lady is illiterate, she can't read, she was talked into it. But I had said one more thing. I said this lady is on Social Securit~, and the difference was that this lady did not have wages that could be garnished and so the company was perfectly willing to cancel this cOntract, because they couldn't collect. The only tinie that they are adamant is when they know they hold the club of garnishee over the purchaser. We have been trying for a long time to get legislation passed that would alleviate the paying of purchases with garnishees, installment contracts. PAGENO="0593" CONSUMER CREDIT PROTECTION ACT 1175 Several years ago we persuaded Assemblyman Marx and State Senator Jaffe to introduce legislation. We thought the most important thing, first of all, was to guarantee that a worker would not get fired for receiving a garnishee, because in New York State, up until January 1st of this year, an employer had a right to fire a worker if a garnishee came on the job. Two years ago we were very happy that the Legislature of New York State, and that particular Legislature approved a bill that allows an employee ~pne garnishee in a twelve-month period. That was a step forward. At least it protects the job of a man who got one garnishee. However, we are now working for legislation which, by the way, was supported by the Labor Department, by the Governor, by large numbers of Legal Aid Societies and many other organizations that deal with the problem every day, and that is why this legislation now before the New York State Legislature would make a garnishee available only for that amount, ten percent of that amount above the minimum wage. The reason that we have to tackle it this way is because there is no Federal legislation or State legislation which outlaws the garnishee. This claim that this will cut out credit for the poor is true, but I think that is advisable. I think that credit for the poor should not be the function of the private finance company. I think that when we do cut out credit for the poor, as it now functions, we will then be able to deal with the real problem, which is to provide credit for those people who are able to pay on the same basis that we now provide credit for builders, for college scholarships, for a whole myriad of other people who are no more deserving than the man that works, and I think that your legislation, Congressman, will go a long way in this. Thank you. The CHAIRMAN. Thank you very much, indeed, Miss Kronberg. We are grateful for your testimony, and if you have time to stay, perhaps we will have a chance to ask you questions later. I note Senator Kennedy has a heavy schedule. He was here precisely on time for his appearance and we would like to have him present his testimony now. Congressman HALPERN. I too want to thank the witness for her fine testimony. I do have a few qiiestions I would like to ask you later, if you will be here. Miss KRONBEIRG. I will stay. The CHAIRMAN. Our next witness is the distinguished. Senator from New York, Senator Robert F. Kennedy. We are very happy to have you here, Senator. Senator Kennedy, you have given us a very fine prepared statement. I don't know whether you want to go through the whole thing or summarize. Senator KENNEDY. I won't `go through the whole thing, but I would like to read some excerpts of the statement. Before I begin, Mr. Chairman, I would like to compliment you for the effort you are making in this field. I think it is extremely important, I think the people in the City of New York and the community owe you a great debt. I would also like to compliment Congressman Halpern, who has always been very active in this field. The CHAIRMAN. He is a co-sponsor of this Bill. Senator KENNEDY. I understand that, and I know he has been interested in this legislation for nuite a long time. Mr. Chairman, I also know it would be improper to have this kind of hear- ing without paying tribute to Senator Paul Douglas who started this kind of legislation back in 1959, and then Senator Proxmire, who carried that on, and then Congresswoman Sullivan from Missouri. Mr. Chairman, a casual look through the daily nap~rs here in New York City, or in any other American city, on any given day is all one needs to appreciate the importance of the legislation before you today. STATEMENT OF SENATOR ROBERT F. KENNEDY Senator KENNEDY. 1\Ir. Chairman and Members of the Committee: A casual look through the daily papers here in New York City-or in any other American city-on any given day is all one neels to appreciate the impor- tance of the legislation before you today. Auto dealers and department stores. 83-340 0-67-pt. 2-38 PAGENO="0594" 1176 CONSUMER CREDIT PROTECTION ACT banks and finance companies, appliance stores and furniture stores-all adver- tise the ease of buying on credit. The consumer is barraged with a spate of variations on "buy now, pay later" A used car a(1 invites hin to buy oii long, low easy, hank terms. A TV retailer's ad entices him with `Xo down payiiient, 24 months to pay." And a bank offers "UI) to $2,000 just on your signature, a year to repay." But none of the ads tell him just how much this easy credit will cost him. These advertisements-and the retailing practices they promote-have, of course, been remarkably successful in our affluent society. As more families with more income--3 out of 10 families now earn over $10,000 a year-see more products to choose, they buy, and buy, and buy-and they do it on the instaiF ixient plan. The amount of credit buying has multiplied seventeen times since the end of World War II, four times in the last fifteen years. Short-term consumer debt is now nearly $100 billion, and when mortgages on one-family and other homes UI) to S units are thrown in, Americans owe well over $300 billion, almost as much as the national debt. Mortgage debts aside, about half the labor force is buying something on the installment plan. And the typical worker spends $1 of every $4 in his pay envelope to pay for the car or television set or refrigerator that he bought on time. What is wrong with this picture is that the hard-pressed wage earner was never told-either in the advertisement or at the time of sale-the true cost of the credit involved. If more Americans are buying on credit, more are being deceived by nhisstated finance charges; more are victimize(l by disreputable lenders and sellers. Reputable banks here in New York City advertise personal loans at "$5.25 per year, discount, for every $100 you borrow." They do not say that, even though the money is paid back a little each month, the interest charges are calculated as though all of the money is kept by the borrower for the whole year. This doubles the true interest rate from the quoted 5% percent, and the w-ord "discount" means that there are added charges which bring it to over 12 percent. Reputable department stores promote revolving credit plans at a cost of 1% percent a month. This sounds inexpensive enough-but many do not stop to calculate that this is 18 percent a year, and most do not know that the store's accounting practices may increase the effective rate to a far higher level. And if repiitable institutions understate the cost of credit, or imply that it is less than it is, there are thousands of other stores and dealers who are far less scrupulous. This Committee's files are full of the worst reported cases- the man in Chicago who paid 283 percent interest for a car, the lady who bought a $123.88 TV set for 24 easy payments of $17.50-an interest rate of 229 percent. And the fact is that you and I can shop absolutely at random in any city in the United States and find interest rates-which we must calculate for ourselves, if we are able to-of anywhere from 20 to 50 percent and on up for everything from ears, to furniture, to appliances, to jewelry, to small loans. We hear much about the fact that the poor pay more-and they do. The most shocking cases of overreaching are generally of poor people, who cannot afford a down payment, are attracted by low monthly payments, and are unsophisticated about the total cost they will end up paying. They fall victim more easily to aggressive salesmanship, to contracts disguised as receipts, to unconscionable collection procedures. And I have no doubt that resentment against exploitation is one of grievances being expressed in the riots which have ripped our cities. But the failure of banks and department stores and auto dealers to convey all the facts about their credit policies affect almost every American. The suburban housewife and her wage-earning husband must make dozens of decisions every year about how to finance family needs-a new car, a vacation, clothes for the children, a patio in the backyard. Will they take money out of the savings ac- count or sell some stocks or obtain a small loan or obtain a loan on a life insur- ance policy or buy on credit? Time after time they buy on credit, not realizing that they are paying an annual interest rate of 18 percent, and that it would be much cheaner to take the money out of savings or even to borrow it at a bank. They simply do not know-are not told-enough to make an informed decision about what !s, after all, a very complex matter. Indeed, the whole thing is ob- fuscated for them by a welter of gimmicks-"add-ons," "discounts," "service PAGENO="0595" CONSUMER CREDIT PROTECTION ACT 1177 charges," "financing charges"-which make it virtually impossible to figure out the total cost of credit. And this is a situation in which literally tens of millions of Americans find themselves. As a result, few purchasers know what they pay for credit. One survey families who had borrowed money showed that only 18 percent knew what in- terest rate they had paid. And, of the ones who borrowed $500 or less, those who knew the rate of interest had paid an average of 12.1 percent; those who cUd not know the magnitude of the financing charge were paying 37 percent interest, on the average. The legislation before you today, therefore, is important to every consumer. And consumers, by definition, include us all. Every consumer-hence, every American-needs the information necessary to choose for himself the best way of financing the goods he wants to buy. The right to choose and the right to be informed-those are the rights which H.R. 11601 seeks to protect. This is particularly important today, when we read that the cost of living is rising sharply. For now, more than ever, people will be tempted to borrow or buy on credit to get the tltings they want. And, more than ever, if they do not have enough information to decide the best way to finance their purchases, they will fall nuder the domination of overreaching creditors. We would not find it acceptable if one car dealer quoted us a price in zlatys, another iii lira, and another in deutschmarks, or if, in order to buy a suit of clothes, we had to compare prices quoted in rubles, pounds sterling, and pesos. Yet that-and worse-is the situation regarding consumer credit. Not only must the buyer compare apples and oranges, but he must do so without knowing how many are in each basket. Not only is it as though prices were quoted in different currencies, but it is as though the seller were neglecting to say whether he uses the Mexican or the Spanish peso, the British or the Austrian shilling, the French or the Swiss franc. What is needed is a simple yardstick, a measure so that comparisons can be conveniently made and competition among sellers of credit will be encourged. The consumer needs the assurance that he will be quoted a rate of interest, the lowest rate of interest which the free play of competition will bring-and that in all instances the rate quoted will mean the same thing: an annual rate, com- puted on the amounts actually owed. This is the principle which Senator Douglas fought for so tenaciously, so perseveringly for so many years. This is the principle which motivated Senator Proxmire when he took up the fight this year. It is the principle which was central to the thinking of Congresswoman Sullivan and to your thinking, Mr. Chairman, when H.R. 11601 was drafted. And it is the principle which we must enact into law-this year, while the extraordinary momentum which has cle- veloped for this legislation still carries us forward. Mr. Chairman, I am especially pleased with H.R. 11601. I was pleased, of course, that the Senate passed 5. 5 and I think S. 5 is a good bill, but I believe your bill improves upon it in a number of very important ways. First, the requirement that interest rates on revolving credit plans be stated on an annual basis is, I think, quite important. Revolving credit is now the fastest growing type of consumer credit. More and more department stores are using it, and revolving bank credit card plans are sweeping the country. These plans are so attractive, I think, precisely because they are expressed in terms of a 1% per- cent a month charge, and people do not stop to think of that as an annual rate of 18 percent. If revolving credit is the only exception to the requirement that interest be stated as an annual rate, I think its growth will inevitably be enhanced. And as it is, some have estimated that it will grow to 50 percent of consumer debt within 5 years. Your record is replete with examples of the confusion people experience about revolving credit. Some stores compute the interest before deducting payments made during the month. Others do not even credit returned merchandise before computing the interest. Some have a 30-day grace period before interest is charged; others do not. Some have a grace period but then charge retroactively to the time of purchase. And from this thicket have emerged retailers as wit- nesses, who say their quotation of a 11/2% monthly interest rate communicates sufficiently to the customer. I find that testimony unsatisfactory, to say the least. To leave this maze of practices unregulated would be a mistake in my judg- PAGENO="0596" 1178 CONSUMER CREDIT PROTECTION ACT ment. The annual rate of interest should be stated, so that the buyer can comrn pare. He may discover, to his surprise, that he would be better off getting a bank loan or that be would be better off buying in a different store. And the buyer should understand when a store will start charging the interest and bow the principal amount owed is determined. ELR. 11601 would accomplish these ends. That is a wise aspect of your bill. Second, your bill extends the requirement of full disclosure to the advertising of credit. This is right, in my judgment. Too many consumers have already made up their mind to buy when they walk into the store in response to an especially captivating advertisement. The ads should state the full truth about financing if they are going to go into it at all. Third, the bill includes credit charges of under $10. To people who earn $10,000 and $15,000 a year, this point seems less significant, but to a person of modest income the loss of even five dollars to an .overcharging seller of credit may mean the loss of a pair of shoes for one of his children. The person who pays a dollar a month for six months while be pays for a $50 chair is paying 48 percent interest, and be deserves to know that. Fourth, H.R. 11601 extends the disclosure requirement to mortgages. This is important becapse of the number of ways in which additional finance charges are added through ~ucb devices as discounts and points. The potential mortgagee should know what the effective interest rate is. Your bill would insure that be does. Fifth, the bill prohibits cognovit notes-that is, agreement by the borrower at the beginning that judgment can be entered against him without full legal proc- ess if he defaults on the debt. This provision will end a practice which is an open invitation to overreaching and abuse. Sixth, H.R. 11601 creates a ceiling of 18 percent on interest charges. This is the one provision about which I have reservations. I believe that an 18 percent ceil- ing would be constructive if we could be certain that it would only be a ceiling. What worries me is that it will become a floor as well-that lenders will auto- matically begin charging 18 percent unless state law keeps them from doing so. I urge the committee to weigh carefully whether the need for a ceiling when the bill already recluires full disclosure, outweighs the danger that the ceiling will also be the floor. Finally, and most important. in my judgment, the bill takes a significant new step that will protect thousands of families from harassment and even loss of employment. I refer to the prohibition against the garnishment of wages. Gar- nishment is really the modern equivalent of imprisonment for debt. Particularly for the low-wage worker, it can spell disaster. He may get to work one day and find most of his pay being taken to satisfy a debt or, worse yet, he may find an employer who doesn't care for the clerical burden involved and therefore simply fires him. This is not an isolated problem. At one steel plant in Chicago, 2,000 deductions are made every payday to satisfy debts. The company says it pays out $500,000 a year to its employees' creditors. And garnisbi~ent leads to bankruptcy. As our American postwar credit buying spree has snowballed, so have personal bankruptcies-from 8500 to 176,000 in 20 years. It seem~ more than coincidence that the three States (Florida, Pennsyl- vania, Texas) With prohibitions of garnishment number in the lowest six States in rate of bankruptcy; or that bankruptcies declined by 9% in Illinois after the garnishment exemption was liberalized; or that Iowa experienced a 360% rise in bankruptcies after going from a 100% wage exemption to a $35 a week exemp- tion. In a recent study in Michigan, 75% of bankrupts indicated garnishment was a factor in filing bankruptcy. And you have heard the personal testimony of bank- ruptcy referees and other experts that the incidence of personal bankruptcy is very much affected by the type of garnishment law which a State has. Bankruptcies ruin people's lives. They cause permanent psychological damage to family relationships. They cause those creditors who did not hound the debtor to lose everything They are not very satisfactory for anyone. Ending garnish- ments would not only protect thousands of individuals, but would protect most creditors as well. The fact is that garnishment is a legal tool often used by the same sellers who sell at unconscionable interest rates in the first place. One study in Milwaukee showed that a third of the over 6700 garnishments in one year were by three establishments. Two stores in Akron, Ohio accounted for twenty percent of the garnishments there. PAGENO="0597" CONSUMER CREDIT PROTECTION ACT 1179 Ending garnishment might cause overreaching sellers to think twice. And com- parisons of States having differing garnishment laws shows that the prohibition would neither discourage legitimate sellers from extending credit nor cause great- er losses for sellers. On the other hand, I do urge you to consider carefully the suggestions that have been made to improve the anti-garnishment provision in the bill: To protect workers more completely, the prohibition should apply to all personal earnings, instead of just wages, and should include also a prohibi- tion on wage assignments. To protect legitimate creditors, a ceiling on the exempt income of perhaps $15,000 should be established. High-income people, such as entertainers and executives, do not warrant a total exemption. It may be, too, that total abolition of garni~~hinent will prove impossible at this time. I strongly urge you, however, to report at least a provision protecting work- ers from being fired because of a garnishment and establishing a reasonable na- tional wage exemption for garnishment. These provisions would at least do away with the worst abuses. If we pass HR. 11601, we will have protected the right of all Americans to buy on adequate information. We will have enhanced the competitiveness of the credit market-and such informed competition will harm only the disreputable loan-shark. And if we succeed in reducing interest rates by even one point on the average, we will save $1 billion a year-cash that can be spent to reduce existing financial burdens or to buy products. In the end we would have stimulated econo- mic growth and improved the allocation of resources in the economy. If we do not pass this law, we turn our backs once again on the consumer; we show once again our indifference to his predicament. We have this choice. We can abandon the consumer to the finance companies and the merchandisers who prey on his desire for a better life, or we can ins~irq that he has the information he needs to choose intelligently. If the initiative shown by the Subcommittee is matched by the full Congress, we will choose correctly. I thank you, Mr. Chairman, and I would like, if I may, to have the full state- ment appear in the record. It was cut, as you can see. The CHAIRMAN. It certainly will appear. Senator Kennedy, we are most grateful to you for taking the time to appear here today and give us this testimony. I think I can say, having sat through a solid two weeks of hearings, morn- ing and afternoon, that this is the most comprehensive and certainly one of the most thoughtful and powerful statements that we have heard, and I think the Subcommittee will benefit greatly by it. It is very interesting, I think, in your pointing out the type of consumer debts that exist, the interest paid on the consumer debt, the interest paid is abont the equivalent of what the Federal Government pays in the way of interest. I don't have any questions at this time, but I do want to say we really appreci- ate having you heretoday. Senator KENNEDY. Thank you, Mr. Chairman. Congressman HALPERN. I, too, wish to commend our distinguished Senator for his valuable contribution to our Committee. It is particularly important to us, because of the differences between the weak Senate Bill and th~ stronger House Bill. The Senator's analysis and recommendations are more meaningful to our Committee, and I wish to thank him for giving us his time. Senator, you have contributed invaluably to coming up with an effective an- swer to meet this vital consumer problem. Senator Kennedy. the Senate Bill pas~ed on July 11th by a vote of 92 to nothing, as you stated, has many gaps in it which the HR 11601 will close. Can you promise strong support in Congress if we can pass the bill in the House? Senator KENNEDY. Congressman, I will use all of the seniority that I have gathered. Congressman HALPERN. Now, we have heard the suggestion that Truth in Lending legislation will not have a very significant effect on consumer and credit practices, because consumers are just not sensitive to the level of finance charges or credit costs. If, perhaps, this is true, what educational efforts do you think we can make to make the consumer more aware of this? PAGENO="0598" 1180 CONSUMER CREDIT PROTECTION ACT Senator KENNEDY. I think if the consumer has not been aware, it is because he hasn't understood the difficulty involved with credit. I think your Committee is very, very helpful as an educational device here within our own State, and I think more of these hearings can be extremely important, but I think the passage of this bill, the passage of legislation, the people will understand what they have lost over the period of the last several decades. I think we have a responsibility because we know what the situation is. It is more dif~lcult for people to know all of the various terms, all of the various devices used to make it more difficult for him to comprehend. I think that is the reason there is less knowledge about the situation at the moment than we would like. Congressman HALPERN. You said in your statement, I think we must all realize that a great portion of consumer sales are made on the basis of adver- tisements seen in newspapers, magazines and radio and TV and other news media and disclosure in advertising is probably as important as disclosure at the time of the transaction. Do you believ~ that the Truth in Lending Bills could have the desired impact if advertising were not included? Senator KENNEDY. I think it's very important. Congressman HALPERN. I should like to reemphasize the major aspects that you mentioned in your testimony on the House bill as opposed to the Senate bill, which requires disclosure of an annual rate by the revolving credit ac- counts. Many feel that the entire purpose of the Truth in Lending legislation, which is to enable the consumer to make wise choices and comparisons, would be defeated if this growing sector of the credit industry were not required to dis- close the same annual rate yardsticks that all other sources must comply with. Senator KENNEDY. I agree. Congressman HALPERN. I think we have had superb testimony and I wish to compliment you on it. The CIIAIRMAt~. Thank you again, Senator Kennedy. We will take a brief recess now of about fifteen minutes before we take any other witnesses. (Whereupon, a fifteen minute recess was taken.) The CHAIRMAN. Our next witness is the distinguished Majority Leader of the New York City Council. I want to say that we are grateful to Councilman David Ross for making arrangements for us to have the hearing here in this beautiful chamber and we look forward to having his contribution to the hearing. We are most grateful to you, Councilman Ross and you may proceed in any way you see fit. Councilman Ross. It's our pleasure to have you here, Congressman Bingham, my old colleague from Albany, and Congressman Halpern. I think it's appropriate that you two members of our Congress hold a public hearing here in our august chambers, with reference to consumer protection, because it's historical that many classic pieces of legisiation emanated from this chamber. STATEMENT BY CITY CoUNCIL VICE CHAIRMAN DAVID Ross Councilman Ross. I appear here today to support the "Truth-in-Lending" proposals now before the Congress. This legislation has special significance for New York City because of the high percentage of our citizens who are unemployed, under-employed or unem- ployable. To these people, the dollar has a higher relative value than to those higher on the economic ladder. Yet, these people are the first targets of business practices which foist higher prices and poorer quality on the ghetto and near- ghetto areas. In the borrdwing of money and installment buying, they also become the first victims, not only of the few illegitimate business concerns, but of the duly- licensed and reputable firms which operate fully Within the law. Their operations are dependent, principally, on the ignorance of tI'e customer and his inability to obtain needed point-of-sale counseling. No American city has been more humane in i~s approach to the problems of the poor than New York. But, New York-though still a dynamic metropolis PAGENO="0599" CONSUMER CREDIT PROTECTION ACT 1181 and the world headquarters for many industries whose contribution to the na- tional economy is vital and immeasurable-cannot solve the problems of the poor by itself. In fact, the disproportionate burden it carries in the area of fulfilling basic, human needs prevents it from attacking some of the many, purely local problems it faces. I recognize that ther are still local problems to be solved at the local level, using mainly local funds. But, I also see that in your proposed legislation you recognize that there are national problems affecting the cities that can best be solved nationally using mainly federal funds. I thrust that in the future the Congress will address itself to more of these problems. I endorse the proposed "Truth-in-Lending" legislation, and I commend Con- gressmen Bingham and Sullivan for sponsoring it. Its enactment will prove bene- ficial to a broad spectrum of the American public, but, by inference, it can be seen that the poorer segment of our society will benefit most from it. Poverty is very often accompanied by-and indeed caused by-a lack of education and language barriers. We have graphic evidence of this in many areas of New York City, including the South Bronx which I have represented in the State Assembly and the City Council for almost two decades, Your bill's full-disclosure provision, its ban on the use of confessions of judgment and Title II, which prohibits garnishment of wages, will help our people in direct proportion to their need for such assistance, as reflected by their economic status. This will hold true for the poor of the South Bronx, the West Side of Chicago and every part of the nation. These people, while waiting for solutions to be found to their basic problems of education and employment, will continue to reach out, through the media of borrowing and installment buying, for a few of the niceties of living that so many Americans take for granted. Your proposed legislation will help them. As far as New York City is concerned, it will take its place alongside the many con- sumer-protection laws enacted in this very chamber and be an effective weapon in the most horrid war of all-the economic war that discriminates most against the poor and continually widens the gap between the affluent and the destitute and near-destitute. I would like to add, Congressman Bingham and Congressman Halpern, I think the mistake that we have all made in this country for too many years is that we don't look upon money as a commodity. It's almost impossible to convince the buying public that when they buy a loaf of bread, when they buy a piece of furniture, when they buy an automobile, they are in the same position as when they take a loan. If a person were to mark an item at a certain price and try to get a higher price for it, or take advantage of the buying public, there are laws to protect the con~umer. Certainiy we must have similar protection in the area of borrow- ing money. That is the commodity that the lender sells. That is the commodity that the borrower buys. Unfortunately, the borrower doesn't realize that when he makes a loan, when he is buying something on time, he is purchasing a commodity, in this instance, the use of money. He has to pay for this. This is right, but he is entitled to know what he is paying for. I have sat through many a complicated legal transaction in my private practice where I have seen educated people, accountants, who will debate what the actual cost of the money will be. If people with Master's degrees in mathematics are re- quired to compute what the interest rates are on loans, the law is bad. In fact, there is no law. We speak in terms of six percent interest. It's amazing how six percent interest can become nine percent when it's com- pounded and you add on some fees. It's amazing how one and a half doesn't add up to eighteen, but it adds up to twenty-five or twenty-six or, if you will, even higher. Gentlemen, the people that are being hurt the most are those that require the protection the most. I am not concerned here, as I am sure you people aren't, with the person who can go out and afford what he wants to buy and pay for it in cash. The Truth in Lending bill directs itself, and properly so, to that great seg- ment of the American population that borrows on time. This is a very im- portant segment of our economy, and if people can't borrow on time, our economy will be seriously affected. Because a person buys on time, is he to be less protected than a person who goes out and buys furniture and pays cash? The answer must be as your bill PAGENO="0600" 1182 CONSUMER CREDIT PROTECT ON ACT is directed, Congressman, because obviously here is where we have the greatest need for protection among the least educated, a ong those who don't have mathematics degrees. I think I am reasonably good in mathematics, I c n't compute the cost. When I do, I turn around to one of my sons, who is a in ch finer mathematician, and he comes up with a different figure. Is it fair to ask the consumer public to have less protection than those of us who pay cash? It's interesting to know that there is so much m ney in the lending of money that it's common knowledge that certain automobie companies oVer the years have paid bonuses to their salesmen when they s U a car on time. When you think in the abstract, the contrary would be so, but it isn't that way. They weren't interested in a man coming in and paying 2,400 for a car, when a per- son buying on time is paying $3,000 or $3,200, and that's financed and added to the top, and service charges and collection of fee . And then there is another gimic, if you will. You know, we have had many instances in this ~rea and around the country where one of these smaller money lending compani~s, perfectly legitimate, with- in the law, perhaps not moral, who makes a $200~ loan, and you know, it's not unusual for the legal fees that are written in adv4nce for the collection of that loan to be equal to $100. So we are back again on ~hat revolving door. A person is born in poverty, he borrowers to get some of th~ minor nicities of life, and he can never climb out. Many years ago it was made illegal to put a $rson in jail for debt. It was a debtor's jail, but you know, we haven't come as f~ir as we think. We have these people who are in prison for life. It's amazing. I spoke to a constituent of mine not long ado, and he went In to buy a rather moderate priced car and came out with otie of the very expensive cars that belong only to the affluent. When I pointed out to him that he should not have purchased that car for $6,000, be told m~ he needed the car for work. I pointed out that a $2,000 or $2,300 car was adeqt~ate for him. But the salesman told him the fQrmer car would cost him $30 a ~xionth to pay for it, and for another $5.00 a month he could buy this car. Nothing was further from the truth. These peo~Tñe never end up owning their car, because by the time he gets through paying for it, it's ready for the junk yard and the spiral goes on ad nauseum. Gentlemen, this is an excellent bill. If anytl~ing,~ it's overdue. Then, I am aware of the problems of legislation, how long~ good legislation may take. I don't think your bill is all-encompassing. It can'~ be, because too many of the companies involved in the lending of funds ai~e under the control of either Federal or State agencies and whenever you g~t this bill passed-I hope it will be shortly-and where there are any lonph~les, through no fault of yours, I promise you the Council of the City of New Y4rk will address itself to those loopholes. This is good legislation. I want to thank you for presenting it and I trust it will pass in the not too distant future. The CHAIii~AN. Thank you, Councilman Ross We are very grateful to you for making this meeting possible in this Counc 1 chamber, and we are proud of what New York City is doing under your leadership, and others, to protect the consumer. Thank you very much. Congressman HALPERN. I would like to com end the Majority Leader on his perceptive and most informative presentati n. You did a superb job and I am sure it will be helpful to us in shaping m aningful legislation. Councilman Ross. I want you to know, Co gressman, that I lived in the South Bronx all my life. There are two types of businesses that have always flourished. One is a pawn shop and the other a lending company. You don't find these in the affluent part of the City. I m sensitive because tonight I will be sitting holding court, if you will, in m community. I can assure you almost as many people with the usual problems of welfare and housing in that type of an area, and it's just amazing how ma y people come in holding sum- monses, garnishees, for something they bought our years ago, three years ago, which didn't work because it's legal. It shoul be corrected. The CHAIRMAN. Thank you. I might say that we have a statement from he Council President, Frank B. PAGENO="0601" CONSUMER CREDIT PROTECTION ACT 1183 O'Connor. He was unable to be with us personally today, but we are very happy to have this statement and it will be in the record at this point. Our final witness before the luncheon break-and we are sorry to have kept him waiting-is Morris D. Crawford, Junior Chairman of the Board of the Bowery Savings Bank. We are happy to have you here today and we are sorry to have kept you waiting. I understand you have a plane to catch. Mr. CRAWFORD. Thank you very much, Mr. Chairman. STATEMENT OF MoRRIs D. CRAWFORD, JR., CHAIRMAN OF THE BOARD OF THE BOWERY SAVINGS BANK Mr. CRAWFORD. Mr. Chairman and members of the Subcommittee, my name is Morris D. Crawford, Jr., and I am Chairman of the Board of The Bowery Sav- ings Bank. I am very pleased to have this opportunity to appear before you to testify on H.R. 11601, the "Consumer Credit Protection Act." As former Senator Douglas has previously stated in his testimony before this Committee, the mutual savings bank industry has been an early and consistent supporter of Truth in Lending. On three occasions In the past, I have been priv- ileged to testify before the ~ubcommitteea of the Senate Banking and Currency Committee on versions of Truth in Lending legislation. On two of these occa- sions-July of 1961 and August of 1963-I testified (on behalf of our New York State and National Associations) in support of Truth in Lending with reference to the extension of real estate mortgage credit, since that form of lending has been the primary investment activity of New York savings banks over the past 20 years. More recently, savings banks in this State have sought legislation similar to that now on the books in other leading savings bank states which would per- mit them to make unsecured consumer loans in addition to those they now make for home improvements. My most recent testimony, presenting our National Asso- ciation's support of the Senate Truth in Lending bill (S. 5), therefore, supported Truth in Lending as it would apply to both real estate mortgage lending and unsecured consumer lending. The savings bank industry has no position as to the provisions of the bill covering open-end type credit arrangements, since they are not relevant to the lending operations of mutual savings banks generally. My long-standing support of Truth in Lending legislation is based upon the conviction that the nation's consumers should have an opportunity to make an informed choice between borrowing and saving to acquire what they want: and when they choose to borrow, they should be in a position to make a meaningful comparison between the various lenders which compete for their loans. It is fundamental to this decision that the American consumers have the whole truth about the price they will be required to pay for credit. Unlike the Senate-passed Truth in Lending bill (S. 5), the bill before this Committee would extend the disclosure requirement to cover advertising of credit. I support this extension since it would more effectively permit the purchaser to determine the comparative costs of goods and services, including any cost differ- ences due to financing arrangements, before he makes his purcha$ng decision. H.R. 11601 also includes a number of other proposals relevant to the credit activities of a savings bank which were not included in the Senate-passed bill. These include an 18% limitation on credit charges; a prohibition against "con- fession of judgment" notes; authority to restrict consumer credit during national emergencies; a prohibition against garnishment of wages; and provisions which would establish a National Commission on Consumer Finance. Unlike the pro- visions on the di~closure of interest rates, I have not had the opportunity to con- sider in any detail the many complex issues raised by these newly proposed pro- visions. I have noted, however, that Treasury Undersecretary Barr believes that they would require a good deal of exploration before any action is taken. I am in agreement with this viewpoint. It is my hope, however, as one who has supported Truth in Lending legislation for many years, that the Committee's consideration of these new rules will not delay enactment of these portions of H.R. 11601 dealing with the disclosure of the cost of credit. There are a few comments I would like to make about the technical provi- sions of the disclosure rules as they apply to the lending activities of a New York savings bank. I was very gratified to see that Sectiofi 202(cfl (2) of the Committee's bill excludes certain enumerated mortgage closing costs from the definition of "finance charge." I would suggest the addition of the following PAGENO="0602" 1184 CONSUMER CREDIT PROTECT ON ACT generic phrase to the listing: "and other customar~ clo~ing costs." This generic language is derived from the Massachusetts law on ruth in Lending. Of course, the costs coming with~n the generic exceptions worn be a matter of rule making by the Federal Reserve Board. There is one class of loans made primarily by th ift institutions which I feel is not the type of transaction which requires the dis losure protection of the bill. I refer to "dividetid anticipation" loans. These loans are only made for tb~ mone- tary gain of the borrower who needs to withdraw Is money between dividend crediting dates. In effect, the cost of the loan mere y. reduces the amount of in- terest the depositor receives and represents an adju tment in the interest earned because of an early withdrawal. I wish to thank the Committee for the opportunit to present my views on this important legislation. Mr. Chairman, if I may depart from the state ent for a moment, I would like to take slight issue with a statement made by enator Kennedy earlier this morning. I believe I am correct that he made the statement that banks in New York and elsewhere advertised, for example, a discount rate o 25 percent and failed to tell the public in the advertising what the true annu 1 interest rate was, or that indeed, it normally is equivalent to about twice th discount rate. I just happen to have with me some samples f the Bowery Savings Bank advertising, which I would not have submittec~, except that this question arose and I would like to submit them for the record, if I may. We have been in this discount lending money field for six or seven years. When we first came into it, we put out a very ion ad, describing the nature of this type of rate and how it does, indeed, moun up to about two times the stated discount rate. We also put out a little quick credit cost c mputer, which would allow people to roughly approximate the true annual interest rate. If they knew what they were borrowing and what the total cha ge was, they could compute it. So I would like to submit these for the record, f I may. I am not criticizing, but I want to make sure that it is known that we a e not failing to disclose these rates, even before the bill is hopefully passed. The CHAIRMAN. Thank you very much. Indeed, Mr. Crawford, I do want to say that we are well aware of the record of the Bowery Savings Bank in support of legis ation of this type. We think it's been really statesmanlike and we welcome y ur statement here today. I am particularly interested in one question that you touched upon, but didn't pursue, and that is the coverage of the firs mortgages. You are probably aware that the Senate bill as passed by the Sen te eliminated first mortgages and you have indicated here that you would supp rt the inclusion of first mort- gages in such legislation. I wonder if you would develop that point for us. Mr. CRAWFORP. Yes. I think that, obviously, it would be less work for us if they were not ipcluded. I think there is less reaso for including first mortgages than other typ~s of transactions, because the bul of it is pure simple interest and those financial charges that are added as p esented under the bill really are very nominal. They don't affect the annual percentage rate to any great extent. I always felt if you wanted to make this thing complete, no mortgage should fail to disclose all of the facts, because all other will also be disclosing them. I think that possibly the Senate Committee w s persuaded that most of the mortgage lending is done by highly regulated institutions, such as savings banks, savings and loan associations and this ki d of protection was probably not needed. But I repeat, that when we testified we did not ask the Senate to remove or except them from the bill and I thin our industry would support the provision of this bill. The CHAIRMAN. Thank you very much. Congressman HALPERN. I wish to commend o r very distinguished witness. He has bei~n an outstanding citi7en and a credit o the banking community. Mr. Crawford's enlightened views have been r fiected in hi~ practices and not )tlst in mere words, and be has been a nrogressiv enlightened representative of the banking industry and we welcome him here to ay. This testimony is most valuable to us and no I would like to clear up one area of confusion that has repeatedly come up i these hearings. It is revolving credit. PAGENO="0603" CONSUMER CREDIT PROTECTION ACT 1185 People suggest that if all of them are required to state the same annual rate, they will be encouraged to dispense with various differences in their credit arrangements, some of which result is lower effective charges to the consumer. However, savings banks generally disclose identical rates, yet have not been stopped from offering different additional benefits. For instance, different com- pounding periods, grace periods for receipt of interest, and so forth. Do you feel that analogous fringe benefits will necessarily disappear from revolving credit accounts if they must all disclose an 18 percent annual rate? Mr. CRAWFORD. Congressman, as I said in my statement, this revolving credit is something that is completely alien to me and to the savings bank business. Therefore, I have very few views on it that I think are worthy of your attention. It has been a matter of puzzlement to me, I must say, as to why they would object to using the 18 percent rather than the 11/2 percent. I realize that there are problems about early payments and a free period at the beginning, but, nevertheless, when you pay 11/2 percent a month, you are paying 18 percent per annum, so why not state it? If everybody stated it, it wouldn't seem to me to have any competitive advantage for them. The CHAIRMAN. Thank you very much, Mr. Crawford. We are going to have one more witness before luncheon. Again, I am very sorry that we have had to keep you waiting. We are very happy to have Miss Mary Tarcher here, the Director of the Legal Aid Society. We are very happy to hear from you, Miss Tarcher. I know your work involves many of the problems that we are considering here. STATEMENT OF Miss MARY TAROHER, DIRECTOR, LEGAL AID SOCIETY Miss MARY TARCHER. Thank you for delaying your lunch so that I can say my piece. Monday is a very busy day and I want to return without delay. The CHAIRMAN. Thank you very much, Miss Tarcher. I wonder if you would have time for a few questions. I note that you favor H.R. 11602 over HR. 11601. I wopder whether you have considered the desirability, for example, of including advertising in the bill, which is something covered in 11601 and not in 11602. Miss TARCHER. I may be a little too disillusioned to reply to that question, but people don't read. Now, certainly, I think that I wouldn't be opposed to including it, but I'm not very hopeful that including it with a lot of other material and probably in fine print is going to really make a substantial difference. The CHAIRMAN. Wouldn't it be helpful if it might at least have the effect of reducing the number of shorthand references that are made in advertising, for example, the expression, bank rates, which you hear so often on the radio? That is a misleading expression and if the effects of the legislation were to eliminates such references, wouldn't that be helpful? Miss TARCHER. I think it would be helpful and I think actually there, too, the different media have different effects on the people. I think what they hear on television is more powerful, and I think it would be effective. I would include it. It's just that sometimes the more type the eye is exposed to, the less reading is done. The CHAIRMAN. How do you feel about the exclusion of the minimum of $10 finance charge? Isn't this an area of considerable abuse, the purchase of a watch, say, on which the finance charge is under $10, but may still be- Miss TARCHEE. I have never seen a contract in our office under $10, except a magazine subscription, and there is no finance charge on that. The CHAIRMAN. The exclusion in the Senate bill, or 11602, is anything where the finance charge is less than $10. And in our bill, in 11601, we have included such transactions and the disclosure of the requirements. Miss TARCHER, There, too, I don't think I have any hard and fast rules. Some of these details I consider less important. They are what I call the psychological details. I didn't dwell on them too much. I didn't think they would have the impact that the big disclosure will have. Most of the people who come to us have a much larger finance charge than $10. The CHAIRMAN. On the question of garnishment, do you feel that the New York restrictions, regulations are too strict today, the New York State regula- tions? Miss TARCHER. Well, the $30 is completely out of date. I like the fact that you can't be discharged for one garnishment. We might up that, although, garnish- ment restrictions are very difficult to assess. PAGENO="0604" 1186 CONSUMER CREDIT PROTECT ON ACT For instance, if we were to have a total exem tion of the minimum wage and only garnish above it, garnishment would go a for years and the fees for the collection of that garnishment would be borne by the debtor. Therefore, it might well serve his interests to pay off a gar ishment faster rather than slower once you are certain that he's making enou h money to be able to pay it. The CHAIRMAN. I was under the impression th t in New York State there was a limitation of 10 percent of wages. Miss TARCHER. There is, 10 percent of the total salary if it's above $30. The CHAIRMAN. Well, Senator Kennedy sugge ted that we might consider modifying the provision in the bill so as to provi e for a reasonable limitation on the amount that might be garnisheed in a Fed ral law and also protect the employee against discharge. I take it from what you have said this would e in accordance- Miss TABOHER. We have in New York State no ischarge for one garnishment. I think, perhaps, you better turn to the Federal overnment itself which levels against the total wages for the collection of tax s. We had a case where a person left her emplo ment when het employer told her that for the next two weeks she wasn't gong to collect her $50 a week salary, and we won the case. She had a good re son for leaving that job. I don't know that the Federal government ha necessarily changed its prac- tice. It will always be limited, and I indicate ere a fair percentage of the earnings, there have been different approaches o it. One would say that the percentage should be above the minimum wage and the other would say that once a person makes, say, $60 or $75 a week, th t 10 percent would be against the total salary. I'm afraid that the very delayed garnishme t collection might again not prove as beneficial as it might seem at first g ance, because it would go on forever. Now, the creditoi~ has lawyers who have no pr blem in going after the debtor. He really will be in bondage forever. The CHAIRMAN. What about the question of evolving credit? 11601 includes the disclosure of annual interest rates on revol lug credit. 11602 does not. How do you feel about that? Miss TARCHER. A very different type of pers n uses revolving credit and I think the 1'/2 percent per month probably tra slates itself into' 18 percent a year to them. But there, too, there are so man intricacies. The time when the l)urchase is made, during the month, the time hen it's paid for, and there are different practices unless you can insure unifo m practices. I always think the first bill should be fairly simple and it's just a personal preference fo~ what seems to me a practical an basic bill with the other things that can be added on as improvements as time oes on. It's not one of the things I would take to the arricades for, although I think I have mndmc~1ted I would have as many ingeni us ways of etpressing the full disclosure as possible. I think that should be the oal. The CHAIRMAN. Thank you, Miss Tarcher. Congressman HALPERN. First I would like to hank the witness for taking the time from her busy schedule to give us the ben fit of her views. Your dedication to the fine work of the Legal Aid Society is to be highly commended and I for one wish to extend my compliments. You mentioned that you prefer 11602 over 1601. If we concentrate for the moment only on the disclosure aspects of the ill, don't you believe that 11601, which includes revolving credit, small transac ions and first mortgages, as well as the whole area of advertising, affords the onsumer greater protection than 11602? Miss TARCHER. Let me say this: If you passe 11601, it would contain features that I am opposed to. If you pass 11602- Congressman HALPERN. I'm talking at this oment merely about the full dis- closure aspects and all its implications. Miss TARCHER. It may well be the full disci sure aspects of 11602 can be am- plified. I was expressing a preference, if give a choice, between the two bills, one of which has several features I am eritica of, and the other which seems to be a good basic bill on which improvements c n be made in the debate between the House of Representatives and the Senate. Congressman HALPEEN. You said you wer not in agreement with the pro- visions of 11601 that would include all pure ases, rather than in 11602 where PAGENO="0605" CONSUMER CREDIT PROTECTION ACT 1187 finance charges amounting to $10 or less wOuld be exempt, or purchases involving such charges would be exempt. Now, if the $10 or less finance charges are eliminated, doesn't this leave the way open for the seller in the instances of purchasing several pieces of furniture, for example, to handle each transaction separately, hence getting around the exemption even through the amount of the purchases involve much more than the $10 finance charge? Miss TARCHER. I think you are right. I think it does lend itself to that abuse. I want to make my point clear. I want to make an amendment to my state- ment. Congressman HALPEEN. Surely. Miss TAROHER. I think that looking at this possible misuse of the exemption, I would be in favor of including it. Congressman HALPERN. We have discussed at length the correlation that must exist between the rapid expansion of consumer debt, the employment of the garnishment procedures, and the rising tide of consumer bankruptcies. On the basis of your experience, how important a factor in these increasing bankruptcies is consumer ignorance or credit? Do you believe that better knowl- edge of credit costs will prevent the consumer from over-extending themselves and ending in a bankruptcy court? Miss PAndER. I'm atraid I don't think so. I think that the emotional reasons that compel people to get in over their heads will still operate and at the time of enchantment or infatuation with a particular car or particular color television set, the penalties that may come later are not too operative. We put people through bankruptcy and generally our bankrupts have heavy medical bills, loans from private individuals that they want to be discharged of, the borrowing of money, as well as the credit that they have gotten on consumer goods. But the consumer goods, in and of themselves, I don't think-at least that's our experience, the only one I can talk about-I don't think that they, them- selves, drive people into bankruptcy. Congressman HALPERN. Do you think the New York State Truth in Lending Law has had any signficant effect on the number of consumers involved in bank- ruptcy suits? Miss TARCHER. We don't have much bankruptcy in New York. At least, judging by the people who come to us, it doesn't begin to compare with what I have heard about the South and Southwest. What social factors contribute to lit, I don't know. I think there might be more bankruptcy where there is no garnishment of wages. Congressman HALPERN. That is all. The CHAIRMAN. Just to comment on that last point, Miss Tarcher. So far with one day with four Referees in Bankruptcy, the hearings indicate just the con- trary. Where there is no garnishment, there is much less bankruptcy. The com- parison we saw dealt with states in the middle South where adjoining states with presumably similar conditions had very difficult garnishment laws, and that seemed to translate itself into the garnishment. But it's of interest to say that in New York, relatively speaking, there are not many bankruptcies. New York had, relatively speaking, a fairly strong protection for the wage earner as far as garnishment is concerned. Congressman HALPERN. That's why I asked your feelings for the New York law. The New York law is limited to 10 percent of one's wages. Miss TARCHER. In the homeowning communities where one constantly makes improvements and buys new furniture, I think people just get into heavier debt, possibly than in New York. I'm not enough of a sociologist to give the reason, but the phenomena is ap- parent in Legal Aid conferences. When we talk about bankruptcy, New York is relatively bankruptcy free. Now, whether this will change, I don't know. The CHAIRMAN. Well, we certainly want to thank you very much, indeed, Miss Tarcher, and we are sorry we had to keep you waiting. Miss TARCHER. I am delighted to be here. The CHAIRMAN. Thank you for your contribution. We will take a recess now for fifteen or twenty minutes. We do have a full schedule, so we will try to resume at a ciuarter to 2 :00. (Whereupon, a twenty minute luncheon recess was taken.) PAGENO="0606" 1188 CONSUMER CREDIT PROTECTION ACT AFTERNOON SESSION The CHAIRMAN. The hearing will resume. As our first witness this afternoon we have Mr. Wil lam Taylor, Local 1199, Drug and Hospital Employees Union, of which he is Vice President. Mr. Taylor has brought with him a group from the u ion, employees who have had problems in the area of consumer credit and its buses, and I would like to have you proceed, Mr. Taylor. Mr. Halpern will be back with us in a moment. If you will take the stand there, and perhaps then if you will introduce the group that you have with you. We are very grateful to you for coming down and ringing this group of ex- perts in the real thing. STATEMENT BY WILLIAM J. TAYLOR, FIRST VICE-PRESIDE T, LOCAL 1199, DRUG AND HOSPITAL EMPLOtEES UNION, RWDSU, AFL-CIO ACCOMPANIED BY OTHER WITNESSES Mr. WILLIAM J. TAYLOR. Thank you very much, Mr. C airman. My name is William J. Taylor, I am the First Vi e President of Local 1199, Drug and Hospital Employees Union. Our union represents 28,O~0 hospital workers and ,000 retail drug employees in the New York area. Approximately 70 percent of our total membership are Negro and Puerto Rican workers and the overwhel ing majority of them are compelled to live in the ghettos of Harlem, Bedfor -Stuyvesant and the East Bronx. Our day to day experiences with our Members in trying to. assist them with their various problems has convinced us that one f ctor which contributed to this summer's ghetto uprising is the exploitation of the minority groups by un- scrupulous merchants. Our experience shows that the typical ghetto dweller pays more for rent, services and goods than any ot er group in our city. What compounds this evil is the fact that in exchange for t e excessive prices which he is compelled to pay, be is obliged to live in a slum dw lling, receives inferior serv- ices and the quality of merchandise available to hi is usually second rate. One of the greatest evils practiced by the unscrupulous merchants who exploit the minority groups is the "legalized credit racket". U der this system workers are encouraged to purchase shoddy and inferior merc andise at excessive prices. They are persuaded by the fast talking pitchmen o assume obligations far be- yond their capacity. The over-riding sales pitch i always "buy now and pay later". They are then saddled with excessive mt rest charges, insurance pre- miums, a variety of so-called service charges and ot er legalized gimmicks which further inflates the cost of their purchases. Since the sales contracts are usually held by credit company which is a separate legal entity from the company that sold he merchandise, they seldom have recourse when a mechanical appliance breaks down or a television set stops functioning. In the event they default on a payme t they then become victims of the widespread practice of "sewer service" and u known to them a judgment is then entered and their wages are garnisheed. At his point the Marshall levies another 6% in interest, the credit company adds nother 15% or 20% for legal fees and the original purchase price, which was cx essive to begin with, has now usually tripled. An example of this will be testified to by M . Anderson. a member of our Union. He purchased a freezer and food plan for some $950.00 which Attorney- General Louis Lefkowitz's Staff appraised at $4 0.00. After paying $501.00 he found it necessary to refinance his contract an he is now defending himself against a judgment of over $1.000. Several other members of our Union are also resent and prepared to testify to similar experiences in connection with pur ases of furniture, appliances and burglar alarms. On behalf of the members of our Union, we w icome this hearing and the op- portunity to testify. We would urge the Congre s and the State Legislature to correct these vicious practices by enacting the B 11 now under consideration. We also believe that legislation should he enacted to eliminate wage garnishees; that the maximum interest rate should be limite by law to a reasonable amount; that the legal procedure to set aside a j'idgmen obtained after "sewer service" should be simplified and that use of the entire legal apparatus i.e., the Courts and the Marshalls, should be denied to these un crupulous operators who victim- ize. those members of our society who are least able to defend themselves. PAGENO="0607" CONSUMER CREDIT PROTECTION ACT 1189 Mr. Chairman, with your permission, I have several members of our union here who have actual experiences, and I would like to call upon them to tell you their experiences with the credit companies and with these unscrupulous merchants and witii me Court~ and the "sewer services" and the wage garnishees. And I think if you get it firsthand from the victims, it will be much more meaningful. With your permission, Mr. Virgil Anderson will come up and testify. Just tell the Committee in your own words what happened, Mr. Anderson. You have your documents here to substantiate it and try to be as brief as possible. The CHAIRMAN. Thank you very much, Mr. Taylor. Mr. Anderson, we are glad to hear from you. Mr. ~ 1EGIL ANIMLSON. Fir~,t I would like to say to the Committee that I have a case that is pending about a freezer, and I want to be as brief as I can about this. At the first point I want to stress to the Committee that when I purchased this freezer I was unaware of the additional charges that I was confronted with, also with the financing of this freezer. 1 was unaware of the additional charges that they confronted me with. The bill of sale of this freezer I didn't understand. The food in this freezer, I unuerstood, when it was sold to me, is the food alone and not the freezer. I went along with this until late April, March to April, and then 1 began to get pressure. At the same time I was making payments on this freezer, and at the same time I was unaware of things that happened to me. Finally, I got a notice from the company's lawyer that I was being sued. I went to my union to find out what I could do. They were willing to help me and told me they would help me and back me in any way they could. They advised me to go to the consumer frauds ofhce. They introduced me to Mr. Michaels. They looked over the case and told me it was a goou case, but they could not help me until I got the right and appropriate representation. I went back to my union. They told me to go to Legal Aid. So 1 went to the Legal Aid Society and I engaged a lawyer. Up until this present time 1 have a case pending sometime in the near future. I have papers and different documents that the Committee is welcome to look over. Here I have a contract of- The CHAIRMAN. Mr. Anderson, might I suggest that you show those papers to Mr. Holstein here of the Committee staff, and if he feels there are any tha~t should be incorporated in the record, they will be incorporated. In the interest of time, we will hear from the other employees with you. We are grateful to you for this, and we hope that there is legislation that will make this thing impossible. Miss Senior? Miss SENIOR. My complaint is I purchased from the New York Warehouse, and I ordered it on July 11th, so it didn't come, and I asked him what was the trouble, so they said to me I had a garnishee. I wasn't aware of it, nobody told me. I co-signed for my son-in-law. That was a co-sign, and that was the problem. I had to get my money back through the union. So the union sent me to the Consumer Frauds. The man said I couldn't get back my purchase, the matter had to be cleared up, but I got it back with the union's help. The CHAIRMAN. Thank you very much, Miss Senior. We hope that kind of thing won't be allowed in the future. Mr. Brown? Mr. BROWN. I have here a case where sometime ago I purchased some mer- chandise from a store and in keeping with the contract I continued to pay right up to date, until suddenly one day my boss called me to tell me that a garnishee had been issued on my salary. The CHAIRMAN. What was the purchase? Mr. BROWN. Merchandise: furniture and things like that. I went to the Consumer Frauds. Nobody told me anything about the gar- nishee. I was up to date in payment. I went to the Consumer Frauds and they took it from there. I paid approxi~ inately $500. This garnishee calls for approximately $900-odd dollars. When the Consumer Frauds saw it they got it back to $605. PAGENO="0608" 1190 CONSUMER CREDIT PROTECT ON ACT The CHAIRMAN. We will try to correct that typ of situation. Thank you very much, Mr. Brown. Next is Mrs. Howard. Mrs. HowARD. My husband first came to this co ntry in January. In March I came from work, there was a gentleman in my a artment selling my husband a burglar alarm. Well, the burglar alarm cost $165 without the fire alarm. When I came from work I hear him talking to y husband and I said I don't want none of that. He said with the lire alaim it i ~UJ, anu the burgiar alarm cost $165. I didn't agree with it, but my husband signed, and being that I was in the country five years I had to co-sign with him. A few month~ ago they calico and said if I don't pay him I am going to get a garnishee. He said I have to pay $365, and it cost $. 65. The CHAIRMAN. Thank you very much, Mrs. Ho ard. Mr. Rodriguez? Mr. RomuGuRz. I have a payment of $800, so my rother Is already paying more than $648, which makes the balance of $132. So now, without warning, they took the case t court because for one reason or another my brother is stuck to pay, and they garnishee my check for $15.25 a week. So I call my brother, we go to the corporation, w are willing to pay the balance, but people there say they refuse the money beca se the case is already taken to the courts. They never serve me with a summons, so I an't go to the courthouse and defend myself. The CHAIRI~tAN. Thank you very much, Mr. Ro riguez. Mrs. Duncan? Mrs. DUNCAN. My case is about a freezer. Sometime ago, I wasn't long in this country, hen a salesman presented him- self to my house selling one of these freezers, ~ou know. He didn't tell me the price, he didn't make me know percentages. He ~just makes things so easy. I pay $50 a month, and that would include food and freezer and everything. Anyway, not knowing better, I signed, and abdut three days after they sent me a bill for $1,146.00 for that freezer. When I ca led the office I told them that I couldn't afford to pay this, that is too much mone for me. At that time I was only making $55 a week. So they told me the contract is signed already and I had to pay it, and all other threatening things. Well, being new in the country, not accustom to the language and everything, I was taken~ I didn't know where to go or no hing, until after I found that I could go to the union. In about o~ie year the freezer went bad. I cal d theni and toid them the freezer is bad, if t.hey could send someone to figure it out. They told me I will have to sign over a new contract. So I didn't sign the contract. I got someone to fix it. It cost me $110 to fix it and, anyway, I still continued paying, and I ade my last payment last month, and they are still sending me notes that I a owing them money, and I have all my receipts and everything that I paid up So I took it to the union. That is all. The CHAIRMAN. Thank you very much, Mi s Duncan. Mr. JAcoBs. I borrowed some money from ousehold Finance and then about January I got a garnishee on my job, and they told me I was two months behind. I paid them the money; it took care of t at. I made aa agreement to pay them as much as I can a week. They charge me $45 a month, and I couldn't afford that. So I got a garnishee for $500-s mething dollars, and my mother- in-law got one too, which makes it $1,100, a d I only owed them $500. So they are getting twice that. The CHAIRMAN. Is your mother-in-law here? Mr. JACODS. Yes, Mrs. Senior. The CHAIRMAN. I see. Thank you very much Mr. Taylor, I am very much grateful to y u and the members of your union for coming down and giving us the first-ha d look at the trouble involved. I think this very much shows the proble , particularly where the purchaser has no idea what the charges are. PAGENO="0609" CONSUMER CREDIT PROTECTION ACT 1191 I think also mentioned here was sewer services, and unfortunately we can't ~do anything about that in the Federal bill, but we recognize it as a problem~ Our next witnes~ iS the di~tinguished Assemblyman from the Bronx~ one of the most admirable and imaginative and hardworking public servants inn our City. He is here because be introduced a tightening of tb~ Truth In Lending~ Laws in the State Legislature, and we are very gtad to have him comment on. the bill before us or any other aspect of the pi~oble1u. STATEMENT BY ASSEMBLYMAN Ronnirr ABRAMS or THE 8lsr Dismicr Assemblyman ABInAMS. Eefoi~e I begin nni formal testimony, I would like to applaud Congressman Jonathan Bingham for his consistent ~1!t~drt for aiThrding the consumer of the nation thin chance to khow what tie 15 gettihg and how much he is paying. I, my fIrst year in the New York State Legislature, introdTh~ed the ~i'ruth ifl li4ending bill which he spotisored upon his election to Congress. It is mow an honor for me tb appear before him to' nrge enactment of this legislation which you and Congressman Halperni are sponsoring. The CIIAIRMA~. Thank you i~ery muich, Mr. Abramns. We are delighted to have you, and I want to thank you for the kind words you gate me. I know that you have been leading the fi~ht for consumers in the Assethbly for the past two and a half years. Congressman ITALPEIiN. I want to commend' the d ing~uisilbd Assemblyman and I want to thank him for the bonon~athe mention he gave to mhS~ name here today. I can see why you enjoy tile tine reputation you have. You contrIbute greatly to the consumer legislation and the interests of the couisumner, amid I want to extend my most hearty welcome to you. The CHAIRMAN. Our next w1tuies~ is Miss teOna U'itie~tone, t~frector of the `Chelsea Conservation Project of the Hudson Guild. We are happy to have you, Miss Fipestone. STATEMENT or MIss LEONA FiNEsToNE Miss ~`INaSrON~. I pIaith~d to bring other wittiessea, who could n~t cdnte because of illness but I want to s~Mk' On the etpeelence that they had. I would like to tell you what we have found in our community, which covers 14th t~ 34th Streets, front ~1xth Av~eiine to the flndhoi~ Elver. We provide many services for these families and the probleths they have among them. One of the most important problems Is the problem of buying on insfIillment plans. They not only buy front lOcal `stores, they buy from door~to-door salesmen, who really are a blight. They sell household goods that could easily be boul~bt for a fraction of the cost of what the purchase priCe Is In the contract. We had an occasion where a woman came in here and she told us that tile company which bad sold her a sewing ihac1l1~~ wanted aim addittenfil paymneht, which she said she had already made. Fortunathiy she had all of her receipts, This doesn't always happen, because people lose weekly receipts. rn adding them up, I found she had patd $2li~ for a sewln~ machine Which, if it works, could cost pvobably~ $45. In one year it was more than, well, fIve times the amount of the actual upkeep value of such a machine. First of all, it didn't work, and secondly she couldn't get them to repair it. Thirdly, they were dunning her for monies she did not owe. Assuming she didn't known the language, we needed an interpreter, and we `have interpreters in our office. I called up and read off the receipts, and they withdrew the complaint. We have a very large Puerto Itlean populatio~i in Chelsea, and this population is the most picked upon, naturally, because of the language problem and the un- familiarity. They buy from local stores, and they buy furniture, and the furniture costa them $2,000, and if you look at this furniture you know it is not worth more tha~t $200. $2,000 is ten times the amount of the furniture. They are shy about calling the stores. It iaim~posaible for them, after they sign the contract, to withdraw, as you have heard these people testify. I think that prevention is the most irn~portant measm'e that we can take. `These people go in blindly and thoy~ are blbmd because there is no wa~y that they can get help without adequate Federal legislation. 83-340-67--pt. 2-39 PAGENO="0610" 1192 OONSITh~LEE CREDIT PROTECT ON ACT In addition to that, if they do sign a contract ui~ nowingly, at least there is~ recourse. I We do send them down to the Criminal Fraud Bureau, but for the most part all they can do is see that the contract is enforced, that is all, see that they get the merchandise, which has no value, but they can'/t protect them against over- charges as long as there is no legislation. I Many of these families that buy on the installnlient plan are working-let's say the head of the family doesn't make more th~n $65 a week, and this Is a family with at least two adults and three ehildren,Jif not more. If that salary is garnished, if there is any attachment to it, it is ve~y unlikely that this man can keep up paying hjs rent. I This is just what happened. People come in and ~ispossess them, because they haven't paid theLr rent in two months and it is becaiuse they are being held up by the companies t~iey have bought the merchandise from on the in~tallment plan. So they are caught on all sides; by low wages, l~y overcharges, by fraudulent practices, and then being threatened with eviction~ and these problems multiply just as the evil of installment buying, We have cSse after case in our office of buying a used car, fi~irniture, household appliances, refrigerators that don't work, sewin machines that don't work. All of these things ~rom people who know that t ey can get away with it, and there should be a time when these people know, th so who sell should know, that there is some protection for the consumer, and if hey do not live up to the law, and there should be a law protecting the consum r, then they would be subject to some kind of prosecution. I should very much like to see this bill enacted o the people can be protected. The CHAIRM~N. Thank you very much, Miss Fi estone. Congressman HALPERN. I would like to compli ent Miss Finestone. The CHAIRMAN. Our next witness i~ Mr. Rober Watts, Executive Manager of the New York State Bankers Association. Mr. ROBERT WATTS. Let me say ait the outset I ave been very impressed with the testimony I have heard here and I hope that banking is not associated with these kinds of practices, STATEMENT OF ROBERT B. WATTS, EXEcUTIVE ANAOER, INSTALMENT Cnam~ DIVISION, Nnw YORK STATE BANK RB ASSOCIATION Mr. WATTS. My name is Robert B. Watts, I am xeeut~ve Manager of the Instal- ment Credit Division of the New York State Bankers Association In that en pacity I spea1~ for the more than 800 commercial anks in our staite. In the first place I think your committee is o be coinplim~nted In selecting "Consumer Credit Protection Act" as the name 0 your bill H,R.1j601, "Truth-in- Lending" has rankled bankers over the years. T e latter title ]~ad a connotation similar to the "have you quit beating your wi e" pitch. It was just taken for granted that we were cheats. Naturally banking could not have achieved its stat- ure of public service and achievement based on a philosophy of deception. Quite the contrary, we of the New York Sta e Bankers Association have al- ways favored full disclosure ~f rate and In fac, at the last session of the state Legislature we had such a pill introduced and inj all likelihood we will do so again. at the coming legislative session. I With respect to the two so-called "truth-in-le~id1ng" bills currently under con- s1d~raiion our preference is for S.~. The HousO version is unduly severe, unnec- essarily rigid, covers areas which far transcen4~ the avowed ilurposes of the bill and in parts are grossly discriminatory. If we Iare to be askeçl-"whieb gallows do we wish to be hung on"-our answer is S.5Hwe can live ~vlth it although it has certain ~1efects in our opinion. We prefer to state the finance charge In ter s of dollars per hundred per an num. This method is realistic. It is easier and ore easily understood. It permits a purchaser or borrower to readily compare sts at one Institution as against apother. S,5 requires the charge to be shown as a simple annual interest rate. We disagree with this approach, at the samO ti e recognizing that low bank rates put us in a highly favorable competitive po ition compared with department stores, finance companies and small loan compa les. Probably the most offensive features~ of S. is that it discriminates between banks and their competitors In the field of evolving credit. Banks, generally speaking, will be required to show their char e as a simple annual interest rate while department stores are permitted to sh w the rate as a monthly charge. PAGENO="0611" CONSUMER CREDIT PROTECTION ACT 1193 The American Bankers Association urged the Senate Committee to come out for a single uniform method of disclosure applicable to all classes of lenders and sellers, It prefers, as does the New York State Bankers Association, monthly disclosure in the case of revolving credit. The Senate Committee itself, in its re- port on 5.5 recommended uniformity of rate disclosure. Despite these commend- able statements of principle, the Senate Committee voted to retain the contro- versial and discriminatory provision in S5. It is our Associatio~fs feeling, though we are firmly in favor of "truth-in-lend- ing in principle theie is entirely too much haste in implementing it under H B 11601. The original 5.5 provided a three-year lead time to permit necessary changes in state statutes or constitutions so that compliance could be made with Federal legislation without conflict. The final version cut this lead time down to less than two years. H.R. 11601 would make the effective date July 1, 1968 which is less than a year away. Another factor being ignored is the proposed Uniform Consumer Credit Code which has been under study by the National Conference of Commissioners on Uniform State Laws. `It would seem that sober reflection would dictate that leg- islation such as we are discussing here, should be held up until the Commissioner's report is,available In 1969. Briefly, then the position of the New York State Bankers Association can be summarized as follows: 1. A single uniform method of time disclosure should be applied without dis- crimination to all creditors and all types of credit. 2. Creditors should be permitted to state finance charges in terms of dollars per hundred until January 1, 1972 with the effective date of the act no earlier than 1970. 3. Insurance charges should not be considered part of the rate. 4. Real estate mortgages should be excluded. 5. Wage and salary garnishment should not be prohibited. Again, gentlemen, may I repeat, we strongly support the principle of full dis- closure and we will work hard to implement a fair and realistic bill. Thank you for this privilege of appearing before you. Perhaps selective legislation will protect the unsuspecting against the shyster and unscrupulous lender in ~ome other l~gislatlon, but not in this particular bill. Again, gentlemen, may I repeat we otrongly suppdft the principles of full dis- closure, and will work hard for a fair bjll. The CHAIRMAN. Thank you, Mr. Watts. I would like to ask you a couple of questions'. It has been mentioned here earlier today'that frequently one hears advertising of credit by stores and appliance dealers and so forth, cars, With the term "Low Financing, Bank Rates." Now, this is something which we, consider is often very misleading in that it suggests regular bank rates, at the implied rate Of 6 percent. Would you comment on this? Mr. WATTS. This would be beyond us- The CHaiRMAN. I don't suggest this Is your fault. Mr. WATTS. I think this Is whOre the term Is just tossed off' by the dealer, I think this kind of advertising is improper and misleading, because what is a bank rate? Banks here in New York City charge somewheres around three-quar- ters of a percent' less than the law would permit. You get Upstate New York, they charge the maximum rate. , The CHAIRMAN. Do you have any cbjection to the inclusion of advertising of this type in the legislation? Mr. WATTS. Not at all. The fact of the matter is, as I pointed out, we'~-if we were not sincere about this thing, we would be even more so, because we are tremendously conservative. If you convert the maximum 6 pOrcent discount,, 1 percent a `month discount, or, let's say, 12 percent discount, it is about 24 percefit, `so we come off sme1ling~ nicely of roses. The CHAIRMAN. Mr. Crawford was here this morning from the Bowery Savings Bank, and ~e' was in favor of the inclusion `of first mortgages in legislation such as this. Mr. WATTS. We don't feel it is necessary, because mortgages are usually termed in simple interest rates. PAGENO="0612" 1194 CONSUMER CREDIT PROTE~TT N ACT The CHAIRMAN. Mr. Watts, I personally, speakin for myself, am very con- siderably sympathetic with the problem you are onfronted with respect to the state Usury Laws, and I feel there is a need fo some delay in the requireS ment in the State in terms of percentages, wher there may be a problem. If you are truly speaking of dollars per hundr~d, that is not necessarily mlslead1n~. If you are talking In terms of dollars dl~count rate per one hundred percent, that may be something else again. Mr. WATTS. Dollars pet hundred per annum. Frankly, I think that the monthly approach is a very mlsleadiii~ approach, that Is to say one or one and a half percent per month. You have heard people here today that could `t utiderstand, "One and a half percent, that Is a bdrgalii," when actually it is 18 percent. The CHAIRMAN. Eight. Mr WATTS We are very sincere about this thin We realize that there are charlatans, but we don't want to be washed do n the drain because there must be some way to overcome some of these readful things that we are confronted with. This is out of the area of Truth in Lending, p rdon the phrase. The CHAIRMAN. I would also like to say that think you will find among the sponsors of IJ.E. 11601 sympathy wIth your osition, that there ~bould be one rule for all and not a discriminatory arrang ment. Mr WATTs One way or the other we think th t our revolving credit should be treated the same way. The CHAIJtMAIr. Congressman Halpern? Congressman HALPERN. Thank you. First I want to welcome our witness and Ui nk him for his very helpful testimony. You do a most credible job in representing N w York State a bankers and your comments are well taken, and ~ am sure th y will be yery helpful in our deliberation. / I gather from your answer to Congressman Bin ham's question that you favor the advertising coverage In H.R. 11601? Mr. WTTS. Yes. That Is,. I would have to see be legislation first. Congressman HALPERN, But In principle? Mr. WATTS. yes. Congressman HALPERN. Do you think it is ob~e tionable to represent all trans- actions where ~harges are $10 or less? The Senate $ill excepts suck charges. Mr. WATTS. ~ think it will make it simpler in ew York State where there is a $10 minimum charge today. This might present some dimculties. I am not a wyor. Congressman HALPERN. Isn't It possible if th re is such an exception that it could be taken advantage of? For example, a person could make several d iferent credit purchases at one source. Isn't it possible that each purchase coul be e~nsiUe~red a separate. trans- action and hepce the finance charges coul4 then be many times the $10, and yet they are exempt from the law? Wouldn't Itbe simpler to have all credit trapsa tions included? Mr. WATTS3 Here is where you are dealing w tb the unscrupulous and it is a tough lob to beat them at their own game. Perhaps if the bill provided all extensions o credit through some persons to differentiate between one as against another on~ and tomorrow another one and the next day another one all consolidated. Of course this is a little out of my field. Congressman HALPEEN. As far as you are oncerned, you would like to see as much protection as possible for all credit, nd if we can find the machinery to do it, by excluding that provision, we would like to do that. Mr. WATTS. Well, from a technical standpoi t this would provide a problem and abuses. Congressrnan HALPERN. Why do you prefer a statement of dollars per hundred per annum, since from an annual rate, since the ercentage rate- Mr. WAT'Is. $6.00 per hundred per annum s on a simple interest rate, It is closer to 12 percent. You see, the trouble Is even our good Asse lyman who gave the example on the push button figuring, actually what be as doing was demonstrating the difficulty in converting this into simple man's in crest rates. PAGENO="0613" CONSUMER CREDIT PROTECTION ACT 1195 In an ordinary transaction there is no problem, but you have all kinds of com- binations; skip payments and balloon notes and so on, and to me it just adds un- necessary difliculty. If I note that it is going to cost me $6.00 per contract here, and I can go across the street to XYZ Bank and get it for $5.00 per hundred, it is as simple as that. These people are taken advantage of and they don't know. In fact, I was amazed this morning when one witness said they didn't care what the rate was. If they don't care what the rate is, this legislation is for naught. I say that facetiously. It is a heck of a lot easier to come up with a discount rate than a simple interest rate. Congressman HALPJmN. Considering merely the disclosure provisions of the bill, I~ased upon your observation, do you not feel this bill is preferable in in- cluding revolving credit rather than excluding this one credit process, as does S. 5? Mr. WATTS. We don't object to including the revolving credit. Congressman HALPRRN. Thank you very much. The CHAIRMAN. Mr. Watts, would you mind answering one more question. When you speak of dollars per one hundred- Mr. WATTS. Per annum. The CH4IRMAN. I did not realize you were referring to a discount. Mr. WATTS. $6.00 per annum is 6 percent discount. The CHAIRMAN. It is almost, did you say, 12 percent simple annual interest? Mr. WATTS. Yes. The point is that in our opinion this gives the public an op- portunity to compare costs. If you standardize that we find it is a great deal easier to quote dollars per hundred per annum than try to convert that into a simple ttflnual rate. We can leave-this isn't any matter of life and death. It would be a great deal easier. This makes it a little more difficult to ~o~np~y with. The CHAIRMAN. At that point you do ruin count~r to one of the basic ideas in Senator Douglas' mind all along, as he presented it to us the other day; that it isn't sufficient to give the discount rate, that it i~ necessary to have the simple annual rate In order to have a true picture. Mr. WATTS. That has been his contention for years, and the fact of the matter is that the New York State Bankers Association has pretty much taken a lead in accepting and embracing the full disclosure as oppOsed to many other associa- tions throughout the country. If what we suggest accomplishes the purpose, then let's do it the easier way than to make it very difficult. The CHAIRMAN. I don't want to pursue the matter any longer, but it is possible I am miStaken, but I think you will find that the intention in S. 5, where they used the term dollars per annum interest rate would be to include the simple interest rate. Mr. WA1~TS. We made the suggestion that if the banks, for instance, incorporate a bracket In the note and say that the charges on this note do not exceed 12 percent. Now, as long as you are sure it is not over 12 percent, you are within the law, but as it is now you have got to-It is a very nebu1ou~ phrase, within reason or something of that sort, from S. 5. Lawyers, I don't think, are very happy with that kind of phrasing. Even that would be a mechanism to peot~ct the lender from violation in all instances. The CHAIRMAN. Well, thank you very much, Mr. Watts. I do appreciate your testimony and your appearance here. Congressman HALPERN. I have one question that I thinly is pertinent oh this questinn of dollars per hundred per annum. Would you not state the dollars per hundred on the declining balance so that people would realize that as they repay over the year, that they have an average of $50 to spend over the year, rather than $100 Mr. WATTS. Well, frankly, I am not an active banker, I am on the staff. I suspect this would make it rather awkward and compileated. This brings up the question of refunds. I don't know if you are familiar with the method of refunds which follows this theory of declining balances~ so that if you lent $100 over a period of a year with monthly payments, actually you would only have $50 outstanding. PAGENO="0614" 1196 CONSUMER CREDIT PROTECTI N ACT Here is where the borro~ver can't understand wh if he pays it off halfway down, he doesn't get half of his interest back, becau e it has already earned-I will be very glad to send you copies of a very clear ex lanation of this. Congressman HALPERN. I think that would be ver helpful to us and we will appreciate it if you could make that available for the record. Mr. WATTS. It is a very plausible and understa dable explanation for the layman. Congressman HALPERN. Fine. Thank you very much The CHAIRMAN. Our next witness is Mr. Micha 1 Sampson, Vice President of the New Yorlç City Central Labor Trades Cou cii, Vice President of the New York State AFL-CIO, and Business Manage of the Utilities Workers. We are ver~r glad to have you, Mr. Sampson, and glad you could be with us. STATEMENT or MICHAEL SAMPSON, VICE PREsIDE T, NEW Yoiur AFL-CIO Mr. SAMPSON. Thank you. My name is Michael S mpson. I believe the Chair- man has stated the organizations I am affiliated wi h Most important of all is the fact I am Chairma of the Community Services Committee for New York City services. As Chairman of this group, we deal in several a eas of community activities and one in particular are consumer problems. For the last twelve years we have run educatio al courses in consumer prob- lems where we have classes both in English a d in Spanish, to make our members, and nen-members as well, in the comm ity aware of the pitfalls in the purchases of furniture, appliances, items of daily necessity as well, and the pitfalls in borrowing that many of the lower- aid people in our community are confronted with. A great deal of testimony has been heard by his Committee in connection with proposed legislation before you. Let me say at the outset that we in the labor ovement, both In New York State Central Labor Council and the New York St te AFL-CIO. are very pleased that at long last some legislation appears on the orizon to meet the problems of some of our exploited people in. an area whe e they can least afford to be exploited. One of the most glaring of consumer Interest is nes arising in recent years is the need for fui-ther remedial legislation in the I stailment lending field. Public controls over the vending of installment credit re still highl~ç' Inadequate in our State. Debt-poolers flourish. Legal protections for buyers and borrowers are inadequate and harsh garnishment and wage as ignment laws still remain the rule instead of the exception. Confusion reignis as to what credit actually e ats the borrower or buyer on the installment plan and as to what sources offe credit on the niost reasonable terms. A survey of the consumer problems of 500 lo -income families in New York City, conducted a few years ago by Columbi University Professor David Caplowitz, clearly shows the magnitude of this problem as related to the war on noverty. It shows th~tt in suite of their poor economic ositions and poor credit status, most of these families owned many expensive a plianees. 95 percent owned at least one TV set; almost two-thirds `owned a hon'ograph; almost half owned a sewing machine; and almost half owned an a tomatic wasTh1ng machine. Most of these families had spent eonsiderabl money furnishing their apart- ments. The typical family bought sets of furniture or at least two room's when It moved Into public housing and had spent ap roximately $500 for furniture. Some 1E percent had paid more than $1,000 for urniture, bought at the time of the move. The prices paid for apuliances were quite h gh. 40 percent paid more than $300 for their TV set and 13 percent had pai more than $400. A number of families owned expensive combination televislo and phonograph sets, and one family reported paying $000 for such an applianc Partly bec~nse they are so dependent upon edit, says Professor Caplowitz In his remarkable study, and uartlv because t ey are 1ntimb~ated by the large downtown store, most of the families buy thel major durables from neighbor- hood merchants or from door-to-door peddler rather than going to the large department stores and discount houses. PAGENO="0615" CONSUMER CREDIT PROTECTION ACT 1197 Symbolic of the narrow shopping scope of the poor is the practice of buying from door-to-door salesmen, the men with the traditional slogan of "A dollar ~down, a dollar a week." Fully half of the families surveyed had made at least one credit purchase from these door-to-door salesmen, and more than a third had made repeated purchases. Because they are poor and have such low ratings as credit risks and because they lack the training to be sophisticated shoppers, people of low incomes are the natural prey of unscrupulous, exploitative merchants. As a rule, they do not know how much interest and other financing costs they are paying In fact for the loans and installment purchases. One of the abuses is the discount arrangements they make when a purchaser goes in and buys an appliance, and the next thing. you know he is making his* name into a second party, and when he seeks any kind of relief he has to go to someone who has nothing to do with the sale. A good example is the television set. You have some poor families who want to get their children off the streets. He knows he can't afford to buy it, but figures by paying $2.00 a week he can at least have some entertainment in his home to keep his children off the street. He buys a television set and is told it is guaranteed. The set doesn't work, the man waits, ten days, twenty days, and they delay in sending the man over until his so-called guarantee is used up, and the only place be can go is where he has to make his payments. In many instances he still makes his payments where he bought the ap- pliance. In lots of instances the payment isn't made to the one who had the note. The end result is one of the most serious things we are confronted with, gentlemen. If we can eliminate that, we can eliminate a great deal of abuses that exist in the lending and time purchase plan, and that is garnishees. You will be amazed, and I will be glad to show you facts that some of your lending institutions in this City and all of us are aware of, the fact that they all have clearing houses on credit, whether it is borrowing money, buying clothes, furniture and appliances, they all have clearing houses. Yet, despite that, they will take some individual and loan him money or sell him some mer- chandise on time, knowing full well they have two, three and four garnishees pending. I can show you cases where there are six and seven garnishees pending. It is like a chain reaction, and yet the result is an employer has to set up ex- pensive accounting procedures, be has to make the payroll deductions, and he has to forward the check, and he says, "I am not going to pay these ex- penses, you are fired." It took us a great many years, until the last session of the Legislature, to get a State bill passed saying you can't fire anyone until they have tw~ garnishees. We still have the loophole that when a responsible lending agency stands be- fore you and says you should not fire garnishees, he is talking out of both sides of his mouth. If only credit houses would once and for all know they cannot have a man fired-this is a sword that hangs over a person's head. He has to make up or loses his job. He loses his job, he becomes another relief client, depending upon the City to support him. There is the danger, and I think one of the finest things in this bill is the elimination of people being fired because of garnishees and the elimination of garnishees, because we are back in the days where you become a debtor and slave for your life. As far as the labor movement here in New York, we wholeheartedly support the bill and will cooperate wholeheartedly with the gentlemen who support the bill. Thank you. The CHAIRMAN. Thank you very much Mr. Sampson. We are very grateful for that expression of support. Congressman HALPERN. I, too, want to commend our witness. Unions are naturally concerned about the effect of garnishment on the secu- rity of their members' jobs as is cited here and the ability of their members to subsist on a given wage. I would like to ask two questions pertinent to this. PAGENO="0616" 1198 CONS~Th~ CREDIT PROTECT ON ACT Does the issuance of a garnishment arise in unio negotiations with manage-~ ment and have any settlements of the issue result d? Mr. SAMPSON. Let me give you my own person 1 experience. I represent a union of 25,000 members, naturally a large volume, and I would be confronted with the problem of garnishments more than an o ce with 4,000 or 5,000, and repeatedly in our negotiations the cost of effeetuat~ng reductions of payments, forwarding these1 payments to the various credit agencies or banks is a charge- able items, is a fringe benefit in our negotiations a~d we. in a sefise, are losing X cents per hour in benefits, so that unscrupulous ~enders can hale a field day. That's how it affects us, but beyond that even m~re important is our concern over the exploitation of the workers. Let me give you two cases. Only In the last ~eek, I had a man with six ehi1~dren who bought a used car. He was one da~r late in hls payments The very next day a garnishee was gotten against blm~ the very next day. I had another case where a man bought a used c r. He made his payment but somewhere between the agency and the discount ouse there was a delay and seven days after he made his payment the garni hee was gotten against this man. We were called in on this matter and' this man happened to have four garnishees and they were all waiting in line a one is paid up to collect another one. We knew why the man wanted the ear. He had s x children, He had a brother who was dying ~nd the only way to get down the e was to have a car. So, it's more than just what the cost is to us in negotia ions and fringe benefits. We want to see the end of the exploitation of people who are so easy with credit who will get themselves in debt over their head , which they shouldn't, and become a problem to themselves, a problem to the family, where they are making this exorbitant payment, something ha to give, either in food or clothing or education, and the family in the end Sn ers. It's better if they didn't have it th.an to find themselves in debt and lose their job as a result of this debt. Congressman HALPuRN. My question was more imed as to whether or not the issue of garnishment arises in negotiations wit management and have any settlements of the issue resulted. In other words, when you do negotiate with m nitgement, does this question come up? Mr. SAMPSONL I can say this, speaking for my elf, I wouldn't want to speak' generally- Congressman HALPETiN. Well, you represent the unions i~i the Trades Council. Mr. SAMPSON. In some instances where you make an appeal to management, they will be generous and go along with you. In some instances they won't. They take a hard line and say, "No, we are not going to stand this cost. He has one, two and three more.' We are not going to pay the bookkeeping ex- penses, no." Congressman HALPERN. It is a subject of concern? Mr. SAMPSON. It is very, very much. Congressman HALPEEN. What attempts have your unions within the Trades Council made, based on the lines of communication open to them, to educate their members in the area of consumer finance? Mr. SAMPSON. We have been conducting consumer classes and graduating' counselors for fifteen years now in both Spanish and English. Congressman HALPERN. That's very good to hear. Mr. SAMPSdN. But, of course, every time you `find a solution or a possible answer to alert the people to something, they come out with a neW gimic. The latest one now-if you saw the advertisement-is that they show you a card, "Have A Checking Account. You can overdraw on your checking account. All you have to be is a resident for a short period of time and be employed for a short period of time, and you can overdraw." But they don't tell you what you are going to pay. This is what encourages people to get themselves in debt. They don't realize the price in the end. They don't realize what the price or What the cost is, and this is the answer to the whole thing. Congres~m~n HALPERN. This would help the unions in their own educational programs? Mr. SAMPSON. It would help the unions, but more important It would eliminate the exploitation of the people that unions are Interested in. PAGENO="0617" CONSUMER CREDIT PROTECTION ACT 1.199 Congressman HALPERN. Thank you very much. The CHAIRMAN. Thank you very much, Mr. Sampson. That is most Inipres- sive testimony. Our nONt witness is a member of the bar and has particular expertise in the field of compensation, a former President of the New York Compensation Board, Miss JeOnnette Harris. STATEMENT OF JEANNETTE ii. HARRIS Miss HAnRIS. Thank you very much, Mr. Chairman. My name Is Jeannette H. Harris and I am an attorney, having practiced in the City of New York for more than twenty years. I have specialized mainly In claimS under the Workmen's Compensation Law and claims Involving employees of the City and of the State of New York who become disabled and are entitled to benefits under Pension and I~etirement laws. I am Past President of the New York Workmen's Compensation Bar Association. I am now Chairman of the Committee on Workmen's Compensation Law of the New York County Lawyer's Association. My work brings me into contact with thousands of low-income workers at a time when they are disabled from working and dependent upon the pitifully low benefits paid under the Workmen's Compensation Law of this state. (While maximum payment Is $dO.00 a week, many disabled workers receive much less, as little as $20.00 a week, and often they receive nOthing while the claim is in litigation.) Faced with a stoppage of income, it is then for the first time that an instalment contract is examined. How many tithes have I heard one of my clients say: "I thought the price of the TV set (or the sofa, or some other article) was $300. I have been paying $5.00 a week for a whole year I still haVe to pay $5 for another year; that makes $500, not $300. Now they tell me If I don't pay, they will take away the set and sue for the balance just the same." Many times the client does not even know the actual price; only that be was supposed to pay $3 or $5 every week for a certain number of weeks. Shall the answer always be as it was in Ancient Rome, Let the Buyer Beware? We think we have advanced far beyond that civilization in ethics, morality and honesty. At least let the buyer know the price he is paying for the article and the price he must pay for credit, leaving it up to him to decide if it is wortL tl'e extra charge. I believe that no responsible business man is averse to giving the facts, 1e'~d good business men would rather make a cash transaction and be willing to ~ve a discount for cash, thus making the gap between cash purchase and credit purchase even wider. But it is in the realm of finance companies that one sees the worst aspect of these instalment payments. Take my disabled worker, pressed for payment and in fear of losing his whole investment~ He goes to one of those loan companies who advertise that it is better to "consolidate all your little debts into one big one." The company is happy to oblige and take over the payment o~ the in- stalment contract and even give an extra $25.00, Payment, he is told will be suspended for two months, which he believes will be long enough for him to get back his job and collect the compensation he hasn't received. Later, when 1~or some reason he is still unable to work, he learns to his dismay that the paper he signed is a chattel mortgage covering not only the items of the instalment contract, but in addition every stick of furniture and clothing he possesses. It follows that for the greatest good, a statmont should be reciuired in simple English of the actualiterms. In addition I suggest that the law make provision whereby when for good reason (illness, disability, accident) and the buyer is unable to complete pay- ment within the time required but has paid at least 50% of the actual purchase price, exclusive of finance charges and Interest, an extension of time to pay is automatic, with even a reduction of the amount of credit charges. The members of my profession, practicing in my specialty, would also approve, as I do, the prohibition of garnishment of wages. The Workmen's Compensation Law prohibits assignment, attachment or garnishee of compensation payments (Sec. 33, WOL) and this provision has worked well, despite the great outcry as time of original enactment that the businessman would be defrauded, that it would be a means of taking money from the creditor without due process of PAGENO="0618" 1200 CONSUMER CREDIT PROTECTION ACT law; that business would flee the state, etc., etc. But the fact is that over the years the economy of this state has prospered and increased. The growth of the finance industry into the retail business has been so great and many of its methods so unfair that there is a need for federal regulations and supervision. These companies as well as the retail industry are not simple individual entities, but are the creatures of large holding companies, having na- tional and even ititernational significance, and thus controllable only by the federal governmen~t. The CHAIRMAN. Thank you very much, Miss Harris. We are grateful for that statement and I think you bring to this problem a point of view that we haven't had presented here today. I think your reference to the prohibition of garnishment in the case of com- pensation payments is very apt and most useful to us. Congressman HALFERN. I have no questions, but I would like to commend Miss Harris for her most perceptive and very enlightening testimony. It is based on many years of experience with `the public and in particular with the consumer, and I wish to commend her and compliment her for her help to this Committee. Miss HARRIS. Thank you very much. I'm very glad to see both of you gentlemen on this Committee, since I know Congressman Halpern, being from Queens, and also Congressmar~ Bingham. The CHAIRMAN. I think.we discussed compensation matters. Miss HARRIS. That's right. The CHAIRMAN. Our next witness is Mr. Edward Panarello, Reptesentative of District 20 of the Retail Clerks Union. We are very happy to have you with us, Mr. Panarello. STATEMENT ON EDWARD PANARELLO, RETAIL CLEHKS UNION Mr. EDWARD PANARRLLO. I am very happy to be here, Representatives Bing- ham and Halpern. We know your reputations and we echo what Miss Harris said. I am sure some results will come out of this hearing. My colleague, Mik~ Sampson, gave some good testimony with regard to our community servik~e programs, as far as the New York Central Labor Council Is concerned. There is no question about it, that under his direct supervision that these classes are held regularly for a number of years, but our sort of work be- comes tied up in a sense that all that we try to expound about helping people, we have certain things that we are confronted with and that is the operation of retailing or the operation of lending money and what the consumei~ is' subjected to. Despite all the efforts that we put into trying to educate our members, we find that we are up against a wall. There is no question about it. I think this is the American way, because when I was given a synopsis of the law, I see the title hetre, "Consumer Credit Protection Acts," and `I think that the good Itepresenta- tives here realize that fully knowing their record, that we want to protect the i~onsumer. I originally came out of retail and I know some of the cases of exorbitant credit charges and the revolving way of charging credit charges to the extent where a consumer might reduce a bill down to a $10 balance' and buy some addi- tional merchancilse and find that when he or She becomes delinquent in payments, not only is the last purchase repossessed, `hut the first purchase with a $10 balance. After a recovery we find that a deficiency judgment is obtained and they are not only paying some more interest charges, but they have no merchandise in their' home and they are paying on what they call a deficiency balance. I had the sad experience of working in the credit department and witnessing all these charges that were put on to customers' bills. I think there should be expo- sure as to how much is charged through interest within the area of limitations, within the State or Federal regulations. There is also something related that I would like to call your attention to. We have a situation whereby a person-and we had one specific case where a member who subscribed to magazines, five or six magazines, with payments of $11 a month, d~cided after the subscription application was signe~l not to continue to receive the magazines. This man was told by the agent, "You catinot cancel. You are just stuck with the bill." No payments were made. Subsequently, a garnishee order was placed on his wages. He owes approxi- mately $200, paying $8.00 a week. He makes $80 a week, has a wife and several' children. He has no magazines, and he owes close to $200 with the charges,. Sheriff's fees, judgment fees, and I say this respectfully, attorney's fees. PAGENO="0619" CONSUMER CREDIT PROTECTION ~CT 1201 We are trying to help him. How do we try to help him? We seek some help from Mr. Lefkowitz' office and we use him plenty, because, to be brief, we had another case of getting tools from some outfit. The member never received the tools. It was the same procedure. We found a garnishee on his wages for some~ thing like $300. After enlisting Mr. Lefkowitz' office, I recall that a settlement was made where this member paid approximately $125 to sort of get this garnishee off his back~ I think something should be done about what we call the service of summons, where suddenly you have a judgment against a person who never has an appear- ance in~ court or due notice. We find exorbitant charges, refinance charges. Then it's handed over to a collection agency and from there it goes into the Sheriff's office who has to be paid a certain fee. A case in illustration was made by my colleague, Mike Sampson, about garnishees, and the question was asked if we had trouble and the answer is: Yes, we have a rough time with employers because most of the time when a garnishee is placed on someone's wages, they take a hard attitude and they want to dis- charge him. It just so happens we have a union that intervenes, but people who don't have a union representing their rights are at the mercy of some managements who feel they shouldn't have a garnishee. That is one of the reasons we tried and we were successful in having this law enacted, this past January. Now, we feel in the labor movement and in the interest of all workers and consumers, that there should be definite protection as to stipulated amounts. It should be an open book. A person should know when they buy an article whether it be furniture or a car or borrowing money, they should know exactly how much they are paying in interest, and I think somebody should know when they become delinquent. I'm not talking about the person who buys on time and says "I'm not going to pay," and unfortunately they, too, are victims of some high-pressure merchants, by salesmen who think they do have credit bureaus where they could investigate this as a chronic delinquent. They should not be extended credit, and a legitimate case where an illness strikes at home and they cannot pay their $25 payment, I think there should be a provision as to what happens after they become delin- quent and a court case follows as to the charges in relation to, again, increased credit charges, attorney fees, and then the Sheriff's fee. So that the organization in line with the New York City Central Labor Council and the State AFL-CIO and our council definitely urges that this law be enacted. And I want to thank you very much for your patienCe. The CHAIRMAN. Thank you very much, Mr. Panarello. We are grateful to you for that statement. You obviously have substantial contact with these problems and it's very helpful to have your support. Congressman HALPERN. I, too, want to thank the witness, and I associate my- self with the remarks of Mr. Bingham in telling you how pleased we are to have you here and to have the benefit of your views. Now, various retail witnesses have contended that disclosure of credit terms would create intolerable burdens for commercial and other store employees who would have to figure them out. Do you feel that, with the various tables and charts that would be provided, store employees would be unable to provide the Information required by this legislation? Mr. PANARELLO. No. We happen to represent retail workers in some very, very large concerns right here in the City of New York and they have a credit department and they have a staff of young ladies or young gentlemen who are trained by charts where within a two-week period, they are skilled enough to work the operation in figuring out what the credit charge is going to be. So I see no question or no burden whatsoever on the operation of a business. Congressman HALPEan. There is no problem that you think cannot be resolved? Mr. PANARELLO. Right. The CHAIRMAN, Thank you, Mr. Panarello. Our next witness is Mr. Frank Rubel, Executive Secretary and General Coun- sel of the New York State Credit Union. STATEMENT GE FRANK RUBEL, EXECUTIvE SECRETARY, NEW YoRK STATE CREDIT UNION LEAGUE Mr. RUBEL. Gentlemen, I have been in the credit union movement for 51 years, and practicing law for a longer period than that. PAGENO="0620" 1202 CONSUMER CREDIT PROTECTION ACT The New York State Credit UrtJon League, Inc., Is In full o-ppo~Ition to tWO Iwovisions in this 1411, H,R~ UGOl, one being the prohibition against the use of Confessions of Judgments and, secondly, the prohibition of garnishment of wages and salaries~ Confessions of Jtuilgments are statutory in New York State and are completely regulated by the ~13ivil Practice Laws and Rules. The main reason why a Con- fession of Judgtne~it should be permitted is that the person confesses judgment in a sum not in excess of the amount borrowed at the time the loan is made. Sec- ondly, it eliminates the preparation of lengthy legal papers, in the form of summonses and complaints, and also the location of the borrower or ce-maker, in the event the loan, becomes delinquent~ The New York Law so provides that the judgment-creditor may only collect costs of one half the sum that would be awarded In the event a summons and complaint were served. The judgment- debtor, of course, is credited with all payments made to the judgment-creditor before the entry of judgment. Respecting the prohibition of garnishments, we can only state that credit unions exist for two reasons-one is to encourage thrift by the education of its membership (which usually consists of low and middle-income people) to save monies and, secOndly, tQ lend money to the members at a reasonable rate of interest for usefi~l and productive purposes. The loans are generally made with the character of the member as security; in other cases, co-makers are required by law. In the event garnishments are prohibited, credit unions will not be able to function and, eventually, will dry up and pass away. We are unalterably opposed to this portion of the H.R. 11601. The New York State Credit Union League, Inc., bad a membership of 1,151 credit unions at the end of 1966 with shares of $445,000,000, loans of $391,000,000, reserves of $35,576,000 and assets ii~ excess of $464,000,000, with over 800,000 members. The state chartered credit unions are permitted to charge Interest on loans at a maximum rate of 6% per annium, discounted, or 1% per month on unpaid balances. The credit unions chartered by the federal government are permitted to charge interest at a maximum rate Of 1% per month on unpaid balances, which must include all charges to the borrower. Credit unions are non-profit organizations and its membesrbips consist of em- ployees or associations with a common bond of interest. Each member must be elected by the directors. Respecting Senate Bill #~ credit t~n1ons see no reason why lending agencies, including credit unions, should not divulge the interest rate charged on loans and -also the dollar cost on loans made to its members. The rest of the bill 5.5, in the opinion of credit union leadership, will protect the borrowers of any type of institution. Back in 1916 we started a Credit Union in the Municipal Building In Man- hattan for municipal employees and State employees who were born in the City of New York. We started with $570 and our membership consisted of more than 50, and our assets more than $21,000,000. In this State alone, we have now 1,151 credit unions with a membership of over 900,000, with assets greatly in excess of $200,- 000,000 and we are unalterably opposed to the elimination of garnishments. You will recall, Mr. Bingham, in 1956, you gave me a telephone call from Albany when you were counsel to Governor Harriman in respect to a bill that the Governor had signed, permitting State employees and political subdivisions to assign unearned wages to banks, trust companies, and credit unions. A Mr. Lewman was fearful of the fact that banks and credit unions would take the checks and salaries of State employees and City employees. And you asked me if I would draw a contract so that no credit union or bank would take more than two wages in a month, even though it be a hundred percent wage assignment. Do you recall that I said to you we would be satisfied with one payment a month. Would you believe it, that there has only been two of those papers filed with the State Comptroller since 1956, and there hasn't been one filed in ten years. Now, to get back to the garnishment and confession judgment, the CPTJR in New York State controls very strictly the entering of confessions of judg- PAGENO="0621" CONSUMER CREDIT PROTECTION ACT 1203 ments. They may not be connected with a note. A person may ~tot sign a confession for more than the amount loaned. The law prescribes the method and manner of entering your judgment. Take for instance, a man who borrows a thousand dollars from the credit union. When be pays $500 back, on the back of their judgment it shows the amount of the loan, the amount paid, the balance, the interest, and you may only charge half a bill of cost. If you have to serve a summons a~d complaint, you have to first locate the person who owes the money and serve him. This credit union alone lends a million dollars a month to low and middle income people, and I can tell you now, gentlen~en, If this bill passes with that elimination of garnishment, yo~i can kiss over $11 billion dollars loaned to middle and low income people goodbye, that is, you can kiss the credit unions goodbye, because even though they may not use them to a great extent, it is something that you have got over their heads If they don't pay, and all you can get is 10 percent of the man's wages if be doesn't pay. Now, in the credit union, you don't file the judgment until a man is at least three months' delinquent. If you are willing, as we did in the case I spoke of, Mr. Bingham, that you will possibly remember, the Attorney General said to me when I drew that bill-and I have been going to Albany for 50 years as a vo1un~ teer-if you will limit this strictly to supervised agencies, like banks, trust com- panies, we will go for the bill and ask the Governor to sign it. Do you recall anything about that The CHAIRMAN. I suspect that this conversation may have been with my col- league, Judge Gutman, who is counsel to the Governor. Mr. RUBEL. Were you Secretary to the Governor? The CHAIRMAN. I was Secretary to the Governor,, yes. Mr. RIJBEL. You are the gentleman, because you are the one who called me. Getting back-my memory is very, very good and I thought possibly you would remember this, and I would be very happy to let you know that only two have been filed in respect to confessions of judgment in New York State. They are so strictly controlled that it may not be connected with the note. It must be a sepa- rate instrument. Now, if we eliminate garnishee, that would also eliminate the wage assign- ment, which must be approved in each individual case by the head of the department, board, or commission by the persons employed. I won't take but two minutes iuore. Tm the first place, when unions are strietl~ llmited as to the amount of thone~ they may receive on a loan, the New York State L~w provides that you niak discount at a figure of 6 percent per annum maximum, or a charge of not more than 1 percent a month on an unpaid balance. The Federal law provides that a payment may not exceed 1 percent a month on the unpaid balance, but that must include all charges, Insurance, 1nvest~ga- tion, death insurance on the loan, insurance on the shares that he'S got in the credit union. In other words, in the Federal law If you have up to $2,000 In shires and you die, your estate gets the benefit of the $2,000 and you do~'t pay for it. That s paid by the credit union. I see no reason in the world why any lender could not tell any person that borrows from him the rate in interest in doll~r~. Many people don't feel that way, but credit unions certainly bare no objection. I'm sure every credit union in the United States with over $11 billion dollars represented in over 22,000 credit unions in the country, are in a great position to help little people. In fact, the Federal government Is spending mOney orga~i1zitig credit unions in the low-income loca!ities so they may progress and help each other. Now, if you wanted to pass these bills and eliminate credit ufiiotLs, I see no objection, and I don't even object to banks and trust companies, because they are supervised and if they do anything wrong, you can rest assured that the supervisor's agency will certainly get on their neck. I thank you very much. The CHAIRMAN. Thank you very much, Mr. Rub~l. I would like to clarify one point. I take it that credit unions in New York State could get along with thO kind of restrictions on garnishments that are imposed in New York State? Mr. Rim~t. Positively. I like that law. In fact, it was my suggestion to the Attorney General that employers who dismissed employees because of a gar- PAGENO="0622" 1204 O6~S~TMEI~ CRIIDIP PROTECTION ACT nishment should be strung up, and they passed a law sccording to that sugges~ tion, saying he could get his job back. There is no doubt about it. The laws in this state are very strict in respect to garnishments. You may not have more than one garnishee at a time. The CHAIRMAN. Do you happen to know anything about the operation of the credit unions in thd States of Texas and Florida? Mr. RtBEL. I do know they don't allow them, but the credit unions don't get along as well as we do. I'll tell you why. Federal employees are not garnishable. I'll give you an answer to something that will give you a shock. If a credit union or bank gets hold of an employer of an employee who has failed to make hi~ just and honest payment, out he goes. He's fired, and I'm going to let you in on a little secret. Back in 1959, we had a Police Commis- slop in the City by the name of Valentine. He dismissed two or three policemen a day for non-payment of just and honest debts, and this is the reason why. I set up this procedpre which originally, 86 (a) of General Municipal Law applied. And in 1956 that was repealed and we made it all-inclusive, so it would treat &ate employees the same as Municipal employees. The CHAIRMAN. I'm sorry that my memory is not as good as yours in that regard. I am sure you are right. Mr. RUBEL. I have some correspondence with you. In fact, I sent you the contract and you turned it over to Mr. Lefkowitz for his approval and it was i~igned by the then State Comptroller and it's been functioning beautifully. In fact, 99 percent of the loans that the Municipal Credit Union makes are based upon the wage assignment with no co~makers, no security, and the employee, that is the commission, city and state, individually, approve the copy, the original and the employee geta-as the law provides-a copy of what he signs. In other words, It states on it in big letters "This is a wage assignment," and I believe in it thoroughly, but I don't think that you should destroy something that has taken us over 50 years in this State to accomplish. In fact, Governor Roosevelt was State Senator in 1913 and introdttced the State law. He was the President that fathered the Federal law, and in this State we have 124 state-cthartered credit unions and 750-some-odd Federal chartered flfliofls. The CHAIRMAN. I would like to say that the Committee on Banking and Cur- rency, of which we are members, is very much interested in credit unions and we certainly don't want to do anything to harm them. We think this a fine type of organization and we want to thailk you for your testimony. Congressman IL~.LPERN. Yes. I, too, want to commend the witaess and I'm glad our distinguished Chairman here today pointed out that the Banking and Cur- rency Committee not only believes in credit unions, but supports them, and I would like to add that the Banking and Currency Committee has handled all of the legislation passed by the Congress to encourage and promote credit unions. We handled all bills affecting credit unions, so you can be assured we don't in- tend to hurt t~he Credit unions in any way whatsoever. In loOking o$r yo~ir memo, your testimony, I note that it is headed Memo in Opposition to H~R 11601. Shouldn't that really read opposition to two provisions in 11601? Mr. RTJBEL. You are absolutely correct. Congressman HALPEBN. Do you agree with the general disclosure provisions in the bill? Mr. RUBEL. ~&bsolutely. Congressman HALPERN. Do you believe in the revolving credit requirements? Mr. flunaL. I ~bsolute1y do. Congressman HALPERN. Do you agree with the advertising in the bill? Mr. Runat. i~bsolutely. Congressman HALPERN, I am very, very pleased to hear that. Now you sug- gested that garnishments are so essential to the operation of tl~e credit unions. Doesn't this indicate that, perhaps, they extend credit to borrowers who can't afford the credit and should not receive it in the first place? Mr. RUBEL. ~When a person comes to the Municipal Credit Uniou, the one I man- aged for 20 years-you know, Sidney Wexler is the Treasurer. The CHAIRMAN. And I have the utmost regard for him. Mr. RUBEL. Sidney would have been here himself if he wasn't sick. I will give you the answer to that. PAGENO="0623" CONSUMER CREDIT PROTECTION ACT 1205 When a person comes to a credit union, they are required to make a. budget. They set up what their income is, what their rent is, what their food is, their laundry, their insurance, and if the wife or anyone else in the family has a job, that also goes there, too. Now, if the credit committee, and they are the sole judges of whether a person should have a loan-And I want to say this to you, gentlemen, in this union over here with over 52,000 members, a great deal more than 50 percent of them are colored, and I'll say one thing right now, they make their payments just the same as the others, and many of them have the maximum shares. You see, when you get people and encourage them to save money, even if it's only $5.00 a month, if you can get them to do it, you have got a marvelous credit union. The two purposes of the credit union is to create that thrift. That's primary and you mustn't forget the membership is limited strictly to a common relation- ship with the employer or association or a parish or a lodge or a city or county. For instance, over in Queens you've got some beantiful credit unions over there, and one of the greatest friends we ever had in Albany is the fellow who is now the District Attorney. Now, getting back to the question as to not permitting over-borrowing, this is the problem. Nobody, I don't care who it is, can borrow a nickel from this credit union or others unless we can clear off all of their debts. I didn't get back to tell you the story about at the time in 1939 there was 75,000 garnishees on file in the Comptroller's office in the State of New York. Congressman JIALPERN. How many? Mr. RUBEL. 75,000. Congressman HALPEEN. How many employees? Mr. RUBEL. 200,000. That didn't mean individuals. Some had ten, fifteen, twenty garnishees, so when Mr. Valentine, the Commissioner of Police, fired these police- men, I went to Bill Reardon and I said, "Bill, this won't do. We have got a good credit union here. We have got a law, Section 86(a) of the General Municipal Law, which permits the assignment of unearned wages if approved by the head of the Department, Board, Commission where he is employed." He said, "Why don't you go over and see Commissioner Valentine?" I went over to see him and took with me a statutory procedure for carrying out this and he designated the First Deputy to approve of all this. So we put an advertisement in the Leader and the Chief that we would consolidate all of the debts of Municipal employees if they came in with a complete story. So, when we got finished with it, there were 30,000 garnishees on file and none by the Municipal Credit Union. Yes, we filed them, but not too many, but we are very happy with the fact that our credit committee, if they find that a person wants to borrow more than they can afford to pay back-and under our employee laws we have no limitation. We are not limited to 36 months. We make a loan big enough, say, $3,500, and allow them 50 months to pay it back, or 60 months, because they only paid interest on the unpaid balance. If they die before they are 70, the loan is completely cancelled. If they become disabled before they are 60, the loan is completely cancelled. Now, does that answer you in respect to how we can keep them from over- extending themselves? Many times we will consolidate all their debts and pay them and the credit committee will have them sign an affidavit. The affidavit says, "John Smith being duly sworn, deposes and says that in further consideration for the giving of a loan to myself in the sum of $3,500, I will not create any other debt by loan, charge account or otherwise, except in a sOrious emergency, in which event I will come back to the Credit Union and have them try to solve my problem. Now, if a person got a loan of a thousand ddllars and he ran into a serious emergency tomorrow, he is taught, we educated, to come back tomorrow. Usually a man must pay up half his loan before he can come back to borrow more, but he had tuition or things like that that people have to pay. Congressman HALPERN. Would you oppose or favor a Federal garnishment provision in this bill which wa~ limited, as the New York State law is, to only 10 percent? Mr. RUBEL. Limited to what? PAGENO="0624" 1206 CONSUMER CREDIT PROTECTION ACT Congressman I~ALrEnL I ask If you would favor a Federal garnishment pro- vision such as, say, in this bill, which was limited as the New York State is to 10 percent? Mr. RITBEL. I ~on't think any state permits more than 10 percent. Congressman IIALPEEN. Would you favor a Federal law to `this extent? Mr. RtJBJrL. I don't see how you can operate too well under a Federal law when you have gøt the Courts here set up to do a job like this in New York State~ Congressman HATYBRN. Do you believe the other states should have similar provisions which a Federal law would require? Mr. RUBEL. I don't see how you can eliminate one state and take all the rest of them in. Congressman ITALPERN. You would not eliminate New York. I merely said to provide the sam~ provisions New York State has in a Federal law. Mr. RUBEL. Me you familiar with what a person has to go through to get a garnishment under the New York State law? Congressman TIALPERN. You said you weren't opposed to the New York State law. Mr. RUBEL. I am not opposed. I am telling you the involvement you would get into with a Federal law. First, you have got to get an execution, then it has to be seftt on the judgment day, then the Marshal must wait 20 days before be files It. You get terribly involved. You would get terribly involved if you tried to Involve all this, because in this State, the Marshal is operating in the City and they may not operate out of It, and the Sheriff is operating all over, and I don't want to say anything about changing the law, but they have been trying to get rid of Marshals and I am in favor of them. Congressman HALPERN. Didn't you say you favored New York State law with limitation of 10 percent? Mr. Runar~. Positively. Qongressman HALPERN. You would not object if this is employed in the law we are now advocating? Mr. RUBEL. I would not object. I have no objection to a 10 percent limitation. I will get back to that because under the Personal Property Law, Section 45(a) is the ode that forbids State employees to sign on wages; 46 through 49 of the Personal Property law relegates that wage assignments up to a thousand dollars should be restricted to 10 percent. Do you follo* me? Congressman HALI'nRN. Yes, I follow you. Mr. RuBnL. Now, there is no limitation on a loan made by a bank or trust company; if the loan Is over a thousand dollars. So, you may take an assignment in excess, but any bank or credit union would never take more than one payment a month out of an employee's check. He wouldn't have a job, because he would quit. That may be the end of that. The law is so strict in protecting the con- sumer and I like the strietne~s. Don't think that 1 don't because I haito Introduced 98 percent of 1~he law affecting credit in this State, drafting them. I'm in favor of the consumer law on the books. I'm against 18 percent interest. I think it's outrageous. In fact, most credit unions charge a lot less than the legal limitation. Ip fact, the Municipal Credit Union charges somewhere, perhaps, between 7 or 8 percent and it's not discounted and we don't have any problems and we don't pay rent tax to the State, don't pay to the Federal government, and we don't pay for collections, and it does a job. And I can tell you now, If that bill passes in the form It's In with respect to garnishments, you can forget credit unions, becau~e they won't ex~t. I'm being very frank with you. Concrressman HALPERN. I think I differ with you on that score. As a matter of fact, If a borrower can be made to pay only through garnishments, does this not indicate that the lender should have a more careful examination of the horrower'~ background? Mr. RTTBEL. 98 percent of the `people pay, but you `don't know they exist, be- cause that other 2 percent can ruin you. Do you follow me? Congressman HALPERN. I follow you, but I don't necessarily agree. Mr. RUBEL. My experience tells me that over 50 years of dealing with people, all kinds of people, that all the investigation you want to do won't do any good if they lie to you, and this Is all under oath. PAGENO="0625" CONSUMER CREDIT PROTECTION ACT 1207 When they get a loan, they swear to the facts being true. If they were not true, we wouldn't make a loan. Fine men sit on that credit committee four times a week and they pass ~n the laws. And I say that 98 percent, close to 99 percent, you don't even know they have a loan, but that other 1 or 2 percent, brother. Suppose you lend a million dollars a month. Do you know what you are losing if you didn't have the right to garnishee and if you went back to giving notice to the employer, the head of the department that a bum iii his offices doesn't pay his debts to the credit union, what do you think would happen? Now, I read something about Bankruptcy. You know, I have been gQing to ~ankruptcy Courts for many years. I can tell you now, gentlemen, that 99 per- cent of the people that borrow money from the Municipal Credit Union and go Into bankrupte~, we don't have~to look for them~ They come to us and say, "I want to pay my just and honest debts and I am making a payment and signing a waiver," and that's the answer to that. Many are not profit organizations, they are not charitable organizations, they are there to give service to the members. You know that as well as I do. You gentlemen have had a lot of experience in Washington. I see no reason in the world why concessions of judgment as controlled by the law in New York State should not be usable and also the garnishment laws, because they are extremely strict and I believe In strictness. Congressman HALPEBN. You would not object if New York State law or ~om- parable language to the New York State law was part of this legislation? Mr. RunuL. I do not. Congressman HALPEIu~. That Is my point. Mr. RUBEL. As long as you can't make us repeal our law. Copgressman HALPEuN. No question. So I conclude that you agree with all of the provisions of this bill, cycept the provision of garnishments, and you say you would like this law if that was not a part of this bill? Mr. RTIBEL. Yes. Congressman BINGHAM. Thank you very much. You might be interested to know, Mr. Rubel, that Senator Kennedy earlier today suggested something somewhat similar to what you said. Our next witness Is Mr. Fred Noz. Is he here? Sn~TEMsNT or FuED Nez, ASSQCIAPION or Co~znoI4i~ AN9 PRQrES5IQNAr, Ar~o1INrY$ Mr. Funu Noz. Yes. I am Fred Noz of the Association of Commercial and Pro- fe~sional AttQrneys. The CRAIRMAn. ~ am very happy to have yop here, Mr. Noz. Mr. Noz. I have two letters which I have addressed to the Committee and sent to W~sbington. I would consider it a personal favor if you read them personally, so you will be familiar with what is in my letters. ~n my testimony I shall attempt tQ, with your permission, to highlight soipe of tim niore salient features of the problem which is pretty much summarized in my two lettere, The rensQn why there are two differept letters is that the first letter addresses Itself to the problem of the proposal to aboli~h wage garnishment altogether, and the second letter addressed itself to the prob~em ~y the testimony of Repre- sentat~ve Rosenthal, to the effect there i~ some ljmitation to be placed ppon wage gapiishmen~s, Taking the first problem first, that is the proposal to ban the wage garnishment altogether, I wish to emphasize that this is ~ credit-oriented economy and the wage garnishment is the ulost widely used commercial tool in the United States today. Since the economy is-I don't think you will have any disagreement on this- Is completely credit oriented, we are concerned with what is a natural part of the eeonorny of this time, namely a collection tool corresponding to the nature of the economy. I am sure you have statistics already available on the volume pf installment se1iii~g, statistics on the volume of personal loans being made. Of course it doesn't step there. Any time any small company delivers some~ thing in advance and expects to render an invoiCe at the end of the month that is a credit transaction. 83-34O--6'~----4O PAGENO="0626" 1208 CONSUMER CREDIT PROTECTION ACT We are reaching a point where even to pay for a thing that costa as little as $30, a sale is made on the basis of $2.00 a week, so this is completely a credit- oriented economy. I can go on to mention the credit cards which are so widely used today. Even the airlines are now starting to sell their tickets `through the use 4 credit cards. Any change in wage garnishments, which are a part of this, will do harm to our economy as it is today. If wage garnishments are abolished altogether-80 percent of all debts are collectable `through garnishments. If they are not col- lectable, this will deal a severe blow to our economy. Gentlemen, kindly accept this letter as an objection to any proposals for any ban upon wage garnishments. The undersigned is an attorney who has been specializing in cOllection law and specifically iii wage garnishments for approxi- mately fifteen years and, for this reason, claims to possess familiarity with the actual workings of day-to-day problems in the field of credit and salary attach- ment. The device of wage garnishment is the most important and widely used collec- tion tool in the United States today. In various localities various names are used, such as Income Executions, Wage Executions, Garnishee Executions, Wage Attachments, Wage Assignments, and so forth. This device of wage garnishment is a natural part of our credit-oriented economy as it exists tOday, and any inter- ference with so important an aspect of our present economy will do violent harm to that economy. The economy of the United States today depends upon credit, and this is true in spite of the fact that some of us may wish that the facts were otherwise. It is submitted that nothing can be done at the present time to change the economy of the United States from a credit-oriented economy back to a cash-in-advance- oriented economy. We are confident that the Committee already possesses statis- tics on the volttme of installment sales and is aware of the staggering volume. The percentage of automobiles subject to mortgages as contrasted to automobiles owned free and clear is perhaps one good example, but there are innumerable other examples. All personal loans made by banks and finance companies fall into this category, since these personal loans are in effect sales of money repayable in installments. Utider our present economic system, items which cost as little as $30 are purchased under the installment plan and paid off at the rate of $2 weekly. Many tire stores can be seen around the country advertising in their windows "Tires on time, no money down." It seems reasonable to assume that the Committee is already familiar with the tremendous volume of business done through credit cards and through charge plans at department stores. The airlines are now selling tickets on the installment plan. The use of credit, however, goes beyond installment sales and personal loans in the sense that everything which is not paid for by actual cash or certified check in advance is in Sctual fact sold on credit. All ~nerchandise which is delivered and which is to be paid for only at the end of the month is sold on credit. A credit transaction also takes place when an uncertified check is used for payment in advance; there is always the possibility that the uncertified check will fail to clear the bank, whereupon a collection problem will arise. The device of wage garnishment is a natural and absolutely necessary part of this credit-oriented economy, as described above. It should be obvious that there is needed a device for guaranteeing, at least to some extent, that `the credit ex- tended will be paid. Wage earners participate in our credit economy by virtue of the fact that they have their salaries to offer as collateral for their participa- tion and that they are thereby eligible for credit. rersons possessing substantial assets such as real property and so forth still participate most directly through their weekly earnings, since various large assets usually are not liqu~1d, and the weekly salary is generally considered to be superior collateral. If this drastic and extremely ill-advised step of abolishing wage garnishment were ever taken by Congress, the situation would immediately ~r1se in which as much as 80% of all delinquent bills across the country which are presently col- le~ti'ble would,thereupo'n become uncollectible, At the very least this would force a. substantial increase in prices and even triple prices in many areas where credit is exclusively used. This problem of substantial increase in prices, which will follow as an automatic result of the enactment of the abolition, is one of the most important items which we are seeking to stress ~u this letter. We are confi- dent that Congress wishes to avoid anything which might even tend to bring upward pressure on prices, and this proposal, upon enactment, would certainly PAGENO="0627" CONSUMER CREDIT PROTECTION ACT 1209 raise prices more than slightly. At the very least, the various business firms would need to raise their prices in order to compensate for the accounts which go delinquent and which would under the new situation no longer be collectible even through the hiring of attorneys, and so forth. The problem is compounded by the fact that many consumers who presently pay their bills, upon learning of the new law, would take the occasion to join the ranks of the delinquents. All payments would be voluntary, and no one would be required to pay, which is the reason why we maintain that prices in some areas could as much as triple. The net effect of the higher prices forced by this chauge in the law would be the penal- izing Of the honest consumers who pay promptly and the forcing of these con- sumers to pay on behalf of their fellow consumers who would not choose `to pay. It seems reasonable to suppose that the general run of consumers who do make it a practice to pay promptly would be irritated at Congress for forcing them to pay on behalf of the delinquent consumers. Banks and loan companies would be prevented by the usury laws from increasing their prices and would be prevented from continuing business. We wish to stress also that the abolition of wage garnishment, if enacted, would bankrupt all loan companies and finance companies and all stores and merchants either specializing in installment selling or devoting a substantial per- centage of their business to installment selling and also all other businesses which depend upon legal enforcement of their accounts receivable. What may seem most spectacular is the fact that many banks would be caused to fail or would at least be seriously damaged; their entire personal loan departments would be prevented from functioning. Without the device of wage garnishment, the vari- ous businesses mentioned in this paragraph would have no means of enforcing collection of their accounts receivable and would no longer possess any basis for extending credit to anyone. The consequences would even prevent retail fuel oil dealers from continuing with their present system of delivering oil as needed and billing their customers at the end of each month, secure in the knowledge that if any customer does not send his payment, a wage garnishment will be available. The same principle applies to charge accounts at stores which are payable in full at the end of each month rather than in installments; it remains necessary for the stores to have available to them the device of wage garnishment in the event that the particular customer does not make his payment at the end of the mçmth. We could go on to cite the example of newspapers which accept advertisements irom individuals and then forward bills only after the advertising has been run, and we could go on to cite innumerable examples. We cannot stress too strongly the fact, as described in the foregoing paragraph, `that an overwhelming number of business failures will result from the abolition of wage garnishment, including many loan companies and finance companies which are publicly held. A checking of the roster of the New York Stock Ex- change shows the presence of various companies of this type. The going out of business of just one large finance company would cause to be unemployed all of its own present employees as well as those of smaller firms which are dependent upon the financing. Numerous business failures among companies in the generalS category of finance companies and retail businesses specializing in credit selling, `together with severe damage to the banks and possible bank failures, will create a substantial unemployment problem, especially considering the chain reaction and harm to dependent businesses. It is submitted that from the standpoint of the consumer the abolition of the wage garnishment will also turn out to be a severe blow. That portion of the consumer public which utilizes any form of credit, and almost all consumers now fit into this category, will upon abolition find itself almost without credit and required to pay cash in advance. Specifically, those wage earners who now have no collateral to offer except ~their weekly salary in future weeks will be cut off from all credit, since there will be no basis for extending credit to them. It is strikIng that these are the persons who have the greatest need for installment buying and who are not capable of making other than small purchases except through installment plans. It is persons in this category also who have the great- est need to acquire personal loans upon occasion from the banks and finance com- panies. Upon abolition there will not even be a basis for permitting such persons to receive delivery in advance plus an invoice at the end of the month, since there will be no means at all to compel payment, assuming that such consumers do not deign to forward the ~payment at the end of the month. A substantial ex- ~ample to be cited Is the automobile financing industry and its customers. Upon PAGENO="0628" 1210 CONSUMER CREDIT PROTECTION ACT abolition the enti*e present system of financing automobiles will be violently dis- rupted, and autor~iobiles are now such a large part of our economy that any sub- stantial harm to the automobile industry would result in a depression. It is sub-* mitted that the electorate will be angry, rather than pleased, with Congress for' bringing an end to the credit no~r possessed by the various members of the public, The American public today expects to possess credit standing, and a change in the' law, which would eliminate the credit standing of many of the members of the public and force them to pay cash in advance, would be resented. It might be obser~red in passing that an extremely unfair transition period would follow abolition, since accounts receivable acquired under present law would not be enforceable upon abolition. Loans issu'ed and sales made under the present law would upon abolition be placed into a completely different collection (actu- ally uncoliectible) situation. We understand that one witness before the Committee made a statement (er- roneously) to the effect that It th not bankers `and merchants who utilize wage gar- nishment but rather collection agencies. We submit that this statement is errone- ç~us to the `extailt of being preposterous, as can be checked by glancing at the' names of the creditors appearing upon the various garnishment instruments. On the face of the proposition it should be obvious that the collection agencies repre- sent finance companies and merchants; there is no one else they can represent except an occasional individual wh~ might lend money to a friend. Many business retain their own attorneys without going through the medium of a collection' agency. The law practice of the undersigned, a just one example, consists of the representation of many retail stores directly and having no cnnnection with any collection agency. Attorneys like ourselves who specialize in collection law amt who accomplish collection by means of legitimate process would be forced to dis- continue our law practices immediately upon abolition. In many .l'urisdietions banks and finance companies are empowered to forward wage assignments di- rectly to the employers without the use of any outside agent or attorney: banks and finance companies are presently following this practice in substantial volume. It might be observed that the various Sheriffs of the various counties across the TTnlted States would be among the casualties of abolition. Most of the Sheriffs in most of the counties perform some criminal function, and substan- tially all perform the civil function of leveying Executions. In almost all counties the function of levying Executions is a very substantial portion of the total business handled by the Sheriff. If wage garnishment Is abolished or substan- tially reduced, it will mean the end of the office of the Sheriff as we presently know It; SheriffS, or at least the civil divisions of their offices, will function after abolition with very small offices and with radically reduced staffs of deputies and secretarie~. ljpon the discontinuing of the present system of collecting by means of 1eglti~nate legal process, Illegal loan sharks would enjoy a substantial increase in `business. It is' submitted that the statutes relevant to wage garnishment in the State of New York are humane, fair, and practical, and may be cited as a good ex- ample of a well~fnnctioning system of wage garnishment within our present credit-oriented economy. The New York statutes provide that exactly 10% of the salary of the judgment debtor ~ha1l be deducted by his employer. This is, of course, a very small percentage, leaving the other 90% of the weekly salary exempt from Execution. It possesses the feature of treating all judgment debtors in all income brackets the same because a percentage rather than a fixed amount is deducted. A `judgment debtor earning a very small weekly wage needs to pay only a few dollars weekly, and it might be observed that at least his creditors are not cut off without any repayment. A judgment debtor earning a fairly substantial weekly salary experiences the same 10% deduction which in his case Is a larger monetary amount. The New York statutes `also provide that the various wage garnishments shall wait in line one behind the other, assuming that any one Individual has been garnished by more than one creditor. Tt follows that 10% of the weekly pay' is the most that can be' deducted under any clrcum- stances. An individual earning $125 a week, upon deductions of 10%, Is left with $112.50 per week; it is submitted that anyone capable of living on $125 weekly could, if necessary, live on $112.50, and of course, the payment of just debts is a proportionate r~a son for bringing some pressure upon the jud~nient dehtor~ A very important provision of the New York statutes, whIch happens to be new, and which happens to have taken effect in January, 19~i7, prohibits any employer from discharging any employee because of a wage garnishment. Ex- PAGENO="0629" CONSUMER CREDIT PROTECTION ACT 1211 perience during the seven months or so durjpg which this new statt~te has been ~operative~ has been extrelne~~ ~ayorahJç~, Aitheugh si~me peoi~do~ QrtginaUy baU doubts about its prai~ical ~~~D~lttlotl, e erience ~s ~eeu de~nonstratlng a gen- erally and substantially good result an~cl very SWift accomplishment of the aétual aim of this statutory provision. For example, several of the large hotels in New York City formerly refused to accept ~vage garnishments and insisted that the creditors issue abeyance permission; upon enactment of the new statutory pro- vision, these hotels have changed their policy and now as a matter of regular routine make the 10% weekly deduction, the same as all of the other employers. This statutory provision against discharge would seem to meet and cancel out the most frequently heard criticism of the device of wage garnishment. We wish to stress very strongly, however, the fact that in New York before the present year and in the various other states which have no such statutory provision as described above, no more than one employer out of ten has been participating in a practice of discharging upon receipt of wage garnishment. The vast majority of all employers simply accept the wage garnishment as one additional deduction alongside of Federal income tax, Social Security, State income tax, City income tax, Blue Cross, and so forth. Most employers are not bothered by one additional deduction, inasmuch as their bookkeeping is already geared to a substantial number of deductions. Attorneys specializing in collec- tion law will be able to explain to the Committee that the one employer in ten who insisted upon terminating the employee l~ regularly handled by the issuing of what is known as a "letter of abeyance." This is a letter sent by the attorney, who represents either the creditor directly or the collection agency, to both the ~employer and the Sheriff, granting permission to the employer to ignore the wage garnishment and to refrain from making deductions until further notice~ The judgment debtor is then given an opportunity to submit weekly installments himself under the threat that the wage garnishment could be reinstated, and of course, the judgment debtor invariably complies with the making of payments. This, as a practical matter, prevents job holders from being discharged because of wage garnishments~ Actual discharges which are not intercepted by letters of abeyance are very rare in the industry. It might also be noted that the New York statute requires that a copy of the wage garnishment instrument be forwarded by the Sheriff to the home address of the judgment debtor, which gives him a chance to pay off even in installmentS, and then for delivery to the employer only if the judgment debtor fails to re- spond within twenty days. It is submitted that the Committee might reasonably recommend to the vari- ous states the New York statute which functions well in the leading commercial state and seems to meet all of the objections. As a legal point, it is difficult to see how the Federal Legislature has juris- diction to make any provisions with respect to the enforcement of Judgments entered in state courts. It is elementary that Income Executions, Wage Garnish- ments, Wage Executions, and so forth, are forms of Executions issued to the Sheriff for the purpose of collection of Judgments previously entered ifl the various local courts of each state. Each state has its own laws regarding the entry of judgment and the issuing of execution thereon. The Judgments are au entered in the state courts, and the ExechtionS are Issned b~ and with the authorization of these courts. The Federal Legislature would seem to be without power to legislate with respect to the types Of Executions which might be issued, and so forth. There is in New York City a specialized bar assoCiation known as the As- sociation of Commercial and Collection Lawyers, the trleinbership &f which specializes in collection law and is extremely familiar with wage garnishth~nt and related items. The members of this bar association will be happy, the undersigned is confident, to discuss this matter further ivith the Committee at any length desired. For convenience this bar association can be contacted through the office of the undersigned, who happens to be one of the incumbent officers. This is In juxtaposition with our prior letter dated August 14, 1967, which was written as an objection to any prOposals for abolishing wage garnishments. We are sending this additional letter for the purpose of stressing the need for caution in enacting any limitation in the amount of wages subject to wage garnishment. We prO~ose as Ideal, as explained in a reasonable amount of PAGENO="0630" 1212 c0NSIJM1tE C~~EDIT rROT'l~cTION ACT detail in otir sai4 prior letter, the present New York statu~te w1~icb providesi~ for a percentage, ~eeiftcally, 1~l%, rgther th~azL a fixed amount. The unders{gTie~l is an attorney who has been specializing in collection law, and particularly wage garnishments, for approximately fifteen years and for this reason claims to possess familiarity with the actual workings of various day-to-day problems in the field of credit and salary attachment. In our prior letter dated Atigust 14, 1967, we placed some emphasis on the fact that the economy of the United States today is a credit-oriented economy and that almost the entire population, Including in particular those in the lower in- come brackets, has a strong desire to participate In the repeated extension and obtaining of credit. On the subject of the proposalmade recently regarding the limiting of garnish- ment of wages to the excess over what might be considered to be a living wage and similar proposal& to set some type of minimum, we wish to make a strong recom- mendation that no man's salary be exempted completely from wage garnishment in order to avoid cutting that particular man off, from all possible procurement of credit in the future. The same goal can be reached in a much more desirable man- ner by limiting the amount of the weekly deduction to a very small amount, thereby at least avoiding having legitimate creditors cut off with no repayment at all and simultaneously keeping each individual including all individuals in the very low income brackets eligible for at least some credit. We suggest as ideal the present New York statue which provides that exactly 10% of the salar~r of the judgment debtor shall be deducted by his employer. This is, of course, a very small percentage, leaving the other 90% of the weekly salary exempt from execution. It possesses the feature of treating all judgment debtors in all income brackets the same because a percentage rather than a fixed amount is deducted. A jttdgment debtor earning a very small weekly salary needs to pay only a few dollars weekly, and it might be observed that at least his creditors are not cut off without any repayment while such an individual continues to qualify for at least some credit. A judgment debtor earning a fairly substantial weekly salary experiences the same 10% deduction, which in his case is a larger monetary amount. This percentage arrangement permits all members of the public from the lowest to the highest income brackets to participate in qualifying for credit ifl proportion to their incomes, and even those in the lowest income brackets qualify for at least some credit. The proposed system of exempting a certain amount of salary and permitting attachment only of the excess over a certain minimum amount, would, unfortunately, disqualify all members of the public whose income would fall within the exemption, and such persons would not be able to obtain any credit. Under the system of deducting a straight 10%, an individual earning $125 a week is left with $112.50 per week over and above the deduction; it Is submitted that anyone capable of living on $125 weekly could, if pressed, live on $112.50 weekly, and of course, the payment of just debts is a proportionate reason for bringing some pressure upon the judgment debtor. Members of the electorate earning as little as $50 weekly still qualify for a pro- portionate amount of credit because, assuming a default on their part, the creditors are not cut off without any repayment. When a wage garnishment in New York is issued against a person earning only $50 weekly, a mere $~ weekly Is deducted, and the individual continues to qualify for at least some credit. The New York statutes also provide that in cases of unusual circumstances, the judgment debtor may apply to the Court for a reduction of the normal 10%. A total of 10% is the most that can be deducted because the relevant statutes pro- vide that in the event that more than one wage garnishment is levied against the salary of any one debtor, the various wage garnishments must `walt on line, one behind the other. A very Important provision of the New York statute which took effect In January, 1967, prohibIts any employer from ~ischarg1ng any employee because of a wage garnishment. Experience during the seven months or so during which this new statute has been operative has been extremely favorable. Although some people originally had doubts about its practical application, actual experi- ence has been extremely favorable, and a few employers around New York City, who formerly made it a practice to discharge upon service of a wage garnish- ment, have simply reversed their policies and now accept wage garnishments as a routine matter. The present New York statute also requires that the Sheriff forward a copy of the wage garnishment Instrument to the borne address of the judgment debtor, PAGENO="0631" CONSUMER CREDIT PROTECTION ACT 121S which gives him a chance to pay off even in Installments, and then that the Sheriff make service upon the employer only if the judgment debtor fails to~ respond within twenty days. It is stibmitted that the committee might reasonably recommend to the vari- ous state the New York statute which functions well in the leading commer- cial state and appears to meet all of the objections most commonly heard about wage garnishments. We wish to advise strongly that this system of the straight 10% be followed rather than a system of either exempting a certain amount of salary or setting a minimum which the judgment debtor would have to earn before his salary could be attached. Any provision for exemption or minimum will automatically disqualify a certain percentage of the electorate from any participation in our credit-oriented economy and will place those persons into a position wherein they will be required to pay cash in advance for everything which they may wish to purchase and wherein they will fail to qualify for an occasional personal loan. It is submitted that such persons will be angry with Congress for cutting them off from qualifying for any credit at all. If Congress were to set up an exemption or a minimum of as little as $50 weekly, there would follow serious disfavorable repercusstion~: Firstly, persons earning $50 weekly or less would be unable to obtain any credit, would be prevented from purchasing anything on the installment plan, and would no longer qualify for any personal loans. Secondly, assuming an exemption of $50 weekly, those persons earning $10O~ weekly, would suddenly, upon the enactment of this provisiion, find their credit standing reduced to the position of someone earning only $40 we~k1y. The amouxit of credit standing of each member of the public would be sharply reduced to the discothfort of the general public. Inasmuch as it is persons in comparatively low income brackets who need most to purchase by means of the installment plan and to qualify occasionally for a personal loan, it follows that the system of the straight 10% is far superior to any system of exemptions or minimums. Enactment of Federal exemptions or minimums would also create an extremely unfair transition period from the standpoint of merchants, banks, and flnance~ companies which have extended credit and made loans based upon the present statutes. Upon enactment of any exemptions or minimums, certain accounts receivable and outstanding loans would be rendered uncollectible, thereby leaving the creditors unfairly "caught in the middle." A system of exemptions or minimums replacing the system of a straight 10% would automatically drive all individuals earning the minimum amount or less weakly into the loan shark market. Such individuals would not be able to obtain any credit of any type except through dealings with loan sharks, who in turn would very much enjoy a very substantial increase in their busi~ ness. Loan sharks employing goon squads as a means of enforcing collection (rather than legitimate legal process) would be in a position to extend credit to persons caught within the exemption or minimum and would be the only ones, to the exclusion of any legitimate businessman, in the position to extend credit to such persons. Since it is the persons In the lower income brackets who generally have the most frequent need to apply for credit, it would follow that the loan sharks wo~ild indeed enjoy a substantial increase in their business. The extremely high rates of interest charged by loan sharks are, of course, well known, and all of the provisions of the proposed new statute regarding a fair disclosure in advance of interest rates would be of absolutely no benefit to the numerous new customers of the loan sharks. The committee might reasonably, as mentioned above, recommend the various provisions of the New York statute to the various other states because it is difficult to understand how the Federal Legislature has jurisdiction to make any provision with respect to the enforcement of judgments entered in state conrts. It Is elementary that wage garnishments are forms of executions issued to the Sheriff for the purpose of collection of judgments previously entO~red in the local courts of each state. Each state has its own laws regarding the entry of judgment and the issuing of execution thereon. It would seem that the states have exclusive power to legislate regarding the forms of execution which may be issued for the purnose of enforcement of judgment entered in the courts of each perticular state. It Is difficult to understand how Congress can claim power to legislate with respect to the types of executions which may be issued by or in the names of the state courts, and how an adverse ruling upon a test case could be avoided. PAGENO="0632" 1214 CONSUMER CREDIT pROTECTION ACT The Association of Commercial and Collection Lawyers is a bar association located in New ~oi~k City consisting' of members specializing in collection law, wage garnishments, and related items. The members of the bar association would, the undersigned is confident, be willing to consult with the committee further at any length desired. Thank you. The CHAIRMAN. I think we are running out of time, and we do have your two letters which I have looked through with interesL Would it be all right if we address a couple of questions to you now? Mr. Noz. Yes. The CHAIRMAN. I assume since you are appearing here more or less on behalf of the commercial attorneys, that you would have to agree that you are an interested witnes~, an expert witness who is Interested in the proceeding? Mr. Nez. That i~ correct. The CHAIRMAN. Have you made any study of the situation in those states where ~arn1shmeitit have been abolished? Mr. Noz. YOs. There are only a small handful of states around the country where it has been done. They are not particularly leading commercial states~ In states like New York, I will- The CHAIRMAN, Pennsylvania. Mr. Noz. Pennsylvania they have a law where it is a quasi criminal offense to be delinquent in bills. Aside froth that, the credit picture in Pennsylvania is anything from fatorable. The OITAIRMAN~ Texas also. Mr. Noz. Texas also has been infamous around the industry. It Is well kno~tn that many, many people from all states all over the countrll have gone to TeNas to obtain an exemption from paying bills, the way they go to Nevada to get ~ divorce. The credit ~ictbre there is ~rery bad. Nobody can collect anything there, except voluntarily. The CHAIRMAN. I am sure you are familiar with the study that shows there is just as much selling on credit In Texas as in other states? Mr. Noz. There is bound to be an Increase in prices, and the economy would be seriously disrupted if this would b~ practiced on a nation-wide basis. The CHAIRMAN. You ~alnted a very dire picture of what would happen here, but the eRperlence in those states where It has been abolished I don't think bears that out. I would like tO make one comment about your reference to New York State laws. I think as an expert in the field you will have to recogniRe the New York State law Is, by comparison with most states, fairly strict as far as regulations on garnishments are concerned~ Mr. Noz. The 10 percent deduction is reasonable. The CHAIRMAN. But tnany other states allow a lot more. Mr. Nos. Texas has neter had any wage garnishment whatsoever4 and they function that way. They come into the credit field in that state more slowly than the other states. It is just dttring the last few years they have been trying to increase credit selling, and I think they are eventually going to have a bad e*perience there. They haven't developed their credit selling until fairly recently. I know from some experiebce that there are some loan companies which make it a practice to than to employees in PO~as only if they work for a `arger corpora- tion who has a branch in New Yotk or some other state, and they can attach the sale ries in the oth4r statO, and they attach salaries that way. The fact is that some loan companies go so far as to sue the State of New York to collect a Texas bill. I don't think the Texas situation should be reCom- mended to other states. The CHAIRMAN We do have on our Subcommittee Representative Gonzalez, i~'bo is fathiliar with the situation in Texas. We do havO testimony from Referees in Bankruptcy with a corollary on the amount of hankruttcies that occur and the a~iilabiIlty of garnishments. Mr. Nez. The reason there are so many personal bankruptcies in the states where there are garnishees, Is that the people know that by that means they can avoid paying. PAGENO="0633" CONSUMER CREDIT PROTECTION ACT 1215 Take the person who has only salary to offer as collateral. They qualify for credit only through that medium. Then someone tells them by declaring bank- ruptcy they will be exempt from all their prior bills. That is not fair. They in- crease the number of delinquencies. I think the remedy for that is to amend the bankruptcy laws, that the wages after bankruptcy shall become the property of the lender, then we won't have these situations where people run into the Bankruptcy Court, cut off the cred- itors, and so forth. I see it from the other standpoint. The Referee sees just the statistics of who comes in and who files. There was one Referee, according to newspaper accounts, who testified that: merchants and banks don't use wage garnishments, it is only the collection. agency. The collection agency can only represent the loan company. The CHAIRMAN. I don't recall that. Mr. Noz. It was in the newspaper. They represent those people and, of course, many, many attorneys specializing in this field represent the stores and so forth directly. We don't represent collec- tion agencies, we represent the merchants themselves. Moreover, in many jurisdictions the banks and finance companies are per- mitted to file wage assignments directly. Congressman HALPERN. First I want to compliment Mr. Noz for his articulate, informative presentation. It typifies the talent that emanates from my district. Mr. Noz, what do we do to safeguard the public from predatory credit prac- tices involving the sale of shoddy merchandise to unsuspecting people at high prices and high credit charges, followed by the immediate assignment of a debt to another creditor? Mr. Noz. Congress, of course, is working at the time on your Truth in Lending Bill. Whatever you feel is improper should be handled through that legislation, through the Truth in Lending Bill. That would disclose in advance the interest rates being charged, to make it fair. Either the customer is willing to pay that price or is not. Congressman HALPERN. Doesn't this have a direct bearing on the garnishment by the third party? Mr. Noz. No. It doesn't have anything to do with it. The price being charged to the customer has nothing to do with the wage garnishment. The customer agrees to pay a certain price, and your concern is the price be disclosed in advance, including the amount of interest included in the price. Having fair disclosure, the customer then agrees to buy the item and pay installment terms. This then makes everything fair, the consumer knows exactly what he is buying. Regarding inherent defects in merchandise, we are at a different field again. We have the problem of the automobile industry constantly being attacked for certain defects in merchandise, and they will also be with us, the automobile industry. It does not have anything to do then with the execution, the execution merely requires that a person pay. It is an action involving commercial paper and accounts, then it is a situation where the financing must be paid and it must be' paid, and it may be a bank or a loan company which, unfortunately, will go out of business if they couldn't collect. The customer has a legitimate course of action for defects in merchandise. That is a very cleareut legal right and I don't see bow the consumer suffers. Congressman HALPERN. What chance of recourse does the customer have with another creditor who has taken the debt by assignment and shares no responsibility? Mr. Noz. First of all, the law in New York provides that a ten day notice must be served by the finance institution upon the consamer. If the consumer notifies the financial institution within the ten days there is no problem. Assuming that the ten day problem for some reason is to be disregarded, let's say, then we have a situation where, as I explained a moment ago, the consumer pays the financial institution but sues the merchant and/or factory for reimburse- ment. There is no loss for legal remedy there. PAGENO="0634" 1216 CONSUMER CREDIT PROTECTION ACT Congressman H~LPERN. As an experienced collection attorney and represent- ing this field of laW practice today, do you feel that the full disclosure provision of HR 11601 is desirable? Mr. Noz. Frankly, I have no study into that at all. Some may argue that some are too severe, some may not. I am saying they are completely unrelated to wage garnishments and that Congress should forget this idea of including the wage garnishments in this bill, be they in favor or not in favor, Congress should deal with those interest ques- tions on their own merits and decide on the merits they dictate. I am not actually advocating the new revision. It is all beside the point. I am here to discuss wage garnishments, which are my field of speciality. Congremman BIALPERN. Did you not mention before that the disclosure pro- visions of this bill would protect the consumer? Mr. Noz. I said that in response to your question, that you said bow do we protect the consumer from what we call predatory merchants, and I, of course, could have taken a different tack and ask you to define a predatory merchant, but instead I suggested that the interest is to their advantage, and if the mer- chandise isn't the quality that is represented on its face or represented in the catalogue in which it is sold, then certainly there is advantage taken by the mer- chant. I said that in response to your question. Congressman HALPERN. Other than the legal jurisdiction aspect of enacting a Federal law on garnishment similar to New York law, which you have mentioned in your testimony-You do like New York's law? Mr. Noz. Yes. I think it contaitis all of these things, the limitation of 10 per- rent. It is a perc~ntage rather than a fixed amount. Someone earning less than $30 can get some ~redit. An exception woti1d cause a legal problem, if we except $50 a week, those earning $50 a week or less get no credit. Those now earning $100 a week get l~heir credit reduced to $50 a week, and they will be angry at Congress for limiting their credit standing. The debtor has a chance to pay even installments. If there Is no response after 20 days then only is it served on the employer. He can't be discharged by the employer. The New York law seems to tue to be a very, very practical and humane work- ing collection tooL I notice sitting in the audience there are a few more gentlemen specializing in my field, who have a few choice words to say. Congressman HALPERN. That is all of the questions I have now. I am sure that Congressman Bingham agrees that if there are any other thoughts you would like to convey to us, it will be appreciated if you submit it for the record. Mr. Noz. There was a gentleman from the bank lawyers' conference here. He was supposed to be here, and I would propose to offer him a few minutes of my time. The CHAIRMAN. I think at this point we are going to have to have statements in addition to what we have heard. Other than two men who already asked to be heard, who were not scheduled, `if each can be limited for five minutes we will be grateful. Thank you very much, Mr. Noz. `Congressman HALPERN. Thank you, Mr. Noz. The CHAIRMAN. Mr. Taub? STATEMENT OF JACK PATTB Mr. JACK TAUn. I want to thank the Committee for hearing me without a specific request beforehand. I am a practicing attorney before the Courts in this State for seventeen years. I have practiced in practically every `Court in this State. I am also, gentlemen, a consumer. I am familiar with the legal proceedings un- der enforcement proceedings `to enforce judgments other than garnishments. I wish to state here now that I as an individual support the Senate bill for full disclosure. I think that this bill and an~ other bill that will afford protection under full disclosure is good and that we need it. I feel and know that there is great abuse in collections under our credit sys- tem. However, this abuse is not one hundred percent, not fifty percent, it is prob~ ably under ten percent. There is abuse. However, these abuses must be in some ~way prevented. No one can argu~e that point any differently. PAGENO="0635" CONSUMER CREDIT PROTECTION ACT 1217 How can we prevent these abuses? Can we advocate the burning of a house to rid it of roaches? Wouldn't it be a more reasonable measure to fumigate the home? Can you advocate destruction of a system to run out abuse? Is it not better to find some other method of destroying those few who operate on the fringe of society than to hurt the society by piercing its body with an arrow? It is under these premises that I oppose that section of your bill which would abolish garnishments. I think Mr. Noz has gone through a great part of this. However, let me say this: There are probably three possible results from the abolishment of garnish- ments. One, a credit for certain salaried individuals would be greatly reduced or curtailed; how much we don't know. We have heard about Texas, Florida and Pennsylvania. I do know this, that I sent a claim to an attorney in Texas, and the reason Mr. Noz says it is a laughable situation is that this was a just debt of a man who removed from this State to Texas. I received a letter from a lawyer in Texas who said, "I am sorry, under the laws of this state I wrote to the debtor and he refused to pay." Perhaps this is what is being advocated, I don't know. I believe there should be right, and anyone who is right should have justice, regardless of the in- dividual. The second possible result would be, as Mr. Noz says, rising prices. Well, gentlemen, somebody has to pay for this. It cannot be absorbed. If a person does not pay his bills, certain percentages, where is the money going to come froni to continue the financing? Well, those who do pay their bills, gentlemen, will bear their burden, they will have to. The money must come from somewhere. Three. The third result concerns me more than the others, and that is worse collection practices by unscrupulous individuals might result. What type of un- scrupulous individuals? Well, we know that in every field there are people op- erating on fringes. What type of collection activity could they use which would be worse than garnishment of wages? I will tell you. I have seen marshals and sheriffs go into a poor man's house and carry out everything, no garnishment, and have that merchandise sold at a ridiculously low percentage. Voicz FRoM THE AUDIRNOR. Let me say something - The CHAIRMAN. Let's have some order, please. Mr. TAuB, I think this type of practice is reprehensible. However, I think garnishment is reasonable, gentlemen, to be taken for legitimate dollars. They of course do not resort to this. Those who you have not rooted out will resort to these things. There are certain collection agencies, they will resort to these things. I was pleased to hear a statement this morning by Dr. Costello, who pointed out there would be a drying up of some of this credit. The money, where is it, where will It come from? This can be prevented. We have a good law proposed in this State, limiting the choice between seizure of this merchandise or garnishment, but not both. I suggest this legislation, gentlemen. We had `here this morning, and I listened very patiently to several represent- `atives of labor who came here to testify in favor of this legislation. From my reading of newspapers and periodicals it seems that the assets of sothe of the labor unions are greater than some of the banks in this State, are greater than some of the loan companies within this State. Why not these labor unions, who are In favor of this legislation, why could not they open up their large funds and offer credit to these people at their low rates? They do have their credit unions, but they do not extend credit to everybody, they cannot, because it is physically impossible to do so. The CHAIRMAN. Mr. Taub, can you limit your remarks to five minutes. Mr. TAUB. I can say that I came from a ghetto area and that I held a union card from the age of seventeen, from the International Ladies Garment Work- ers Union. I feel that justice must be served and a just debt must be paid. Thank you very much. gentlemen. The CHAIRMAN. Thank you, Mr. Taub. PAGENO="0636" 1218 CONSUMER CREDIT PROTECTION ACT We will now hear from Mr. George Canaris, for five minutes. STATE~nNT OT GEORGE CANARIS Mr. GEORGE CANARIS. Mr. Chairman, I represent the Young Voters League of the Lower East Side. I presume that Mr. Kennedy was here this morning, speaking for-I must say that I was impressed with a man of this sort who never bad worked for a living at all, one of the richest men In this country, who spoke for the poor peo- ple and seems to know what he is saying. It seems to me that he is a good politician. On Friday I read the Times and they said that the HFC, Household Finance Corporation, is on the stock market and it jumped 10 poInts overnight. I am trying to say, sir, that our organizaton of the poor people in New York are against garnishments because poor people, usually, are put into those gen- eral finance companies, they usually consider them poor risks as a rule and usually give them ten times as much as anybody else. The way we see it, the unions never make sure that a man essentially needs the money and has to buy something, will get money because his kids is in the hospital. They make their funds available. The union comes over here, but won't do anything with the monies they have. The finance companies never tell you how much profit they make on this. They come in and say somebody has to pay. In any buslness-÷-in other words, the majority of the people of the City of New York are poor peojle working for a salary and there is no guarantee that the salary will continuO to go on year after year after year. So, therefore, if you try to sell them something, and everybody Is trying to make money, and cause them to buy something, and take them to cofirt, and then they get dispossessed. I think it Is wrong. A poor man can never hire ~i lawyer, because a lawyer says to him, "I want cash on the line." So a poor man gets stuck with this. Those people, they won't tell you how much he is making. SQ what we are say- ing is this thing that is done in the local, the salary, the old people, it is bad. Thank you very ~nuch. The CHAIRMAN. Thank you, Mr. Canarin Next we have Waverly Baker, who is former Director of the Credit Union for Sperry Gyroscope. STATEMENT OF WAVERLY BAKER Mr. WAVERLY BAI~ER. Thank you very much, Mr. Chairman. I did not anticipate speaking today, and it is only as a result of a comment made with regard to credit unions that I felt it necessary to speak at this point. For eight and a half years I have served as the director of the largest Federal credit union in the State of New York and the seventh largest in the United States. During this period of time I acted as legislative liaison for our Board of Directors and in this conjunction I have visited Washington several times, includ- ing the period in 1959 when the Federal Credit Union Act was revised. I feel that the comments made by the earlier witness to the effect that the credit unions would be destroyed by this legislation was contrary to my personal experience with regard to some $10,000,000 in annual loans made by Americans. Our Board of Directors was confronted with the question what t~ do about garnishees of wages, and we were also confronted with the problem of what to do with people who were no longer members of the Sperry Company, but who remained eligible for membership in our organization by virtue of the Federal law. I am able to say that during our eight and a half years that we were success- fully able to devise a method of direction, without resorting to any features that I feel will be denied under Title II, with regard to garnishment of wages. I feel it is fair to say on the basis that credit unions would be harmed by this provision of the bill, and I wanted to make it a matter of record, As a person r feel that the Committee is correct in offering the Congress an opportunity to ban or prohibit garnishment of wages. Thank you, very much. The CHAIRMAN. Thank you, Mr. Baker. Congressman HALPI~RN. I want to thank you, Mr. Baker. Mr. Baker has attended many hearings in Washington on matters pertaining to the consumer, and T am certainly glad he took the opportunity to get up and speak out at today's hearing. PAGENO="0637" CONSUMER CREDIT PROTECTION ACT 1219 The Cn xa~&N. Onr last witness, again for five minutes, will be Mr. Edward Borne. SPArEMEI~T OF EDWARI~ HenNa Mr. EDWARD HORNE. My name is Edward Home. I represent the Insurance Premium Finance Association of the State of New York. It is a different type of business, but it has been represented here before. This is the first time I have ever spoken to any Congressional Committee on Truth in Lending. With respect to the House bill, I want to say a fe~,r words about the 18 percent interest limitation. I~ insurance premium financing we do not choOse the cur- tomer, tbe customer chooses us and be sets the amount of his loan. For instance, we finance an automobile policy, a liability policy here in the State of New York. The policy has a pre~nium of $15O~ $170. Our business is received from an insurance agent or broker. We in turn advance the monies for the premium to the insurance company and the insured ~ay~ the finance company, the premium finance company, in monthly installments. With this situation, 10 percent simple interest is absolutely impossible, inso- far as Impressed premium financing is concerned. Insurance premium financing is rather a large ipdustry that has really developed on a major scale since World War II and probably necessitated by the high insurance premiunis and also the 4esire of the public to cover themselVes with insurance in v~tricni~ areas. As a result of insurance premium findtncingF-It is necessary In the State of New York. For instance, Article 12-d of the Banking Law provides for a $12.00 minimum. That is the charge that for certain premiums over $100 the premium finance company charges $12.00. Now, I am now going to talk about the $lftO& thiflimum. A~tnaliy, I would much prefer to see in a bill a minimum of $10.00 where the t~t~fest tate dogs not have to be disolQSed, but I realize thflt sn tunch water has floWn under the bridge that perhaps it would be a little foolish for n~e to talk a~oht the $12.th!~ charge, and not expressed in simple language. So that I would settle for a $10.00 charge, but I do think lit our business, which Is a volume business, we have-I would imagine, to give some idea of the size of the business, I would Imagine that there is somewhere around $500,000,000 of insurance premiums financed during a calendar year. The bulk of this business Is In what We call the low-premium range, and these lower premiums we have to, beciLuse the bulk of our business is in the low premifim range, we have to at lefist meet our setup costs, we have to make expenses, and this is why the $12.00 minimum charge is here in New York and in other states. Congress passed a similar statute regulating insurance payment financing when Senator Eennedy was on the Committee for the District of Columbia, and in that bill there was a $10.00 additional charge. As I say, I would be pleased to go along with a $10.00 charge, but right now in the S. 5 you have to disclose your interest rate where the finance charge is $10.00 or more. I think we are kind of quibbling, because $10.00 is a round figure, it is a figure people can work with. This would mean in order not to disclose it we would be charging a charge of $9.99, which would lend to confusion rather than understanding of what we are doing. In addition, I are ~ little bit leery of an 18 percent charge, 18 percent maxi- mum, becauSe I think, just as a man spoke against the garnishment provision, I do think 18 percent would have the tendency, sort of like Prohibition, might have a lot of people going into business shylocking loans in an area where legitimate business enterprise has been before but just cannot offer the service, that servIce at 18 percent simple interest. Now, there is no other similarity that, as long as I am talking here-and I haven't spoken to you two gentlemen before. I would like to refer to Section 3 of S. 5, Section 31, Subsection A~ having to do with the termination of the actuarial method. Right now it substantially reads total payment for repayment or the total amount of finance, et cetera. ~his may give us a problem, because we are not sure just when, what date is the date of the transaction. Our charges in the District ~f Columbia, the State of New York, and other states that have been active in premium finance laws, make the charges start ~from the inception date of the insurance policy. PAGENO="0638" 1220 CONSUMER CREDIT PROTECTION ACT When a man buys an insurance, policy he may n~t discuss repayment imine~ diately, but two or three weeks later- The CHAIRMAN. Excuse me. May I interrupt you for a moment. What type of insurance is covered by your insurance finance? Mr. BORNE. All types of auto insurance, fire insuranc'e, homeowners t~ polh~les, big policies for industry, Workmen's Oompensation policies, some life insurance, but very little. That is, straight life. There is no credit life picked up with our insurance premium financing, and that is what I am talking to you about today. The CHAIRMAN. Thank you. Mr. HORNE. If I may get back to this date of the transaction, I thought, and J am still a little wdrried about the date of transaction. He mentioned the Federal ~leserve Board would have the authority to determine such things as to how your rates should be charged and so forth, but when I look at the scope of the Reserve Board's authority, it didn't seem broad enough to me, because we wOuld be pre- pared to use the actuarial method. We are, just starting on our change from the inception date of the insurance contract, you see. So that I would like to propose an amendment to this section, which I do not think would do any harm to the section. If I may show you this amendment-_ The CHAIRMAN. I have a copy of it here, Mr. Borne. I think perhaps it might be just as well If we carried out this conversation on our own time. This is a pretty technical matter, and I am not sure it is for ahearing such as this. Thank you very much. We do appreciate your bringing these problems to our attentiom You raised a number of problems, `as far as I am concerned, that are qutte new. Mr. BORNE. Thank you very much. Congressman UALPERN. I, too, want to commend Mr. Borne for his very artiicu- late and well prepared testimony. The CHAIRMAN. We have a statement from the Attorney General of New York State, Ron. Louis i Lefkowitz. ST4TEMENT OF ATTORNEY GENERAL Louis J. LEFNOWIPZ Mr. LEFKOwITZ. Consumer credit is vitally essential to the nation's economy and its wise use is responsible for much of the comfort Americans enjoy as well as the nation's continuing industrial ana commercial growth, But the fi~grant abuses of the consumer through hidden charges, excessive interest, penalties and other costs demand that positive action be. taken requiring that lending agencies and other ~xtenders of credit give the consumer a better picture of the cost of such credit. Few of the hundreds of thousands of families who make use of credit can determine exactly how much interest they are paying and tragically it is the poor and persons with language difficulties who can least afford to pay excessive charges who find themselves caught in the web of excessive credit costs. Congresswoman Leonor K. Sullivan's bill offers, in my opinion, much needed protection to the public because it calls for full disclosure of the cost of revolv- ing credit and full disclosure of other interest rates, such as those on first mortgages. The "truth in lending" bill, passed by the United States Senate, does not contain these vital features. I do support and urge the passage of the bill introduced by Mrs. Sullivan. One need pay a visit to the Bureau of Consumer Frauds and Protection of my office almost any day in the week to witness the plight of New York con- sumers who have been caught in the web of credit costs. I have been appalled by the lack of information available and I recommended a measure to the 1967 New York State Legislature to require that greater explanation be given in all credit dealings. Unfortunately, the measure did not pass but it Is my firm inten- tion to present a similar measure to the Legislature in 1968. Personal bankruptcies, defaults, legal judgments and garnishment of salaries and wages are all too frequently the result of high cost of borrowing by a credit conscious public. Such tragic results are destructive factors in the economy of the nation and no business man wants them to occur. We can help the con- sumer to wiser use of credit by passage of the "truth in lending" bill sponsored by Mrs. Sullivan and I urge its enactment. The CHAIRMAN. That concludes our hearing for today. I would like to express my great appreciation to my colleague an~ a senior member of this Committee for `taking the time to be here today, and the Com.~ PAGENO="0639" CONSUMER CREDIT PROTECTION ACT 1221 mittee staff and others who have helped make this hearing, I think, a very meaningful exercise. Thank you. Congressman HALPEuN. Thank you. (Whereupon, at 5:00 o'clock p.m., the hearing was closed.) (The following statement was received for inclusion in the record:) HARYOU-ACT Neighborhood Boards Consumer Education Program strongly supports the passage of the Truth-In-Lending bill which is currently pending in the House of Representatives. The consumer should be able to "shop around" for the best "buy" in credit, as well as other merchandise. With true costs of credit obscured by vague, con- fusing, and often gimmickey-kind of language, it is now impossible for the con- sumer to do so. In many instances, particularly in ghetto neighborhoods, shopkeepers sell merchandise, frequently shoddy, to consumers on an installment plan contract, and then immediately turn the contract over to professional contract collectors. When the shoddy merchandise begins to fall apart, the consumer returns to the store to seek redress. For the first time, he is told that the store is not responsible, that his account is being handled by a credit company. Many con- sumers then become disgusted and frustrated, and attempt to withhold further payments until the situation can be corrected. He then finds himself in difficulty on his job, as the finance company simply garnishees his wages. Truth-In-Lending legislation would give the consumer the actual cost he would be expected to pay for credit. He would thus be able to accurately compare prices and types of credit. However, the bill as passed by the Senate, does not deal with the costs of revolving credit. In fact, revolving credit is exempted from the bill. Revolving credit is found in department store, mail-order, and credit card accounts, and constitutes a major portion of the credit market. As it now stands, only the monthly rate will be disclosed on most revolving credit transactions. In order 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 multiply- ing it by 12. If you do not know this, you might assume that 11/~% service charge Is lower than let us say the 12% annual rate charged by credit unions. HARYOU-ACT Neighborhood Boards Consumer Education Program therefore goes no record in support of a Truth-In-Lending bill without loopholes, which will give the consumer the necessary Information to purchase credit as he would any other item, after he has been able to accurately compare the costs. a PAGENO="0640" PAGENO="0641" PAGENO="0642" I