PAGENO="0001" (~ I ~c~' CONSUMER PROTECTION LEGISLATiON ~R THE DISTRICT OF COLUMBIA ~ HEARINGS BEFORE THE SUBCOMMITTEE ON BUSINESS AND COMMERCE OF THE COMMITTEE ON THE DISTRICT OF COLUMBIA UNITED STATES SENATE NINETIETH CONGRESS FIRST AND SECOND SESSIONS ON~ S. 316, S. 2589 TO PROVIDE FOR THE REGULATION IN THE DISTRICT OF COLUMBIA OF RETAIL INSTALLMENT SALES OF CONSUMER GOODS (OTHER THAN MOTOR VEHICLES) AND SERVICES, AND FOR O1~HER PURPOSES S. 2590 ~O PROVIDE MAXIMUM FINANCE AND OTHER CHARGES IN CONNECTION WITH RETAIL INSTALLMENT CREDIT SALES IN THE DISTRICT OF COLUMBIA S. 2592 TO AMEND SECTION 521 OF THE ACT APPROVED MARCH 3, 1901, SO AS TO PROHIBIT THE ENFORCEMENT OF A SECURITY INTEREST IN REAL PROPERTY IN THE DISTRICT OF COLUMBIA EXCEPT PURSUANT TO COURT ORDER DECEMBER 5, 12, 13, 1967; JANUARY 30, 31, AND FEBRUARY 1, 1968 Printed for the use of the Committee on the District of Columbia ~UTGERS LAW SCHOOL LIBRARY CAMDEN,1~J. 08102 / (~VERNME~bQcuMENT U.S. GOVERNMENT PRINTING OFFICE ~7 /88-648 WASHINGTON : 1968 ~ I~.)J~L1H PAGENO="0002" COMMITTEE ON THE DISTRICT OF OOLTJMBI~ ALAN BIBLE, Nevada, Chairman WINSTON L. PROUTY, Vermont PETER H. DOMINICK, Colorado THRUSTON B. MORTON, Kentucky SUBCOMMITTEE. ON BusINEss AND COMMERCE JOSEPH D. TYDINGS, Maryland, Chairman ROBERT F. KENNEDY, New York PETER H. DOMINICK, Colorado (II) `1A~~J JOOH3E~ k&'AJ 2flriTfl~ ,p T~3MLJ)~tj ~ WAYNE MORSE, Oregon ROBERT F. KENNEDY, New York JOSEPH D. TYDINGS, Maryland WILLIAM B. SPONG, JR., Virginia CHESTER H. SMITH, Staff Director PAGENO="0003" CONTENTS BILLS UNDER CONSIDERATION Page S. 316: To provide for the regulation in the District of Columbia of retail installment sales of consumer goods (other than motor vehicles) and services, and for other purposes 2 Staff memorandum 23 S. 2589: To provide for the regulation in the District of Columbia of retail installment sales of consumer goods (other than motor vehicles) and services, and for other purposes 6 Staff memorandum 23 S. 2590: To provide maximum finance and other charges in connection with retail installment credit sales in the District of Columbia 19 Staff memorandum 24 5. 2592: To amend section 521 of the act approved March 3, 1901, so as to prohibit the enforcement of a security interest in real property in tl1e District of Columbia except pursuant to court order - - 22 Staff memorandum 25 I. TESTIMONY Bailey,Josephinc 73 Blumenfeld, Theodore, executive vice president, Atlas Financial Corp 206 Bryant, Mrs.Ida 43 Brylawski, Henry H., executive secretary, Maryland-Delaware-District of Columbia Jewelers' Association, Washington, DC 124 Buffington, J. V., assistant to the Chairman, Federal Trade Commission~. 150 Clark, Mrs. Theresa 43 Coward, Leo 133 Dixon, Hon. Paul Rand, Chairman, Federal Trade Commission 150 Feldman, Sheldon, Bureau of Deceptive Practices, Federal Trade Com- mission 150 Furness, Betty, Special Assistant to the President for Consumer Affairs - - - - 91 Gunther, Frank A., president, Security Bank, and chairman, Law and Legislative Committee for the District of Columbia Bankers Association. 62 Guttman, Egon, professor of law, Howard University, Ad Hoc Committee onConsumerProtection 54 Halloran, Maribeth, Neighborhood Legal Services Project, United Plan- ning Organization 43,73 Hanna, Warren L., assistant counsel, Acacia Mutual Life Insurance Co 232 Holland, Harvey H., JR. (Wilkes & Artis, Washington, D.C.) 108 Jamison, Maggie B 73 Kass, Benny L., on behalf of the Ad Hoc Committee on Consumer Pro- tection 53 LaFollette, Bronson C., attorney general, State of Wisconsin, and Chair- man of the President's Consumer Advisory Council 103 McBrier, C. Robert, chairman of the legislative committee, IRetail Bureau, Metropolitan Washington Board of Trade 2~. 108 McCord, Mrs. Albertha 134 McPherson, 1\'Irs. Adenia, manager, Armstrong Neighborhood Federal Credit Union 171 Marsalek, Frank, Lawyers Title Insurance Co., Washington, D.C. branch. - 139 Monday, Frank E., An~costia Consumer Action Program 219 Morgan, John, Allstate Credit Corp 188 Munter, Godfrey L., Real Property Section, District of Columbia Bar Association 138 Myers, Miss Pauline, United Planning Organization 219 Nassau, Stephen N., representing the Consumer Protection Committee of the Greater Washington Chapter of Americans for Democratic Aetion_ - -. 116 (III) PAGENO="0004" Iv Page Reed, Cleveland, R. & W. Construction Co - 175 Rusk, David, associate director, Washington Urban League 169 Silver, Larry, deputy director of law reform, Neighborhood Legal Service Projectof the District of Columbia 73 Smith, Paul, president, District of Columbia City-Wide Consumer Council_ 135 Solomon. Mm. Robert 246 Stalling, Bettin, chairman, Council on Community Affairs, District of Columbia Chapter, Federal Bar Association 239 Ugoretz. Mark, member, Consumer Protection Committee of the Greater Washington Chapter of Americans for Democratic Action 116 Vaughn, Nathaniel 73 Washington, Hon. Walter E., Commissioner of the District of Columbia..~ 36 Wattenberg, Mrs. Ben, chairman, District Affairs Committee, District of Columbia Section, National Council of Jewish Women 246 West, Mrs. Jessie 132 Wheeler, Dorothy, chairman, t.he Metropolitan Legislative Committee 219 White, i Kirkwooci, Neighborhood Legal Services Project., United Planr~ino Organization 43,73 Williams, James, coordinator, Credit Union Consumer Action Program on Consumer Legislation, United Planning Organization 132 W ilhams. W esley S., vice chairman, Council on Community Affairs, District of Columbia Chapter, Federal Bar Association 239 W ilher, \\ illiam F., professor, Boston College Law School 162 Wolf, Seymour D., representing t.he Jewish Community Council of Greater Washington 68 II. WRITTEN STATEMENTS Boone, Mrs 84 Hardy, Christine 47 Howard, Mrs. Mildred 84 Moses, Alfred, chairman, Washington Chapter, American Jewish Com- mittee 249 Myers, Miss F. Pauline, chairman, Washington, District, of Columbia Area Subcommittee on Consumer Legislation, Greenhelt Consumer Services.- - 226 Saul. B. Francis, II, president, Mortgage Bankers Association of Metro- politan Washington, Inc 251 Taylor. Mary 137 Silver. Larry, deputy director of law reform, Neighborhood Legal Services Project of the District of Columbia 74 Whitaker, James 82 Williams, Hattie Mae 83 III. MATERIAL SUBMiTTED FOR THE RECORD American Jewish Committee, Washington Chapter, Alfred H. Moses, chapter chairman, letter dated December 13, 1967, to Hon. Joseph D. Tydings, endorsing pioposed consumer protection legi~lation, with at- tached statement. 249 Bar Association of the District of Columbia, John E. Powell, president., letter dated November 14, 1967, reporting on S. 316 25 Brewer. Mervine B., president, Washington Chapter, the National House- wives' League of America, Inc., letter dated Februaryl, 1968, to Chair- man Tydings, supporting proposed consumer prot.ection legislation 230 City- Wide Consumer Council, M. P. Smith, president, resolution in sup- port of proposed consumer protection legislation for the Dist.rict of Co- lumbia 230 Clark, Mrs. Theresa, Consumer Action Specialist, United Planning Organi- zation `Consumer Credit Costs in Department Stores, 1963," a study prepared for the National Retail Merchants Association, by the public account- ing firm of Touche, Ross, Bailey & Smart * "Consumer Credit Costs in Retail Stores in Maryland, November 18, 1963," a study prepared for the Maryland Council of Retail Mer- chants, Inc., by t.he public accounting firm of Touche, Ross, Bailey & Smart. * District of Columbia City-Wide Consumer Council, Jessie M. West, vice president, resolution dated January 31, 1968 230 * Files of subcommittee. PAGENO="0005" V District of Columbia Savings and Loan League, Bruce Bryan, letter dated Page November 30, 1967, to Hon. Joseph D. Tydings, opposing 5. 2592 35 Federal Trade Commission, Paul Rand Dixon, Chairman, letter dated March 12, 1968, to Hon. Joseph D. Tydings, transmitting economic study of the Federal Trade Commission entitled "Installment Credit and Retail Sales Practices of District of Columbia Retailers-March 1968" 251 Furness, Betty, Special Assistant to the President for Consumer Affairs, letter dated December 12, 1967, to Hon. Joseph D. Tydings, presenting comments on pending consumer protection legislation for the District of Columbia 92 Falck, W. W., president, Maryland Consumers Association, letter dated January 30, 1968, to Hon. Joseph D. Tydings, supporting proposed con- sumer protection legislation 229, 250 Gunther, Frank A., Law and Legislative Committee for the District of Columbia Bankers Association, letter dated February 16, 1968, providing supplemental information requested for the hearing record 64 Maryland-Delaware-District of Columbia Jewelers Association, letter dated December 13, 1967, to Hon. Joseph D. Tydings, stating the position of association with respect to proposed legislation for consumer protection for the District of Columbia 125 Metropolitan Washington Board of Trade, William H. Press, executive vice president, letter dated January 30, 1967, favoring enactment of S. 316 25 Metropolitan Washington Board of Trade, supplemental statement dated March 29, 1968 293 Miller, Hattie, president, Townwomen's Council, Phyllis Wheatley Branch, YWCA 229 Mitchell, Mrs. Rosetta, pre~ident, board of directors, Phyllis Wheatley Branch, YWCA, of the National Capital Area, letter dated February 1, 1968, to Hon. Joseph D. Tydings, endorsing proposed consumer protec- tion legislation 230 Monday, Frank E., Southeast Neighborhood Development Program, Anacostia, resolution supporting proposed consumer protection legisla- tion for the District of Columbia 219 Saul, B. Francis, II, president, Mortgage Bankers Association of Metropoli- tan Washington, Inc 250 "Ten Principles," an analysis of S. 316, S. 2589, S. 2590, S. 2591, and S. 2592, presented by Benny L. Kass, Ad Hoc Committee on Consumer Protection 60 Washington, Hon. Walter E., Commissioner of the District of Columbia: Letters dated December 4, 1967, reporting on: 5. 316 29 S. 2589 31 5. 2590 33 5. 2592 34 Letter dated March 28, 1968, supplementing statement on the subject of holder-in-due-course doctrine 292 Proceedings of- December 5, 1967 1 December 12, 1967 53 December 13, 1967 91 January 30, 1968 149 January 31, 1968 175 February 1, 1968 219 Appendix 249 PAGENO="0006" PAGENO="0007" CONSUMER PROTECTION LEGISLATION FOR THE DISTRICT OF COLUMBIA TUESDAY, DECEMBER 5, 1967 U.S. SENATE, SUBCOMMITTEE ON BUSINESS AND COMMERCE, OF THE COMMITTEE ON THE DISTRICT OF COLUMBIA, Washington, D.C. The subcommittee met, pursuant to notice, at 9:10 a.m., in room 6226, New Senate Office B~ ilding, Senator Joseph D. Tydings (chairman of the subcommittee) presiding. Present: Senator Tydings. Also present: Chester lEE. Smith, staff director; and Robert A. Burt, legislative assistant. Senator TYDINGS. The Subcommittee on Business and Commerce of the Senate District Committee is called to order. This morning we begin hearings on S. 316, S. 2589, S. 2590, and 5. 2592, legislative proposals introduced by Senator Morse of Oregon and myself, designed to protect the consumers of the Washington, D.C., area from certain practices which we feel are contrary to the public interest. A great many consumers in the District of Columbia and the entire Washington metropolitan area are being systematically victimized by a small number of retail merchants. Victimization practices are particularly prevalent in connection with retail installment sales transactions. At the present time there is no general legislative pro- tection against fraudulent practices in retail installment sales in the District of Columbia, nor is there any administrative machinery in the District of Columbia Government with a strong far-reaching mandate to protect consumers in this area. The legislation which is under consideration would correct these serious shortcomings. The beneficial effect of this 1egi~slation would not be limited to the protection .of residents of the District of Columbia, but would extend to the entire Washington metropolitan area, to the suburban counties of Virginia as well as to Prince Georges and Montgomery counties in Maryland. This is because the legislation would protect all consumers who purchased goods and services in the District of Columbia, whether or not they resided in the city. It is also because the legislation would indirectly influence the practices of merchants outside the District as well, by providing consumers with the criteria set by this legislation to evaluate transactions made elsewhere. Four bills are being considered by the subcommittee today: 5. 316, S. 2589, S. 2590, and 5. 2592. These bills deal with different and vary- (1) PAGENO="0008" 2 ing aspects of consumer protection in retail installment sales and in mortgage transactions. In several details S. 316 differs from the other bills under consideration. There are differences regarding interest rates disclosure, maximum finance charges, the treatment of the "holder in due course" doctrine, as well as others. The purpose of these hearings is to explore the merits of these different approaches, so that the fina.l legislative product will give the greatest possible protection to consumers without unduly interfering with legitimate commercial practice. The bifis which emerge from these hearings should be-and I am confident will be-models which other juris- dictions in this country can with pride follow. We must act to protect consumers, but at the same time not to penalize honest, reasonable businessmen. Accordingly, in the course of the hearings we hope to explore with great care the experiences of other States to insure that the requirements imposed on the business community by this legislation would be both fair and reasonable. At this point, I should like to include in the hearing record copies of S. 316, 5. 2589, 5. 2590, and 5. 2592, together with copies of staff memorandums on these bifis and a letter from IVIr. Wffliam H. Press, executive vice president, the Metropolitan Washington Board of Trade, dated January 30, 1967, recommending enactment of 5. 316; also a letter from Mr. John E. Powell, president, the Bar Association of the District of Columbia, dated November 14, 1967, making cer- tain recommendations for amendments to 5. 316; also copies of letters dated December 4, 1967, from the Mayor-Commissioner of the Dis- trict of Columbia, respectively dealing with 5. 316, S. 2589, 5. 2590, and 5. 2592; and a copy of a letter dated November 30, 1967, from Mr. Bruce Bryan, executive vice president, District of Columbia Savings & Loan League, opposing 5. 2592. (The documents referred to follow:) [S. 316, 90th Cong., first sess.] A BILL To provide for the regulation in the District of Columbia of retail installment sales of consumer goods (other than motor vehicles) and services, and for other purposes Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled, That this Act may be cited as the "District of Columbia Retail Installment Sales Act". SEC. 2. For the purposes of this Act, unless the context requires a different meaning- (1) "Commissioners" means the Commissioners of the District of Colum- bia, or their designated agent. (2) "District" means the District of Columbia. (3) "Consumer goods" means tangible chattels bought for use primarily for personal, family, or household purposes, including certificates or coupons exchangeable for such goods, and including consumer goods which, at the time of the sale or subsequently, are to be so affixed to real property as to become a part of real property whether or not severable therefrom, but the term "consumer goods" does not include goods acquired for commercial or business use or for resale, nor shall such term include any motor vehicle as such term is defined in the first section of the Act approved April 22, 1960 (74 Stat. 69; title 4O,~ ch. 9, D.C. Code), providing for the regulation of finance charges for retail installment sales of motor vehicles in the District of Columbia. (4) "Person" means an individual, firm, concessionaire, partnership, joint stock company, corporation, association, incorporated society, statutory or common law trust, estate, executor, administrator, receiver, trustee, con- servator, liquidator, committee, assignee, officer, employee, principal, or agent. PAGENO="0009" .3 (5) "Retail "buyer" or buyer" means a person who buys consumer goods from a retail seller in a retail installment transaction and not principally for the purpose of resale, or who, under a retail installment contract, buys serv- ices from a retail seller. (6) "Retail installment contract" means a contract entered into in the District evidencing a retail installment transaction. (7) "Retail installment transaction" means any retail transaction between a retail seller and a retail buyer in which there is an agreement for the pur- chase of consumer goods or services, or both consumer goods and services, for which the price is to be paid in one or more deferred installments, and such term shall include any transaction involving a contract in the form of a bailment or a lease if the bailee or lessee contracts to pay compensation for the use of the consumer goods which are the subject of such contract and it is agreed that the bailee or lessee is bound to become, or, for no further, or a merely nominal, consideration, has the option, upon full compliance with the provisions of the bailment or lease, of becoming the owner of the consumer goods; except that the term shall not include any retail transaction in which the purchase price is to be paid in full within not more than ninety days from the initial billing date, and no security interest in the consumer goods is re- tained by the seller and no other collateral or security is required or accepted by the seller, and no service charge or other charge is made as consideration for the deferral of payment or extension of credit. (8) "Retail seller" or "seller" means a person engaged in the business of selling consumer goods or services to retail buyers. (9) "Revolving charge account agreement" means an agreement prescrib- ing the terms of retail installment transactions which may from time to time take place thereunder and under which the buyer's periodic unpaid balance is payable in installments. (10) "Service charge" means the amount, however denominated ci ex- pressed, which the retail buyer contracts to pay or pays for the privilege of purchasing consumer goods or services to be paid for by the buyer in install- ments, but such term shall not include the amounts, if any,: charged for insurance premiums, delinquency charges, attorneys' fees, court costs, collection expenses, or recording and filing, fees. (11) "Services" means work, labor, or other kind of activity furnished, or agreed to be furnished, primarily for personal, family, or household use, and not for commercial or business use, whether or not furnished or agreed to be furnished in connection with the delivery, installation, servicing, re- pair, or improvement of consumer goods, including such work, labor, or other activity furnished or agreed to be furnished in connection with repairs, alterations, or improvements upon or in connection with real property, but the term "services" shall not include work, labor, or other activity furnished or agreed to be furnished for which the price or tariff charged or to be charged is required by law to be determined or approved by, or to be filed, subject to approval or disapproval, with the United States or the District, or a department, division, agency, officer, or official of either of such governments. SEC. 3. This Act and the regulations adopted and promulgated by the Com- missioners under the authority of this Act shall be applicable to retail installment transactions which take place and retail installment contracts and revolving charge account agreements entered into on or after the effective date of this Act, notwithstanding the provisions of any retail installment contract, refinancing contract, revolving charge account agreement, promissory note, or other instrument to the contrary. SEC. 4. (a) The Commissioners are hereby authorized to make and enforce such regulations as they deem appropriate to carry out the purposes of this Act and to prevent unconscionable practices in connection with retail installment transactions, including, but not limited to, regulations containing definitions, whether or not used in this Act, insofar as such definitions are not inconsistent with the provisions of this Act. Such regulations may include, without limitation, provisions- (1) respecting the form, execution, and delivery of retail installment con- tracts and revolving charge account agreements, including, without limitation, provisions which shall be contained in such contracts and agreements, and providing for the inclusion therein of notice to the retail buyer concerning his rights under the contract or agreement; PAGENO="0010" 4 (2) requiring the showing in retail installment contracts of the amount, if any, to be charged retail buyers as a service charge, or the basis on which such charge is to be determined, and the amounts, if any, to be charged such buyers for insurance premiums, delinquency charges, attorneys' fees, court costs, collection expenses, and recording or filing fees, such amounts to be itemized separately or to be grouped, as theCommissioners may determine; (3) requiring the showing in revolving charge account agreements of the schedule, rate, or basis upon which the payments and service charge will be computed, and the basis on which will be determined the amounts to be charged the buyer for insurance premiums, delinquency charges, attorneys' fees, court costs, collection expenses, and recording or filing fees; (4) specifying or limiting, or both specifying and limiting, the types and maximum amounts of insurance which may be required, at the expense of the retail buyer, to protect from loss the seller or his assignee, or any other person entitled to payment from a retail buyer in accordance with the terms of a retail installment contract, revolving charge account agree- ment, promissory note, or other written promise to pay the unpaid balance of the total amount to be paid by the retail buyer; (5) governing the form, execution, and delivery of promissory notes and other instruments whereby a retail buyer agrees or promises to pay the unpaid balance of the total amount to be paid under a retail installment. contract or revolving charge account agreement; (6) requiring that payments, other than the downpayment, under retail installment contracts be made in substantially equal amounts and at regular intervals, except that (1) the interval for the first installment payment may be longer than the other intervals, (ii) the final installment payment may be less in amount than the preceding installment payment, and (iii) where a buyer's livelihood is dependent upon seasonal or intermittent in- come, the seller and the buyer may agree that one or more installment payments in the schedule of payments included in any such contract or agreement may be reduced or deferred; (7) specifying the conditions under which there may be cancellation of retail installment contracts and revolving charge account agreements, and providing for the refund of payments and deposits made thereon; (8) requiring that amounts due under instruments evidencing retail in- stallment transactions may be prepaid in full, and providing the manner in which the unearned charges, whether service charges, insurance, or for other purposes attributable to or resulting from such prepayrnents, shall be refunded or credited; (9) respecting the form and procedure to be followed in connection with the consolidation with previous purchases of subsequent purchases under retail installment contracts, and the allocation of installment payments to such purchases; and (10) respecting the manner and methods of repossessing consumer goods, and the sale or disposition of such goods, including, without limitation, rights of redemption. (b) No provision shall be inserted in any retail installment contract or revolving chai~ge account agreement designed to nullify and make ineffective the provisions of this Act or regulations adopted pursuant thereto, or otherwise depriving a retail buyer of the protection afforded him by this Act or such regulations, nor shall any provision be inserted in any such contract or agreement whereby the buyer waives or purports to waive any provision of this Act. The insertion in any such contract or agreement of a provision designed or intended to nullify this Act or the regulations adopted and promulgated pursuant to this Act, or to waive the require- ments of this Act and such regulations, shall constitute a violation of this Act, and, in addition, such provision shall be void and of no effect. SEC. 5. Notwithstanding section 28:1-208 of the District of Columbia Code, payments owed under a retail installment contract or revolving charge account agreement may only be accelerated in the case of a default in payment or per- formance by the buyer, or on the same grounds as would authorize an attachment before judgment under paragraphs (2) through (5) of subsection (d) of section 16-501 of the District of Columbia Code. SEC. 6. The Commissioners may by regulation require that retail installment contracts shall contain a more detailed description of the consumer goods or services to which any such contract relates than is required by section 28:9-110 of the District of Columbia Code. PAGENO="0011" 5 SEC. 7. Section 28:9-203(2) of the District of Columbia Code is amended by inserting immediately after the word "subject" where it appears the second time the following: "to the District of Columbia Retail Installment Sales Act,". SEC. 8. Notwithstanding section 28: 9-204 of the District of Columbia Code, the consumer goods which are the subject of a retail installment contract shall serve as security only for the obligation arising out of the sale of such goods and related collection and default charges, and such goods shall not be made to secure any past or future advance or obligation of the buyer to the seller or to seller's assignee. This section shall not affect the right of a seller to take a security interest in accessions or in other goods to which such accessions are to be installed or affixed and shall not affect the right to place an encumbrance upon fixtures or real estate. SEC. 9. (a) Notwithstanding section 28:9-206 of the District of Columbia Code, no retail installment contract or revolving charge account agreement shall contain any provision by which the buyer agrees not to assert against an assignee a claim or defense arising out of the sale of the consumer goods or services which are the subject matter of such contract or agreement. (b) Notwithstanding sections 28 :3-301 through 307 of the District of Columbia Code, no claim or defense arising out of a retail installment transaction which the buyer has against the seller, and which would be cut off by negotiation, shall be cut off by a provision in the contract or by transfer or negotiation of the contract or of a related promissory note to any third person, unless such contract or note is accompanied by a certificate, in such form as the Commissioners may by regula- tion prescribe, signed by both the buyer and the seller or their respective representa- tives and indicating the date each of them so signed, stating that the consumer goods which are the subject of the contract have geen delivered to and received by the buyer or his representative and appear to be those consumer goods which he purchased, or, if the contract is one for services, that the services which are the subject of the contract have been completely performed in accordance with the terms of the contract. (c) If, as part of or in connection with a retail installment transaction, a note is taken by the seller, such note shall refer to the retail installment contract out of which it arises, and no subsequent holder shall be entitled to hold such note as a holder in due course unless the note or the contract out of which the note arose is accompanied by the certificate referred to in subsection (b). (d) No person shall, in~ advance of the full delivery of the consumer goods which are the subject of a retail installment contract, or in advance of the full performance of services which are the subject of such a contract, require or permit the buyer to sign the certificate referred to in subsection (b), nor shall any person indicate or permit to be indicated on such certificate any date other than the date on which the buyer and the seller or the representatives of each of them, respectively, signed such certificate. Any person who requires or allows the buyer to sign such certificate in advance of delivery of the consumer goods or the performance of the services, as the case may be, and any person who places on such certificate a date other than the date on which the seller and the buyer, or the representatives of each of them, respectively, signed such certificate, shall be in violation of this Act. (e) The execution by the buyer of the certificate referred to in this section shall not estop the buyer from asserting against the seller such rights and defenses as the buyer may have against the seller. (f) The Commissioners are authorized by regulation to prescribe the form and content of the certificate referred to in this section, and to make such other regulations as may be necessary to carry out the purposes of this section. SEC. 10. Notwithstanding section 28:9-208 of the District of Columbia Code, a buyer shall be given a written receipt for any payment when made in cash. Upon the written request of the buyer, the holder of a retail installment contract, whether such holder be the seller or an assignee of the contract, shall give or f or- ward to the buyer a written statement of the total amount paid by him during such period as he may designate, but not in excess of three years prior to the date of such request, and also including either (1) a statement of the dates and the amounts of each of the payments made by him or on his behalf, or (2) the sum of the payments made by him or on his behalf during each billing period, depending on the manner in which the holder of the contract maintains his records. Such requested statement shall be given the buyer without charge not more often than once every six months. If any additional statement is requested by the buyer, it shall be supplied by the holder of the contract at a charge not in excess of one dollar for each additional statement so supplied. PAGENO="0012" 6 SEC. 11. Notwithstanding section 28:9-504 of the District of Columbia Code, in cases of repossession of consumer goods which are serving as collateral, no debtor shall be liable for such amount of expenses, attorneys' fees, and legal expenses arising out of the retaking, holding, or resale of such goods as may exceed the amount realized from the sale of the collateral, nor shall any debtor he liable for any deficiency remaining after the disposition of the collateral in excess of the balance which, at the time of repossession of such collateral, remained unpaid under a retail installment contract or revolving charge account agreement, but nothing herein contained shall he construed to relieve the debtor of liability for reasonable costs accruing in connection with the collection of such unpaid balance. SEC. 12. In any action brought by a debtor under the authority contained in the third sentence of paragraph (1) of section 28:9-507 of the District of Columbia Code, based on the alleged failure of the secured party to dispose of collateral in accordance with the provisions of part 5 of the Uniform Commercial Code for the District of Columbia, the prevailing party shall be entitled to reasona- ble attorneys' fees and legal expenses incurred by him which shall not, in the aggregate, exceed 50 per centum of the amount in issue, as provided by such third sentence of paragraph (1) of such section 28:9-507. SEC. 13. With the exception of the function of making regulations to carry out the purposes of this Act, the Commissioners are authorized to delegate, with power to redelegate, any of the functions vested in them by this Act. SEC. 14. No regulation shall be adopted by the Commissioners under the authority of this Act until after a public hearing has been held thereon. SEC. 15. No person shall, with respect to any statement required or authorized by this Act, or required or authorized by regulations promulgated under the authority of this Act to be filed with the Commissioners, knowingly include therein any false information. SEC. 16. (a) Any person who shall willfully violate any provision of this Act or of any regulation promulgated by the Commissioners under the authority of this Act, shall be punished by a fine not exceeding $500 or by imprisonment for not more than six months, or both. (b) Prosecutions for violations of this Act, or of the regulations made pursuant thereto, shall be conducted in the name of the District by the Corporation Counsel or any of his assistants. SEC. 17. In case of failure by a seller to comply with the provisions of this Act, except as a result of an inadvertent or bona fide error, such seller shall be barred from recovery of any service charge or of any delinquency, collection, extension, deferral, or refinance charge imposed in connection with a retail installment con- tract or revolving charge account agreement, and the buyer shall have the right to recover from such seller an amount equal to any of such charges paid by the buyer either to the seller or to any subsequent holder, plus reasonable attorneys' fees not to exceed the amount recovered; but nothing herein contained shall he construed as relieving the buyer from paying to the seller or such subsequent holder an amount equal to the cash price of the consumer goods or services and the cost to the seller of any insurance included in the transaction. SEC. 18. The authority and power vested in the Commissioners by any pro- vision of this Act shall be deemed to be additional and supplementary to authority and power now vested in them, and not as a limitation. SEC. 19. If any provision of this Act or the application thereof to any person or circumstance is held invalid, such invalidity shall not affect other provisions or the application of this Act which can be effected without the invalid provision or application, and to this end the provisions of this Act are severable. SEC. 20. This Act shall take effect on the first day of the first month which begins more than ninety days after the date of enactment of this Act. [S. 2559, 90th Cong., first sess.l A BILL To provide for the regulation in the Distrin of Columbia of retail installment sales of consumer goods (other than motor vehiclee~ and services, and for other purposes Be it enacted by the Senate and House of Representatives of the United States o~f America in Congress assembled, TITLE 1-GENERAL PROVISIONS AND DEFINITIONS SECTION 1.101. PURPOSES, RULES OF CONSTRUCTION.- (A) This Act may be cited as the "District of Columbia Retail Installment Sales Act", and shall be liberally construed and applied to promote its underlying purposes and policies. PAGENO="0013" (B) Underlying purposes and policies of this Act are- (1) to regulate retail installment sales of consumer goods (other than motor vehicles) and services and to safeguard consumers from unfair, unconscionable, or fraudulent advertising, sales, credit, and collection practices; (2) to permit and encourage the development of fair and economically sound consumer credit practices; (3) to further consumer understanding through disclosure of the terms of retail installment transactions and to promote and enhance competition among retail sellers of consumer goods and services; and (4) to promote and develop programs for the education of retail credit consumers. SEC. 1.102. CONSTRUCTIoN AGAINST IMPLICIT REPEAL.-This Act being a general Act relating to the retail installment `sale of consumer goods and services, no part of it shall be deemed to be impliedly repealed by subsequent legislation if such construction can reasonably be avoided. SEC. 1.103. GENERAL REPEALER-All Acts or parts of Acts inconsistent here- with are hereby repealed. SEC. 1.104. SEvERABILITY.-If any provision of this Act or the application thereof to any person or circumstance is held invalid, such invalidity shall not effect other provisions or the application of this Act which can be effected without the invalid provision or application, and to this end the provisions of this Act are severable. SEC. 1.105. EFFECTIVE DATE.- (A) This Act shall take effect on the, first day of the first month which begins more than ninety days after the enactment of this Act. (B) This Act and the regulations adopted and promulgated by the Council under the authority of this Act shall be applicable to retail installment contracts, open-end credit agreements and extension or refinancing agreements entered into on or after the effective date of this Act, notwithstanding the provisions of any retail installment contract, refinancing or extension agreement, promissory note, or other instrument to the contrary. SEC. 1.201. DEFINITIoNs.- (1) "Annual percentage rate"; "equivalent annual percentage rate": (a) "Annual percentage rate" means, for. the purposes of section 3.104, the nominal annual rate determined by the actuarial method (United States rule). For purposes of this calculation it may be assumed that: (i) The total time for repayment of the total amount to be financed is the time from the date of the transaction to the date of the final scheduled pay- ment. (ii) All payments are equal if all scheduled payments are substantially equal. (iii) All payments are sëheduled 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 from the date of the transaction. A period of time equal to one-half or more of a payment period may be considered one full period. (b) The Council may prescribe methods other than the actuarial method if the Council determines that the use of such other methods will materially simplify computation while retaining reasonable accuracy as compared with the rate de- termined under the actuarial method. (c) For the purposes of section3.104(b) and' (c), the term "equivalent annual percentage rate" means the rate or rates computed by multiplying the rate or rates used to compute the finance charge for any period by the number of periods in a year. (d) Where the same finance charge is imposed for all balances within a specified range, the annual percentage rate or equivalent annual percentage rate shall be computed on the median balance within the range for the purposes of secton 3.104. , (2) "Cash price" of goods or services means the price at which the goods or services are offered for sale by the seller to cash buyers in the ordinary course of business and may include, if separately itemized, any applicable taxes. The cash price of goods may not include the cash price of delivery, installation, servicing, repairs, alterations, or improvements. The amount by which the cash price stated in a retail installment contract pursuant to sections 3.104 and 3.108 exceeds the cash price of goods or services off èred for sale by the seller to retail or cash buyers in the ordinary course of business shall be deemed a finance charge. PAGENO="0014" S (3) "Commissioner" means the Commissioner of the District of Columbia or his designated agent; "Council" means the District of Columbia Council or its designated agent. (4) "Consumer goods" means tangible chattels bought for use primarily for personal, family, or household purposes, including certificates or coupons ex- changeable for such goods, and including consumer goods which, at the time of the sale or subsequently, are to be so affixed to real property as to become a part of real property whether or not severable therefrom, but the term "consumer goods" does not include goods acquired for commercial or business use or for resale, nor shall such term include any motor vehicle as such term is defined in the first section of the Act approved April 22, 1960 (74 Stat. 69; title 40, ch. 9, D.C. Code), providing for the regulation of finance charges for retail installment sales of motor vehicles in the District of Columbia. (5) "Credit" means the right granted to a retail buyer to defer payment of debt or to incur debt and defer its payment. (6) "District" means the District of Columbia. (7) "Finance charge": (a) "Finance charge" means the sum of all the charges directly or indirectly imposed upon and payable by a retail buyer, as an incident to the extension of credit in a retail installment transaction, including, but not limited to, amounts deemed a finance charge under subsection (2) of this section, loan fees, service and carrying charges, discounts, interest, time price differentials, investigators' fees, costs of any guarantee or insurance protecting the creditor against obligor's default or other credit loss. (b) If itemized and disclosed under section 3.104, the term does not include (i) fees and charges prescribed by law which actually are or will be paid to public officials for determining the existence of or for perfecting or releasing or satisfying any security related to a retail installment transaction; (ii) taxes; (iii) charges or premiums for insurance against loss of or damage to property related to a retail installment transaction or against liability arising out of the ownership or use of such property; and (iv) charges or premiums for credit life, accident, and health insurance. (8) "Home improvement contract" or "contract for home improvement work" means an agreement for the performance of home improvementwork. (9) "Home improvement work" means the construction of one or more additions to, other improvement, repair, restoration, alteration, conversion, or replacement of any residential property as herein defined, but the term "home improvement work" shall not extend to or include the sale or installation of any appliance, ma- terials, household furnishings, or equipment, if not made part of the realty. (10) "Home solicitation sale" means any sale, other than a sale by telephone or mail, giving rise to a retail installment contract where (1) the buyer's agreement or offer to purchase is made at a place other than the seller's place of business, and (2) the seller or his agent engages in pesonal solicitation of the buyer. (11) "Open-end credit agreement" means an agreement, prescribing the terms of secured or unsecured retail installment transactions, which may take place from time to time thereunder, and providing that the buyer's periodic unpaid balance is payable in installments. (12) "Person" means an individual, firm, concessionaire, partnership, joint stock company, corporation, association, incorporated society, statutory or corn- m~n law trust, estate, executor, administrator, receiver, trustee, conservator, liquidator, committee, assignee, officer, employee, principal, or agent. (13) "Retail buyer" or "buyer" means a person who buys consumer goods from a retail seller in ~. retail installment transaction and not principally for thepurpose of resale, or who, under a retail installment contract, buys services from a retail seller. (14) "Retail installment contract" means a contract evidencing a retail install- ment transaction and which is entered into within or has substantial contact with tVhe District. V V V (15) "Retail installment transaction" means any retail transaction between a retail seller and a retail buyer in which there is an agreement for the purchase of consumer goods, or services, or both consumer goods and services, for which the price is to be paid in one or more deferred installments, and such term shall include aVny transaction involving a contract in the form of a bailment or a lease if tVhe bailee or lessee contracts to pay compensation for the use of the consumer goods or services or both which are the subject of such contract and Vlt is agreed that the bailee or lessee is bound to become, or, for no further, or a merely nominal, con- PAGENO="0015" 9 sideration, has the option, upon full compliance with the provisions of the bail- ment or lease, of becoming the owner of the consumer goods or services, or both; except that the term shall not include any retail transaction in which the purchase price is to be paid in full within not more than ninety days from the initial billing date, and no security interest in the consumer goods is retained by the seller and no other collateral or security is required or accepted by the seller, and no finance charge or other charge is made as consideration for the deferral of payment or extension of credit. (16) "Retail seller" or "seller" means a person engaged in the business of selling consumer goods or services to retail buyers. (17) "Services" means work, labor, or other kind of activity furnished, or agreed to be furnished, primarily for personal, family, or household use, and not for commercial or business use, whether or not furnished or agreed to be fur- nished in connection with the delivery, installation, servicing, repair, or improve- ment of consumer goods, including such work, labor, or other activity furnished or agreed to be furnished in connection with repairs, alterations, or improve- ments upon or in connection with real property, but the term "services" shall not include work, labor, or other activity furnished or agreed to be furnished for which the price or tariff charged or to be charged is required by law to be determined or approved by, or to be filed, subject to approval or disapproval, with the United States or the District, or a department, division, agency, officer, or official of either of such governments. TITLE Il-REGULATIONS AND GENERAL AUTHORITY TO COMMISSIONER AND COUNCIL Sno. 2.101. The Council is hereby authorized to make and provide for the enforcement of such regulations as it deems apnrqnriate to effectuate the pur- poses of this Act and safeguard consumers from unfair and unconscionable adver- tising, sales, credit, and collection practices in connection with retail installment transactions. Such regulations may include, without limitation, provisions- (A) containing definitions, whether or not used in this Act, insofar as * such definitions are not inconsistent with the provisions of this Act; (B) defining and proscribing advertising, sales, and collection practices which, in the opinion of the Council, are inconsistent with the general purposes of this Act and existing laws including, without limitations- (1) false, misleading, and de9eptive advertisements relating to quality, quantity, price, finance ëharge or rate, or other terms relative to the sale of consumer goods and services, provided that such regulations shall not apply to the owner, publisher, employee or agent of newspapers, maga- zines, publications, or printed matter wherein such advertisement ap- pears, or to the owner, operator, employee, or agent of a radio or tele- vision station which disseminates such advertisement when .the owner, publisher, operator, employee, or agent has no knowledge of the com- mission of a violation of regulations; and (2) advertising and sales practices and techniques that depend for their effect upon an offer to sell consumer goods or services that is not accompanied by a bona fide offer to sell the offered goods or services, or upon an offer of terms or conditions surrounding a sale that is not con- .tained in the retail installment contract or an offer that tends to mis- lead buyers as to the terms and conditions surrounding the obligations of a party or parties to a retail installment transaction, or as to the possi- bility of performance of such terms and conditions; (C) relating to title 3 of this Act, including but not limited to, regulations- (1) respecting the form, execution, and delivery of retail installment contracts, open-end credit agreements, and notices of cancellation, including, without limitation, provisions for a more detailed description of the consumer goods or services to which any contract of agreement relates than is required by section 28:9-110 of the District of Columbia Code, provisions for a brief notice to one who cosigns a contract explain- ing the liabilities ineurred by such signature, and additional provisions and notices to be contained in such contracts, agreements, or notices of cancellation. (2) describing the methods which may be used in determining annual percentage rates under section 3.104 including, but not limited to, the* PAGENO="0016" 10 use of any rules, charts, tables, or devices by creditors to convert to an annual percentage rate any add-on, discount, or other method of com- puting a finance charge; (3) prescribing procedures to insure that the information required to be disclosed under section 3.102 and 3.104 is set forth clearly and con- spicuously; and (4) prescribing reasonable tolerances of accuracy with respect to dis- closing information under section 3.104. In prescribing regulations with respect to reasonable tolerances of accuracy, the Council shall observe the following limitations: (a) The annual percentage rate may be rounded to the nearest quarter of 1 per centum for retail installment transactions payable in substantially equal installments when a seller determines the total finance charge on the basis of a simple add-on discount, periodic, or other rate, and such rates are converted into an annual percentage rate under procedures prescribed by the Council. (b) The use of rate tables or charts may be authorized in cases where the total finance charge is determined in a manner other than that specified in paragraph (2) Such tables or charts may provide for the disclosure of annual percentage rates which vary up to 3 per centum of the rate as defined by this section. However, any seller who willfully and knowingly uses such tables Or charts in such manner so as to consistently understate the annual percentage rate, as definedby section 1.201(1) shall be liable for civil penalties under section 8.204 of this Act. (c) In the case of sellers determining the annual percentage rate in a manner other than as described in paragraph (2) or (3), the Council may authorize other reasOnable tolerances. (d) In order to simplify compliance where irregular payments are involved, the Council may authorize tolerances greater than those specified in paragraph (b) and may establish such classifications and differentiations and may provide for such adjustments and exceptions from this Act or the regulations thereunder for any class of transactions, as in the judgment of the Council are necessary or proper to effectuate the purposes of this Act or to prevent cir- cumvention or evasion of, or to facilitate compliance with, this Act * or any regulation issued hereunder. - (D) relating to title 6 of this Act, including, but not limited to, regulations (1) respecting the form, execution, and delivery of notices required by sections 6.101 (B) and 6.102, and (2) respecting the manner and methods of the sale or disposition of repossessed goods under such conditions as the Council deems advisable. * SEC. 2.102. No regulations shall be adopted by the Council under the authority Of this Act until after a public hearing has been held thereon. SEC. 2.103. The Commissioner and the Council, with the exception of the function of making regulations to carry out the purposes of this Act, are authorized to delegate, with power to redelegate, any of the functions vested in them by this Act. SEc. 2.104. The authority and power vested in the Commissioner and Council by any provision of this Act shall be deemed to be additional and supplementary to authority and power now vested in him or them, and not as a limitation. TITLE Ill-PROVISIONS OF RETAIL INSTALLMENT CONTRACTS SEc. 3.101. APPLICATION.-The provisions of this part shall apply to all retail installment contracts other than contracts for home improvement work, as defined in section 1.201(a), except that home improvement contracts shall be subject to section 3.107 and may be subject to any regulations promulgated under the author- ity of this Act and pertaining to this part. SEC. 3.102. SINGLE DOCUMENTS; GENERALPROVISIONS FOR FORM AND CON- TENTS.- (A) Subject to section 3.101, and except as otherwise provided in this Act, every retail installment contract shall be contained in a single document, signed by both the buyer and the seller, and, completed as to all essential provisions before it is signed by the buyer. Each such contract shall include the address of both the seller and the buyer, a~ description of the goods or services purchased, a description of PAGENO="0017" 11 collateral securing the buyer's obligations under the agreement, if any, and at the top of the first page of the agreement in twelve-point extrabold type the words "Retail installment contract." (B) Subject to section 3.101, the printed terms of every retail installment con- tract shall be set in eight-point type, except as otherwise required herein. If the terms of a retail installment contract are contained on both sides of a page, there shall appear on the first page the following words in ten-point boldface type, "The terms of this contract are contained on both sides of this page." If the terms of a retail installment contract are contained on more than both sides of each preceding page, the following words in ten-point boldface type, "The terms of this contract are contained on more than one page." SEC. 3.103. NOTICE TO THE BUYER.-Subject to section 3.101, and except as hereinafter provided, every retail installment contract shall contain the following notice in ten-point boldface type or larger directly above the space reserved in the agreement for the signature of the buyer: "Notice to Buyer" "(1) You are entitled to a readable copy of the complete contract at the time you sign it. Until you are given such a copy, you may cancel this sale. "(2) At any time you may pay off the full, unpaid amounts due under this contract and you may receive a partial refund of any finance or insurance charges. "(3) If you default on your obligations under this contract and the goods purchased are repossessed, you are entitled to have the goods returned to you in some circumstances. "(4) No one is entitled to enter your premises to repossess goods purchased under this agreement unless he has your permission or a court order. "(5) If you have any questions regarding the legal effect of this agreement, before or after you enter into it, contact the District of Columbia Government Consumer Information Service (telephone number: ), and/or an attorney of your choice." SEC. 3.104. DiscLosuRE.- (A) Subject to section 3.101 andexcept as provided in sections 3.108 and 5.105 of the Act and paragraph (B) of this section, there shall be included on the first page of every retail installment contract in the following order the dollar amounts of the following items, if applicable, such items to be so designated: (1) the cash price of the property or service purchased; (2) the sum of any amounts credited as downpayment, itemizing the amounts paid in money and in goods and containing a description of such goods, if any, sufficient to identify them; (3) the difference between the amounts set forth in paragraphs (1) and (2); (4) all other charges, individually described and itemized, for official fees, taxes, and insurance as described in section 1.201(7)(b) of this Act; (5) the total amount to be financed (the sum of the amounts denoted under (3) and (4) above); (6) the amount of the finance charge; (7) the total amount due (the sum of (5) and (6), above); (8) the finance charge expressed as an annual percentage rate; and (9) the number, amount, and due dates or periods of payments scheduled to repay the indebtedness. DIscLosuRE IN OPEN-END CREDIT AGREEMENT.-(B)(1) Beforeopening.any account under an open-end credit agreement, the seller shall, to the extent ap- plicable, disclose in writing to the retail buyer- (a) the conditions under which a finance charge may be imposed, including the time period, if any, within which any credit extended may be repaid without incurring a finance charge; (b) the method of determining the balance upon which a finance charge will be imposed; (c) the method of determining the amount of the finance charge (including any minimum or fixed amount imposed as a finance charge), the percentage rate per period of the finance charge to be imposed, if any, and the equivalent annual percentage rate; and (d) the conditions under which any other charges may be imposed, and the method by which they will be determined. (2) For each billing cycle at the end of which there is an outstanding balance under any such account, the seller shall disclose to the extent applicable, the following: SS-648-68---2 PAGENO="0018" 12 (a) the outstanding balance in the account at the beginning of the billing period; (b) the amount and date of each extension of credit during the period and, if a purchase was involved, a brief identification (unless previously furnished) of the goods or services purchased; (c) the total amount credited to the account during the period; (d) the amount of any finance charge added to the account during the period, itemized to show the amount, if any, due to the application of a per- centage rate and the amount, if any, imposed as a minimum or fixed charge; (e) the balance on which the finance charge was computed and a statement of how the balance was determined; (f) the rate, if any, used in computing the finance charge and the equivalent annual percentage rate; (g) the outstanding balance in the account at the end of the period; and (h) the date by which, or the period (if any) within which, ~ayme.nt must he made to avoid additional finance charges. (3) If a creditor adds to this billing under an open-end credit plan one or more installments of other indebtedness from the same obligor, the creditor is not re- quired to disclose under this subsection any information which has been disclosed previously in compliance with subsection (A). (C) Additional items may be included to explain the calculations involved in determining the balance to be paid by the buyer. (D) If information disclosed in accordance with this section and any regulations prescribed by the Council is subsequently rendered inaccurate as the result of a prepayment, late payment, adjustment, or amendment of the retail installment contract through mutual consent of the parties or as permitted by law, or as the result of any act or occurrence subsequent to the delivery of the required dis- closures, the inaccuracy resulting therefrom shall not constitute a violation of this section. - SEC. 3.105. SIGNING IN BLANK PR0HIBITED.-No seller or assignee shall at any time take or receive any retail installment contract signed. by a buyer in blank or prior to the time all information required to be disclosed by this part and all terms upon which the parties have agreed at the consummation of the sale have been completed in the body of the contract, and the completed contract has been exhibited to the buyer and the buyer afforded reasonable apportunity to examine the contents thereof.. SEc. 3.106. DELIVERY OF Co~~ OF COMPLETED CONTRACT TO BUYER; ACKNOWL- EDGMENT OF DELIVERY; REBUTTABLE PRESUMPTION.-The seller shall deliver to the buyer, or mail to him at his address shown on the retail installment contract, a legible executed and completed copy thereof. 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 ten point boldface type and, if contained in the contract, shall also appear directly to the left of the space reserved for the buyer's signature. The buyer's written acknowledgment, conforming to the requirements of this section, of delivery of a copy of a retail installment contract shall be a rebuttable presumption of such delivery in any action or proceeding by or against an assignee of the con- tract without knowledge to the contrary when he purchases the retail installment contract. SEc. 3.107. COMPLETION CERTIFICATE INVALID UNLESS TRUE-In any trans- action involving the modernization, rehabilitation, repair, alteration, improve- ment, or construction of real property, a writing signed by the buyer that such work has been satisfactorily completed shall not be valid unless the work to be performed by the seller is actually completed. TITLE IV-RESTRICTIONS ON RETAIL INSTALLMENT CONTRACTS SEc. 4.101. No provision shall be inserted in any retail installment contract or extension or refinancing agreement designed to nullify and make ineffective the provisions of this Act or regulations adopted pursuant thereto, or otherwise deprive a retail buyer of the protection afforded him, by this Act or such regula- tions, nor shall any provision by inserted in any such contract or agreement where- by the buyer waives or purports to waive any provision of this Act. The insertion in any such contract or agreement of a provision designed or intended to nullify this Act or the regulations adopted and promulgated. pursuant to this Act, or to waive the requirements of this Act and such regulation, shall constitute a viola- tion nor this Act, and, in addition, such provision shall be void and of no effect. PAGENO="0019" 13 SEc. 4.102. NEGOTIABLE INSTRUMENTS PROHIBITED -Notwithstanding sec- tions 28: 3-301 through 307 of the District Of Columbia Code, no instrument or series of instruments payable to order or to bearer which when negotiated will cut off as against third parties any right of action or defense which the buyer may have against the seller shall be executed as evidence of the obligation of the buyer in connection with a retail installment transaction. Any such instrument issued in violation of this section is void and may not be enforced by any sub- sequent holder. SEC. 4.103. PROHIBITED CONTRACT CLAU5E5.-No seller or subsequent assignee shall at any time take or receive any retail installment contract or extension or refinancing agreement from a buyer which contains- (A) any provision for the acceleration of the time when any part or all of the indebtedness becomes payable other than for a substantial default in payment or performance by the buyer, or on the same grounds. as would authorize an attachment before judgment under paragraphs (2) through (5) of subsection (d) of section 16-501 of the District of Columbia Code, notwith- standing section 28: 1-208 of the District of Columbia Code; * (B) 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 differ substantially, except that- (1) the intervals for the first installment payment may be longer than the other intervals, (2) the final installment payment may be less in amount than the preceding installment payment, and (3) where a buyer's livelihood is dependent upon seasonal or intermit- tent income, the seller and the buyer may agree that one or more installment payments in the schedule of payments may be reduced or deferred; (C) aiTly confession of judgment or any power or warrant of attorney to appear for the buyer or for any surety or guarantor for him to confess judgment; (D) any provision by which the buyer agrees not to assert against a seller or, notwithstanding section 28: 9-206. of the District of Columbia Code, against an assignee, a claim or defense arising out of the sale of the con- sumer goods or services which are the subject matter of such contract. (E) any provision by which the buyer relieves the seller from liability for any legal remedies which the buyer may have against the seller under the contract or under any separate instrument executed in connection therewith; (F) any provision by which the buyer grants authority to the seller or. assignee to enter the buyer's premises in the repossession of the. collateral, if any; . (G) any provision by which the buyer waives any right of action against the seller, assignee or other person acting on behalf of either, for any illegal act committed in the collection of payments under the contract or in the repossession of goods; (H) notwithstanding section 28: 2-316 of the District of Columbia Code, any provision limiting, excluding, modifying, or in any manner altering the terms of express or implied warranties made in connection with the original sale; and (I) any provision whereby the buyer executes a power of attorney appoint- ing the seller, assignee, or other person acting in the seller's behalf, as the buyer's agent in the collection of payments under the contract or in the repossession of collateral security. SEC. 4.104. Notwithstanding section 28: 9-204 of the District of Columbia Code, the consumer goods which are the subject of a retail installment .contract shall serve as security only for the obligation arising out of the sale of such goods and related collection and default charges and such goods shall not be made to secure any past or future advance or obligation of the buyer to the seller or to seller's assignee. This section shall not affect the right of a seller to take a security interest in accessions or in other goods to which such accessions are to be installed or affixed and shall not affect the right to place an encumbrance upon fixtures or real estate. SEc. 4.105. INVALIDITY OF PROHIBITED CONTRACT PR0VI5I0NS.-Any pro- vision in a contract which is prohibited by this part shall be void and unen- forceable, but shall not otherwise affect the validity of the contract. PAGENO="0020" 14 TITLE V-PAYMENTS. SEC. 5.101. OPERATION AND EFFECT OF PmIENT.-Unless the buyer has written notice, of actual or intended assignment of a retail installment contract, the buyer may pay or tender any amount due thereunder or give any notice required or permitted by the contract, to the person last known to be entitled to payment or notice under the contract, and such payment, tender, or notice shall be binding upon any subsequent assignee as fully as if made to him. SEC. 5.102. RECEIPTS; STATEMENT OF ACCOUNT.- (A) When any payment is made on account of any retail installment contract, the person receiving such payment shall, if the payment is made in cash, give the buyer a complete written receipt theref or. If the buyer specifies that the `payment is made on one of several obligations, the receipt shall so state. (B)(1) Within six months after the execution of a retail installment transaction, including an open-end credit agreement, and within every six-month period there-~ after until the buyer has discharged all his obligations under the contract, the~ seller or assignee, if any, in addition to any other statements or notices required by this Act, shall send to the buyer upon request a statement of account which shall list the following items designated as such: (a) the amounts paid by or on behalf of the buyer, setting forth any refund and any payment of charges for delinquencies, expenses of repossession and extension, to the date of the statement of account; (b) the amounts, if any, which have become due but remain unpaid, setting forth any charge for delinquencies, expenses of repossession and extensions;. and (c) the number of installment payments and the dollar amount of each installment not due but still to be paid and the remaining period the agree-. ment is to run. (2) The buyer shall be entitled to only one such statement in any six-month period free of charge. The sum of $1 may be charged for each additional written statement requested by the buyer before supplying such additional written state-. ment. (3) If the buyer requests information for income tax purposes as to the amount of the finance charges, the seller or assignee, if any, shall provide such information without charge once in every calendar year. SEC. 5.103. PAYMENT IN FULL BEFORE MATURITY.- (A) Notwithstanding the provisions of any retail installment contract to the contrary, a buyer may pay in full at any time before the maturity of the final installment thereof, and thereby shall receive a refund credit and, if the contract included an amount for insurance, a further refund credit for such anticipation, whether or not the maturity of the scheduled payment of the contract was ac- celerated by reason of a buyer's default. (B) Except as provided in paragraph (D), the amount of any such refund credit shall be calculated by the so-called sum of the digits method, and shall represent at least as great a proportion of the total amount of the finance charge as. the sum of the scheduled periodic balances after the date of prepayment bears to the sum of the scheduled periodic total balances under the schedule of installments in the original or refinanced contract. In the event a contract has been extended and is prepaid in full during an extension period the buyer shall receive, in addition, the refund of that portion of the extension charge applicable to a.ny unexpired months of the extension period. (C) DETERMINATION OF THE DATE OF PREPAYMENT-If the prepayment is. made before the first installment due date, it shall be deemed to have been made on the first installment due date; thereafter, if the prepayment is made other than on an installment due date it shall be deemed to have been made on the next preceding or next succeeding installment due date, whichever is nearer to the actual date o prepayment. (D) Where the amount of credit for anticipation of payment is less than $1.. no refund need he made. SEC. 5.104. EXTENSION OF DUE DATE.- (A) A seller or assignee may by agreement with the buyer extend the due date of all or any part of one or more installments under an existing retail in- stallment contract or refinancing agreement. . (B) Except as provided in' paragraph (C) an extension agreement- (1) shall be in writing and signed by the parties; (2) shall incorporate by reference the agreement to which the extension agreement applies; PAGENO="0021" 15 (3) shall state the terms of the extension; and (4) shall clearly set forth regarding any extension charge, the dollar amount for each installment extended (which need not be separately stated if the amounts. are substantially equal) the total additional dollar amount to be paid by the buyer for the privilege of extending the time of payment, and the dollar amount for, the additional cost of insurance, if any, resulting from the extension. (C) If the extension agreement extends the due date of only one installment, it need not be in writing but shall be subject to the provisions of clauses (4) and (5) of paragraph (B). If no charge is made for the extension agreement, the agree- ment shall not be subject to paragraph (B). SEC. 5.105. REFINANCING.- (A) A seller or assignee may by agreement with the buyer refinance the unpaid balance of a single retail installment contract or refinancing agreement to provide for a new schedule of the times or amounts of the payments, or both. (B) The refinancing agreement shall be iii writing, and shall be dated and signed by the parties, and shall incorporate by reference the contract or agreement being refinanced and shall clearly set forth and itemize the unpaid balance being re- financed; such, if any, official fees and additional cost for insurance which qualify for exclusion from the definition of finance charge under section 1.201 (7) (b); the refund credit; the amount to be refinanced; the amount of the finance charge; the finance charge expressed as an annual percentage rate; the number, amount, and due dates or periods of payment scheduled to repay the indebtedness; and the time balance. The refinancing agreement shall comply with the provisions of sections 3.102(B), 3.103, 3.105, 3.106 and titles 4, and 6 of this Act. SEc. 5.106. ACKNOWLEDGMENT OF PAYMENTS; RELEASE OF SEcURITY.-Within twenty days after payment of all sums for which the buyer is obligated under a retail installment contract, the seller or assignee of such contract shall mail to the buyer, at his last known address, sufficient instruments to indicate `payment in full and to release all security in the collateral, if any, under. such contract. TITLE VI-REPOSSESSION SEC. 6.101. DEFAULT BY BUYER; RIGIIT5 OF SECURED PARTY; NOTICE OF INTENT To REPOSSESS.- (A) In the event of default by the buyer in performance ofhis obligations under `a contract or instrument of security which expressly makes such default a ground for repossessing the goods, a secured party, pursaunt to any rights granted by such contract or instrument, may retake the goods and proceed as hereinafter provided, notwithstanding sections 28: 9-501 through 9-507, excepting sections 9-503, 9-505, and 9-507(B), of the District of Columbia Code, or he may proceed to recover judgment for the balance due without retaking the goods. Unless the goods can be repossessed with the permission of the possessor and without use of force or breach of peace, they shall be repossessed by legal process. (B) Not less than fourteen days before he repbssesses, the secured party may, if he so desires, give notice to the buyer of his intention to repossess. The notice shall state the default, the balance due, and the period, if any, at the end of which the goods may be repossessed, and shall clearly, conspicuously, and briefly state the buyer's rights in case the goods are repossessed. The notice may be delivered to the buyer personally or be sent by registered or certified mail to his last known. address. SEC. 6.102. NoTICE; SERVICE; CONTENTS; PENALTY FOR FAILURE TO COMPLY.- Within five days after goods are repossessed the secured party shall deliver to the buyer personally, or send him by registered or certified mail to his last known address, a written notice stating: 1. That the goods, including a general description thereof, have been repossessed; 2. The buyer's right to redeem within fifteen days of the receipt of such notice and the amount due and payable therefor; 3. The buyer's rights as to a resale; and 4. The exact address where any payment is to be made or notice delivered, and where the goods arc stored. SEC. 6.103. BUYER'S RIGHTS OF REDEMPTION.--- (A) The secured party shall retain possession of repossessed goods, for fifteen days after notice has been delivered personally or mailed as provided in section 8.102(A), during which period the buyer may redeem the goods and become en- PAGENO="0022" 16 titled to take possession thereof, by paying or tendering the amount specified below. (B) To redeem the goods, the buyer shall: 1. pay or tender the full amount due under the contract or instrument of security; 2. perform or tender performance of any other promise the breach of which gave the secured party the right to reposesss the goods; or 3. if the secured party has given notice of his intention to repossess under section 6.101(B), the buyer shall pay in addition, the actual and reasonable costs of repossessing and holding the goods, including attorney's fees as provided in section 6.104(2). SEC. 6.104. RESALE AND APPLICATION OF PR0cEEDs.-After default and repossession of the goods and subject to the provisions of this section and section 8.103, the secured party may sell or otherwise dispose of the goods, the disposition to be carried out in a commercially reasonable manner. The proceeds of any such sale or disposition shall be applied in the following order: 1. If the secured party has given notice of his intention to repossess under section 6.101(B), payment of actual and reasonable expenses incurred in sale of disposition. 2. If the secured party has given notice of his intention to repossess under section 6.101(B), payment of reasonable expenses of repossessing and holding the goods, including reasonable attorney's fees where the attorney is not a salaried employee of the secured party or the seller. 3. If the secured party has given notice of his intention to repossess under section 6.101(B), payment of any reasonable expenses for repairing or prepar- ing the goods for sale, to which the secured party may be entitled. 4. Satisfaction of the balance due under the contract, less finance charges and insurance premiums, if any, allocable to installments due after repos- session. 5. Surplus, if any, to the buyer without request. SEC. 105. RECOVERY OF DEFICIENCY PR0mBITED.-If the proceeds of the sale are not sufficient to cover items (1), (2), (3), and (4) of section 6.104, the secured party may not recover the deficiency from the buyer or from anyone who has succeeded to the rights and obligations of the buyer. Notwithstanding section 16.544 of the District of Columbia Code, a secured party who elects to bring an action for the unpaid balance under section 6.101(A) may not, pursuant to any judgment obtained therein, have the goods, which were the subject of the retail installment contract, sold on execution or similar pro- ceedings. SEC. 6.106. If it is established that the secured party is not proceeding in ac- cordance with the proyisions of this title VI disposition may be ordered or restrained on appropriate terms and conditions. TITLE Yll-PRIVATE REMEDIES SEC. 7.101. (A) In the case of failure by any persons to comply with the pro- visions of parts 3 and 4, and sections 5.104, 5.105, or any of the regulations promulgated by the Council pertaining thereto: (1) such person or his assignee shall be barred from recovery of any finance charge or delinquency, collection, extension, or refinance charge, imposed in connection with the retail installment contract or refinancing or extension agreement; and (2) for each violation, the buyer shall have the right to recover from such person or any person who acquires such a contract with knowledge of such noncompliance, a sum equal to the amount of an finance charge, imposed by the retail installment contract or refinancing agreement, plus 10 per centum of the principal amount of the debt (item 5 of subsection A of sec- tion 3.104). (B) In the case of failure b any person to comply with the provisions of sec- tion 5.103, or any regulations promulgated by the Council pertaining thereto, the buyer shall have the right to recover from such person who acquires a retail installment contract or refinancing or extension agreement with knowledge of such noncompliance, a sum equal to twice the amount of the refund credit to which the buyer is entitled under that section. (C) Repossession without delivering or sending the notice required by section 6.102 or failure to comply with section 6.103, shall subject the secured party to a PAGENO="0023" 17 penalty to the installment buyer of an amount equal to 50 per centum of the fair market value of the goods at time of possession. (D) Failure of the secured party to comply with section 6.104 (relating to resale and application of proceeds) shall subject him to liability for any loss caused by such noncompliance or to a penalty to the installment buyer of $500, whichever sum is larger. SEC. 7.102. Section 7.101 (A) or (B) shall not apply to any violation which a seller or assignee establishes by a preponderance of the evidence to be the result of a bona fide, nonnegligent error. SEC. 7.103. In addition to remedies specifically provided by this Act, if the court finds that a i~etai1 installment contract or refinancing or extension agreement or any clause thereof violates this Act, the court may refuse to enforce the con- tract or agreement, or it may enforce the remainder of the contract or agreement without the clause, or give such further relief as it deems equitable and just. SEC. 7.104. Except as provided to the contrary, the remedies provided by this part are cumulative to any additional remedies to which a buyer may be entitled under existing law, including, but not limited to, an action for actual damages that proximately resulted from a violation of this Act or regulations promulgated thereunder, and an action for conversion against a secured party who fails to proceed in accordance with sections 6.102 and 6.103. SEC. 7.105. In any case in which it is found that a buyer, seller, or assignee has violated any provision of this Act, the court may award reasonable attorney's fees incurred by the party charging such violation. TITLE VIII-ADMINISTRATION AND ENFORCEMENT SEC. 8.101. There is hereby created a District of Columbia Department of Consumer Protection, subject to the general supervision of the Commissioner. The Department is authorized to employ sales personnel as may be required to carry out its functions under this Act, and is hereby authorized and directed to- (1) administer and enforce this Act and any regulations promulgated by the Council under this Act; (2) conduct studies, investigations, and research with respect to retail installment transactions, including the retail sale of consumer goods and services and the purchasing of retail installment contracts; (3) conduct educational programs, collect and disseminate information relating to retail installment transactions, and, for such purpose, establish a District of Columbia Government Consumer Information Service; (4) establish and carry on continuous studies of the operation of this Act to ascertain from time to time defects therein jeopardizing or threatening to jeopardize the purposes of this Act, and to formulate and recommend changes in this Act and other laws of the District of Columbia which he may determine to be necessary for the realization of such purposes, and to the same end to make a continuous study of the operation and administration of similar laws that may be in effect in the United States and when he deems advisable, make such studies available to the public; (5) advise, consult, and cooperate with local governments within the Washington metropolitan region, the Federal Government, and interested persons and groups; (6) encourage voluntary cooperation by persons or affected groups to achieve the purposes of this Act; and (7) receive certifications by a clerk of court pursuant to section 10.105 and establish procedures for receiving and receive complaints from all persons affected by potential or actual violations of this Act or regulations promulgated under the authority of this Act, including members of the con- suming public and persons engaged in the business of selling consumer goods and services or purchasing retail installment controls. SEC. 8.102. (A) The Commissioner or his duly authorized agent shall have the power to issue subpenas in the name of the chief judge of the District of Columbia Court of General Sessions to compel witnesses to appear and testify and/or to produce all books, records, papers, or documents relative to any matter being investigated under the authority of this Act. (B) In case of disobedience to a subpena the Commissioner may invoke the aid of the Court of General Sessions for the District of Columbia in requiring the attendance and testimony of any person and the production of documentary evidence. PAGENO="0024" 18 The Court of General Sessions may, in case of contumacy or refusal to obey a subpena issued to any person, issue an order requiring such person to appear before the Commissioner or his daly authorized agent, or to produce documentary evi- dence if so ordered, or to give evidence touching the matter in question, and any failure to obey such order of the court may be punished by such court as a con- tempt thereof. (C) No person shall be excused from attending and testifying or from producing documentary evidence before the Commissioner or his duly authorized agent in obedience to the subpena of the Commissioner on the ground or for the reason that the testimony or evidence, documentary or otherwise, required of him may tend to incriminate him or subject him to a penalty or forfeiture. But no person except a corporation shall be prosecuted or subjected to any penalty or forfeiture for or on account of any transaction, matter, or thing concerning which he may testify, or produce evidence, documentary or otherwise, before the Commissioner in obedience to a subpena: Provided, That no such person so testifying shall be exempt from prosecution and punishment for perjury committed in so testifying. SEC. 8.103. (A) The Commissioner or his duly authorized agents may admin- ister oaths and affirmations to persons summoned in any investigation or hearing conducted under this Act. Any false swearing on the part of any person as to any material fact shall be deemed perjury and shall be punished in the manner pre- scribed by law for such offense. (B) The Commissioner may order testimony to be taken bydeposition at any stage of an investigation pending under this Act. Such depositions may be taken before any person designated by the Commissioner having power to admiflister oaths. Such testimony shall be reduced to writing by the person taking the depo- sition, or under his direction, and shall then he subscribed by the depOnent. Any persons may be compelled to appear and depose and to produce documentary evi- dence in the same manner as witnesses may be compelled to appear and testify and produce documentary evidence before the Department as hereinhefore pro- vided. SEC. 8.104. In carrying out the purposes of this Act, the District of Columbia Department of Consumer Protection is hereby ai~thorized to- (1) hold hearings or otherwise gather information and conduct investiga- tions relative to any aspect of, or matter in, the administration and enforce- ment of this Act or regulations promulgated under the authority of this Act; (2) compel witnesses to appear, testify, or produce books, records, papers, or documents under the authority of and in the manner provided by sections 8.102 and 8.103; and (3) initiate such proceedings as may be necessary for enforcement of sanc- tions provided in sections 8.201 through 8.204, or issue such orders as may be necessary to effectuate the purposes of this Act and enforce the sanctions provided in sections 8.201 through 8.204, and enforce the same by all appro- priate administrative and judicial proceedings. SEC. 8.105. CERTIFICATION RE A CLERK OF CoURT-Whenever the judgment becomes final of the Court of General Sessions of the District of Columbia or the United States District Court for the District of Columbia in a case in which it is found that any person has engaged in conduct violating this Act or regulations promulgated thereunder, or conduct that is unconscionable or fraudulent and is potentially or actually subject to action under section 8.201(A) (2), the clerk of the court in which the judgment was entered shall certify such finding to the Com- missioner or his duly authorized agent. A judgment shall be deemed to have become final for the purposes of this section- (A) if no appeal is taken from the judgment, upon the expiration of the time within which an appeal could have been taken, or (B) if an appeal is taken from the judgment, having been sustained, can no longer be appealed from or reviewed on a writ of certiorari. CIVIL REMEDIES SEC. 8.201. INJUNCTIONS.- (A) Any person may he restrained by civil action brought by the Director of the District of Columbia Department of Consumer Protection, or his delegate, or by an aggrieved retail buyer, from- (1) engaging in conduct or enforcing any contract that violates this Act or any regulations promulgated thereunder, or (2) engaging in a course of unconscionable or fraudulent conduct in con- nection with the making or enforcing of retail installment and other con- sumer credit contracts. PAGENO="0025" 19 (B) In an action brought pursuant to this section to enjoin and restrain any person from violating regulations promulgated by the Council under section 2.101 (B), any advertising, sales, or collection practice that is subject to and complies with the rules and regulations of, and the statutes administered by the Federal Trade Commission, shall be rebuttably presumed to be neither unfair nor unconscionable, absent express provision in such regulations to the contrary. (C) The court shall grant appropriate relief in an action brought pursuant to this section when it finds- (1) that the defendant has or is engaged or threatens to engage in conduct violating this Act or any regulation promulgated thereunder, or (2) that the defendant has or is engaged or threatens to engage in a course of unconscionable or fraudulent conduct in connection with the making or enforcing of retail installment contracts, and that the conduct of the defend- ant has caused or threatens to cause substantial injury to members of the consuming public or persons engaged in the business of selling consumer goods and services or purchasing retail installment contracts. SEC. 8.202. PRELIMINARY RELtEF.-With respect to and pending final deter- mination of any action brought pursuant to section 8.201, after notice to a defend- ant and a hearing is held thereon, the court may grant such preliminary relief as it deems appropriate. SEC. 10.203. (A) Whenever the Director of the District of Columbia Depart- ment of Consumer Protection determines that any person has violated this Act or any regulation promulgated thereunder and that such violation constitutes an enforceable claim for the recovery of penalties imposed by subsections (A) (2) and (B) of section 7.101, the Director may take an assignment in trust from the buyer for such claim, without being bound by any of the technical rules respect- ing the validity of any such assignments, may bring any appropriate legal action necesary to collect such claim for the recovery of penalties, and may join in one proceeding or action such claims against the same person as the Director deems appropriate. Upon any such assignment the Director shall have power to settle and adjust any such claim or claims on such terms as he may deem just. (B) The court in any action brought under this section shall, in addition to any judgment awarded, allow costs of the action, including costs or fees of any nature, and resonable attorney's fees, to be paid by the defendant. Such attorney's fees shall be deposited in the Treasury of the United States to the credit of the District of Columbia. The Director of the District of Columbia Department of Consumer Protection shall not be required to pay the filing fee or other costs or fees of any nature or to file bond or other security of any nature in connection with any such action. SEC. 8.204. CIvIL PENALTY.-AIIy person who shall engage in a course of re- peated and willful violations of this Act or any regulation promulgated by the Council under the authOrity of this Act shall be subject to liability for a civil penalty not exceeding $5,000. In all other cases, any person who shall willfully violate this Act or any such regulation shall be subject to liability for civil penalty not exceeding $1,000. SEC. 8.301. Section 28: 9-203 (2) of the District of Columbia Code is amended by inserting immediately after the word "subject" where it appears the second time, the following: "to the District of Columbia Retail Installment Sales Act,". [S. 2590, 90th Cong., first sess.] A BILL To provide maximum finance and other charges in connection with retail installment credit sales in the District of Columbia Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled, That this Act may be cited as the "District of Columbia Retail Installment Sales Finance Charges Act". DEFINITIONS SEC. 2. For the purposes of this Act- (1) "Commissioner" means the Commissioner of the District of Columbia, or his designated agent; (2) "consumer goods" means tangible chattels bought for use primarily for personal, family, or household purposes, including certificates or coupons exchangeable for such goods, and including consumer goods which, at the PAGENO="0026" 20 time of the sale or subsequently, are to be so affixed to real property as to become a part of real property whether or not severable therefrom, but the term "consumer goods" does not include goods acquired for commercial or business use or for resale, nor shall such term include any motor vehicle as such term is defined in the first section of the Act approved April 22, 1960 (74 Stat. 69; title 40 ch. 9, D.C. Code), providing for the regulation of finance charges for retail installment sales of motor vehicles in the District of Columbia; (3) "Council" means the District of Columbia Council, or its designated agent; (4) "credit" means the right granted to a retail buyer to defer payment of debt or to incur debt and defer its payment; (5) "finance charge" means the sum of all the charges directly or indirectly imposed upon and payable by a retail buyer, as an incident to the extension of credit in a retail installment transaction, including, but not limited to- (a) the amount, if any, by which the price at which goods or services are offered for sale (excluding the price of delivery, installation, servicing, repairs, alterations, or improvements) by the seller to retail installment contract buyers exceeds the price at which the same or comparable goods or services are offered to retail cash buyers in the ordinary course of business; (b) loan fees, service and carrying charges, discounts, interest, time price differentials, investigators' fees, costs of any guarantee or insurance protecting the creditor against obligor's default or other credit loss; except that the term "finance charges" does not include (i) fees and charges prescribed by law which actually are or wifi be paid to public officials for determining the existence of or for perfecting or releasing or satisfying any security related to a retail installment transaction; (ii) taxes; (iii) charges or premiums, in compliance with section 5(A) of this Act, for insurance against loss of or damage to property related to a retail installment trans- action or against liability arising out of the ownership or use of such property; and (iv) charges or premiums, in compliance with section 5(A) of this Act, for credit life, accident, and health insurance; (6) "open end credit agreement" means an agreement, prescribing the terms of secured or unsecured retail installment transactions, which may take place from time to time thereunder, and providing that the buyer's periodic unpaid balance is payable in installments; (7) "person" means an individual, firm, concessionaire, partnership, joint stock company, corporation, association, incorporated society, statutory or common law trust, estate, executor, administrator, receiver, trastee, conser- vator, liquidator, committee, assignee, officer, employee, principal, or agent; (8) "retail buyer" or "buyer" means a person who buys consumer goods from a retail seller in a retail installment transaction and not principally for the purpose of resale, or who, under a retail installment contract, buys services from a retail seller; (9) "retail installment contract" means a contract evidencing a retail installment transaction and which is entered into within or has substantial contact with the District; (10) "retail installment transaction" means any retail transaction between a retailer seller and a retail buyer in which there is an agreement for the purchase of consumer goods, or services, or both consumer goods and services, for which the price is to be paid in one or more deferred installments, and such term shall include any transaction involving a contract in the form of a bailment or a lease if the bailee or lessee contracts to pay compensation for the use of the consumer goods which are the subject of such contract and it is agreed that the bailee or lessee is bound to become, or, for no further, or a merely nominal, consideration, has the option, upon full compliance with the provisions of the bailment or lease, of becoming the owner of the consumer goods; except that the term shall not include any retail transaction in which the purchase price is to he paid in full within not more than ninety days from the initial billing date, and no security interest in the consumer goods is retained by the seller and no other collateral or security is required or accepted by the seller, and no finance charge or other charge is made as consideration for the deferral of payment or extension of credit; (11) "retail seller" or "seller" means a person engaged in the business of selling consumer goods or services to retail buyers; and PAGENO="0027" 21 (12) "services" means work, labor, or other kind of activity furnished, or agreed to be furnished, primarily for personal, family, or household use, and not for commercial or business use, whether or not furnished or agreed to be furnished in connection with the delivery, installation, servicing, repair, or improvement of consumer goods, including such work, labor, or other activity furnished or agreed to be furnished in connection with repairs, alterations, or improvements upon or in connection with real property, but the term "serv-~ ices" shall not include work, labor, or other activity furnished or agreed to be furnished for which the price or tariff charged or to be charged is required by law to be determined or approved by, or to be filed, subject to approval or, disapproval, with the United States or the District, or a department, division, agency, officer, or official of either of such governments. INCLUSIVE CHARGES SEC. 3. No fee, expense, or other charge whatsoever shall be taken, received, reserved, or contracted for in retail installment transactions regarding consumer goods, except the following: (A) finance charges permitted by section 4 of this Act; (B) charges for delivery, installation, repair, or other services upon the goods which are included in the contract separate from the cash price of the goods and which are not imposed on the buyer as an incident to the extension of credit; (C) charges for official fees, taxes, and insurance which are itemized and described in the retail installment contract which qualify for exclusion from the definition of finance charge under section 2(5) of this Act; and (D) additional charges authorized by section 5 of this Act. MAXIMUM FINANCE CHARGES SEC. 4. No finance charge shall be taken, received, reserved, agreed upon, or contracted for in excess of the maximum rates set forth in this section. Such rates shall be computed in accordance with rules, regulations, and instructions issued by the Council. For purposes of this section, the annual percentage rate means the nominal annual rate determined by the actuarial method (United States rule) and, for purposes of this calculation, it may be assumed that (i) the total time for repayment of the total amount to be financed is the time from the date of the transaction to the date of the final scheduled payment; (ii) all payments are equal if all scheduled payments are substantially equal; (iii) 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 from the date of the transaction. A period of time equal to one-half or more of a payment period may he considered one full period. The Council may prescribe methods other than the actuarial method, if it determines that the use of such other methods will materially simplify computation while retaining reasonable accuracy as compared with the rate determined under the actuarial method. Where the finance charge is imposed for all balances within a specified range, the annual percentage rate shall be com- puted on the median balance within the range for purposes of this section. (A) A creditor may, in a retail installment transaction, contract for and, if so contracted for, may charge, receive and collect a finance charge at rates not to exceed the following: (1) On so much of the total amount to be financed as does not exceed $500, 20 per centum per annum; (2) On so much of the total amount to be financed as does exceed $500, 16 per centum Pe~~ annum. (B) A creditor may, in an open end credit plan in which a service charge is levied on the opening balance less payments and return credited during the period, contract for, and if so contracted for, may charge, receive and collect a finance charge at rates not to exceed the following: (1) On so much of the total amount to be financed remaining unpaid as does not exceed $500, 1~ per centum per month; (2) On so much of the total amount to be financed remaining unpaid as does exceed $500, 1 per centum per month. (C) A creditor may, in open end credit plans other than those described in subsection (B) of this section, contract for, and if so contracted for, may charge, reserve and collect a finance charge at rates not to exceed the following: PAGENO="0028" 22 (1) On so much of the total amount to be financed remaining unpaid as does not exceed $500, 1~ per centum per month; (2) On so much of the total amount to be financed remaining unpaid as does exceed $500, ~ per centum per month. ADDITIONAL PERMITTED CHARGES SEC. 5. A retail installment contract may provide for the payment by the buyer of- (A) charges or premiums for insurance, to protect from loss the seller or his assignee or any other person entitled. to payment in accordance with the terms of a retail installment contract or any extension or refinancing agreement respecting such contract, of such types, maximum coverage amounts and rates as the Council shall by regulation prescribe; (B) a delinquency charge on each installment in default for a period of not less than fifteen days, in an amount not in excess of 5 per centum of such installment or $5, whichever is less, or, in lieu thereof, interest on each such installment in default at a rate not in excess of 8 per centum per annum. Only one such delinquency charge may be collected on any such installment regardless of the period during which it remains in default; (C) an extension charge not to exceed 1 per centum of each installment for each month from the date when such installment or part thereof would otherwise have been payable to the date when such installment or part thereof is made payable under the extension agreement: Provided, That when any such charge is made, no delinquency charge as provided in sub- section (B) of this section shall be made (unless an installment as extended is not paid by the end of the period beyond the extended due date): And provided further, That the buyer may be charged the additional cost, if any, for such insurance coverage which is provided as permitted by subsection (A) of this section, and is provided in such extension. (D) the payment of a reasonable attorney's fee in an action for the unpaid balance and, upon redemption by the buyer of repossessed goods, reasonable attorney's fees incident to the actual and reasonable costs of repossessing and holding the goods, in either case not to exceed 10 per centum of the un- paid balance, to an attorney not a salaried employee of the seller, assignee, or person suing on his behalf; (E) court costs; and (F) actual and reasonable expenses incurred in realizing on a security interest, following default of the buyer. SPLITTING OR DIVIDING TRANSACTIONS SEC. 6. No seller shall induce or permit any buyer to split up or divide any retail installment transaction for the purposes of contracting for or receiving a higher finance or other charge than would otherwise be permitted by this Act. REMEDIES SEC. 7. In the case of failure by any person to comply with the provisions of this Act, or any of the regulations promulgated by the Council pursuant thereto- (1) such person or his assignee shall be barred from recovery of any finance charge or delinquency, collection, extension, or refinance charge, imposed in connection with the retail installment contract or refinancing agreement; and (2) for each violation, the buyer shall have the right to recover from such person nr any person who acquires such contract with knowledge of such noncompliance, a sum equal to the amount of any finance charge, imposed by the retail installment contract or refinancing agreement, plus 10 per centum of the principal amount of the debt. [S. 2592, 90th Cong., first sess.] A BILL To amend section 521 of the Act approved March 3, 1901, so as to prohibit the enforcement of a secu- rity interest in real property in the District of Columbia except pursuant to court order Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled, That section 521 of the Act approved March 3, 1901 (31 Stat. 1271), as amended (D.C. Code, sec. 45-601), is amended by inserting the PAGENO="0029" 23 subsection designation "(a)" immediately before the first word of such section, and by adding the following: "(h) Notwithstanding any other provision of law and notwithstanding any provision in a mortgage, deed of trust, or other instrument to the contrary, no action to enforce a security interest in any real property in the District of Colum- bia, including but not limited to mortgages and deeds of trust, shall be effective except pursuant to an order issued by the United States District Court of the District of Columbia." U.S. SENATE, COMMITTEE ON THE DISTRICT OF COLUMBIA, Washington, D.C., December 2, 1967. MEMORANDUM FOR MEMBERS OF THE BUSINESS AND COMMERCE SUBCOMMITTEE In re S. 316, to provide for the regulation in the District of Columbia of retail installment sales of consumer; goods (other than motor vehicles) and services, and for other purposes. Dates of hearings: Tuesday, December 5, 1967, 9 am.; Tuesday, December 12, 1967, 10 am.; Wednesday, December 13, 1967, 10 am. S. 316 is similar in purpose to 5. 2589. The objective is to permit the District government to regulate retail installment sales so as to provide the buyer fullest disclosure of contract terms and finance charges. This proposed District of Co- lumbia Retail Installment Sales Act is in part patterned after the Act relating to retail installment sales of motor vehicles, but adapted to the retail sale of consumer goods and services. 5. 316 is identical to 5. 3795, introduced late in the 89th Congress. S. 316 grants specific authority to the District government to regulate- a. insurance requirements; b. size and interval of payments; conditions for cancellation of contracts, prepayment of debts and refunding of unearned charges, repossession of goods, and rights of redemption by the buyer. S. 316 prohibits or modifiesvarious types of contract provisions relating to- a. acceleration of payments; b. balloon payments; c. goods purchased under one contract to be security for other indebted- ness, by providing that the, only collateral shall be the goods covered by that contract; d. waiver of claims or defenses of buyer; e. modifies holder in due course doctrine by requiring promissory notes in retail installment contracts to contain a certificate dated and signed by both buyer and seller stating the contract was performed. Without such certificate the third-party note holder would take the note subject to the same defenses the buyer has against the seller-fraud, forgery, or failure of consideration. S HOWARD A. ABRAHAMS, Assistant Counsel. U S SENATE COMMITTEE ON THE DISTRICT OF COLUMBIA. Washington, D.C. MEMORANDUM FOR MEMBERS OF THE SUBCOMMITTEE ON BUSINESS AND COMMERCE In re S. 2589, To provide for the regulation in the District of Columbia of retail installment sales of consumer goods (other than motor vehicles) and services, and for other purposes. Dates of hearings: Tuesday, December 5, 1967, 9 a.m.; Tuesday, December 12, 1967, 10 a.m.; Wednesday, December 13, 1967, 10 a.m. S. 2589, the "District of Columbia Retail Installment Sales Act", would pro- vide regulation of several aspects of retail installment sales transactions. It would also establish in the District of Columbia government a Department of Consumer Protection, to prOtect consumers against fraudulent or deceptive retail practices. The Department would conduct investigations and hearings, and issue orders to enforce regulations. PAGENO="0030" 24 The bill would require broad and detailed disclosure of terms of consumer credit contracts, including the amount of interest charged, the percentage rates of interest, and payment schedules. S. 2589 would also provide for elimination of the holder in due course doctrine in retail installment sales transactions. This doctrine permits retail sellers to assign their rights to payment under sales contracts to finance companies, with the result that retail purchasers must pay the full price to the finance company even if the seller fails to perform his part of the contract. Under the terms of S. 2589, the buyer could assert his defense against payment to the original seller also against the finance company to which the contract was assigned. S. 2589 also prohibits several specific provisions in installment sales contracts that have been used by some sellers to take advantage of unwary buyers: (1) Acceleration clauses, by which the indebtedness becomes payable other than for a substantial default; (2) Balloon payments, by which an installment, other than the down pay- ment, is not substantially equal to other payments; (3) Confession of judgment clauses; (4~ Agreement not to assert a claim arising out of the sales against the seller or an assignee; (5) Clauses which relieve the seller from liability for legal remedies under the contract or related instrument; (6) Provisions giving the seller or assigi~ee authority to enter the buyer's premises to repossess the collateral; (7) \~Taivers of rights of action for ifiegal acts in collecting payments or repossessing goods; (8) Provisions altering terms of express or implied warranties; (9) Granting power of attorney to anyone acting for the seller to act as agent of the buyer. Another provision of S. 2589 would permit the buyer to pay the last person known to be entitled to payment, unless he receives written notice of actual or intended assignment of his contract. Title VI deals with repossession, redemption, and resale of the goods subject to installment sale contracts. This title permits the seller to sue for deficiency or repossess the goods. This title provides that a secured party may, after repos- sessing the goods, dispose of them "in a commercially reasonable manner", and that, if proceeds of such sale do not cover expenses of repossession, resale, and the balance due, the secured party may not recover a deficiency from the buyer. HOWARD A. ABRAHAMS, Professional Staff Member. U.S. SENATE, COMMITTEE ON THE DISTRICT OF COLUMBIA, Washington, D.C., December 2, 1967. MEMORANDUM FOR MEMBERS OF THE BUSINESS AND COMMERCE SUBCOMMITTEE In re 5. 2590, to provide maximum finance and other charges in connection with retail installment credit sales in the District of Columbia. Dates of hearings: Tuesday, December 5, 1967, 9 a.m.; Tuesday, December 12, 1967, 10 a.m.; Wednesday, December 13, 1967, 10 a.m. The purpose of 5. 2590 is to provide for regulation of finance charges and other- charges imposed in connection withretail installment sales contracts. Presently, District of Columbia law regulates maximum interest rates for loans and automobile credit sales, but there is no regulation of maximum interest rates for consumer credit sales~ generally. 5. 2590 would adopt the same maximum interest rates now imposed by New York and California, and require that interest charges not exceed 20 percent per annum for the first $500 and 16 percent per annum for all debt above that amount Revolving charge account agreements are limited in that service charges cannot exceed 1~4 percent per month On unpaid balances not exceeding $500, nor 1 per- cent per month on unpaid balances exceeding $500. Also, S. 2590 provides for regulation of credit insurance charges and other charges which are often imposed as disguised forms of interest to avoid maximum statutory interest rates. HOWARD A. ABRAHAMS, Assistant Counsel. PAGENO="0031" 25 U.S. SENATE, COMMITTEE ON THE DISTRICT OF COLUMBIA, December 1, 1967. MEMORANDUM FOR MEMBERS OF THE BUSINESS AND COMMERCE SUBCOMMITTEE In re S. 2592, to amend section 521 of the act approved March 3, 1901, so as to prohibit the enforcement of a security interest in real property in the District of Columbia except pursuant to court order. Dates of hearings: Tuesday, December 5, 1967, 9 a.m.; Tuesday, December 12, 1967, 10 am.; Wednesday, December 13, 1967, 10 a.m. The purpose of 5. 2592 is to provide that security interests in real property, such as deeds of trust, can be foreclosed only through court action. This bill will protect consumers from the practice of mortgaging homes as security for credit purchases, with automatic forfeiture in case of failure to meet credit payments. This bill would prohibit automatic foreclosures, and would require any fore- closure to take place through regular court proceedings where the homeowner has an opportunity to protect himself. HOWARD A. ABRAHAMS, Assistant Counsel. THE METROPOLITAN WASHINGTON BOARD OF TRADE, Washington, D.C., January 30, 1967. COMMITTEE ON THE DISTRICT OF COLUMBIA, U.S. Senate, Washington, D.C. DEAR SENATOR: Please be advised that we favor enactment of 5. 316, a bill to provide for the regulation in the District of Columbia of retail installment sales of consumer goods (other than motor vehicles) and services and for other purposes. We worked with the Corporation Counsel in the drafting of this bill for more than a year, and we feel that it is a sound proposal. Sincerely, WILLIAM H. PRESS. THE BAR ASSOCIATION OF THE DISTRICT OF COLUMBIA, Washington, D.C., November 14, 1967. Re S. 316, proposed District of Columbia Retail Installment Sales Act. Hon. ALAN BIBLE, Chairman, Committee on the District of Columbia, U.S. Senate, Washington, D.C. DEAR SENATOR BIBLE: I am pleased to transmit to you the attached report of the Bar Association of the District of Columbia recommending certain changes in the above-mentioned Bill, and supporting its enactment as so amended. Study of S. 316 was completed by the Association before receipt of the Com- mittee's letters of November 1, transmitting copies of S~ 2589, S. 2590, 5. 2591, and 5. 2592, which were introduced by Senator Tydings on October 26. We shall expedite our study of these more recent Bills relating to credit, and shall report to you in the event that the Bar Association adopts a position with respect to them. Sincerely yours, JOHN E. POWELL, President. REPORT OF THE BAR ASSOCIATION OF THE DISTRICT OF COLUMBIA ON 5. 316, 90TH CONGRESS, FIRST SESSION, THE PROPOSED DISTRICT OF COLUMBIA RETAIL INSTALLMENT SALES ACT (Prepared by the Uniform Commercial Code Subcommittee of the Commercial and Business Law Committee) I. DESCRIPTION OF THE BILL (a) Background.-In its opinion in Williams v. Walker-Thomas Furniture Co., 198 A. 2d 914 (1964), the District of Columbia Court of Appeals strongly urged enactment of legislation similar to the Maryland Retail Installment Sales Act PAGENO="0032" 26 "to protect the public from such exploitative contracts" as it found the retail installment contracts in that case to be.2 Thereupon, the District of Columbia Commissioners directed the Corporation Counsel of the District of Columbia to draft legislation. The Corporation Counsel organized a drafting committee, on which were representatives of! Metropolitan Washington Board of Trade. District of Columbia Bar Association. National Business League. Better Business Bureau of Metropolitan Washington. `~\Tashington Urban League. United Planning Organization. Neighborhood Legal Services Project. Community Relations Committee of the Jewish Community Council. And others. The bill has resulted from extensive deliberations of these participants over a period of nearly two years. WTe are informed that a number of the provisions of the bill represent compromises among the participants, but that there is general agreement among them that the bill will effectively deal with the most serious problems arising in connection with retail installment sales and revolving charge- account sales, without being so oppressive as to drive legitimate businessmen out of the field. (b) Context.-The bill is in part patterned somewhat after the Act relating to retail installment sales of motor vehicles in the District of Columbia. (D.C. Code, §~ 40-901 through 910), but is adapted to be applicable to the retail sale o consumer goods (other than motor vehicles) and services. The bill is also quite similar to the Maryland Retail Installment Sales Act. (Maryland Code, §~ 83-128 through 153), and to legislation in many other states, although it is broader in coverage than most such Acts.2 Consumer protection is-its goal, and disclosure is its primary method. Possibly, other types of legislation might more surely protect consumers from their own folly, but only at the cost of such unacceptable regimentation as price control or prohibitions upon categories of persons from buying categories of goods. Thus, this bill will not flatly prohibit a person living on welfare from buying "on time" a combination hi-fi-TV set costing $500.00. But it is designed to ensure that installment-purchase consumers - have some information about what they are buying, the terms of payment, and the costs of deferred payment; and its prohibitions against balloon-installment clauses (providing for a final monthly payment which is substantially larger than the prior monthly payments), before- or after-acquired property clauses (providing that property other than that which is the subject of the sale shall become security for payment of the sale price) and other provisions may discourage installment sellers from making such sales to such persons. So far as known, no comprehensive study of the effectiveness of retail install- ment sales acts as consumer protection measures has been undertaken, but the fact that forty-five jurisdictions in the United States have adopted such acts (including the District of Columbia as to motor vehicles) would seem to be some indication that they have value. A proposed Uniform Retail Installment Sales Act is now under consideration by the ALT-ABA Commissioners on Uniform State Laws, but it is likely to be several years, we are told, before this proposal achieves its final form, and it includes a Small Loan Law in addition to retail installment sales regulation. Thus, it would not be appropriate to recommend deferring action on the instant bill pending consideration of the Uniform Act. (c) Provisions.-(i) Coverage.-The bill covers retail sales of both consumer goods and services, if the price is to be paid in one or more deferred installments, regardless of whether or not there is any extra cost or finance charge involved, and regardless of whether or not the seller retains any lien on or interest in the goods or services. Sec. 2(3) and 2(7). (The sole exception to this broad coverage is charge-account type sales in which the price is to be paid in full in 90 days or 1 The United States Court of Appeals remanded the case to the trial court because of possible legal un- conscionability of the contracts involved in the case. 350 F. 2d 445 (1065). 2 Virginia's statute is much less detailed. See Virginia Code, §1 46.1-454 through 548. For a list of the forty- five jurisdictions which have retail installment sales acts see Footnote 2, p. 2072, in Wililam E. Hogan, "The Code and State Retail Installment Sales Legislation," in Coogan et al., Secured Transactions Tinder the Uni- form Commercial Code (1066). The Federal Trade Commission has recently proposed "Guides Relating to Retail Credit Transactions" along the same lines. PAGENO="0033" 27 less and in which there is no service charge.) See. 2(7). Thus, the bill covers re- volving charge-account transactions (Sec. 2(9)), as well as all other retail install- inent sales of consumer goods and services entered into in the District of Colum- bia (except sales of motor vehicles, which are covered by D.C. Code, §~ 40-901 through 910). Sec. 2(6) and 2(3). The bill does not cover wholesale transactions, nor does it cover non-consumer goods such as goods required for commercial or business use. (ii) Enabling and disclosure type act-In the main, the bill is in the form of an enabling act, authorizing the D.C. Commissioners to make detailed regulations relating to installment sales of consumer goods and services. See § 4(a). In turn, the contemplated regulations would he generally of the disclosure type, requiring sellers to make full disclosure to buyers. See, e.g. §~ 4(a)(1) through (3). The regulations may include provisions, among others, (1) requiring a detailed descrip- tion of the goods or services being sold (~ 6); (2) requiring notice to the buyer of his rights (such as the rights of redemption and of prepayment with partial refund of finance charge) (~ 4(a) (1), (8) and (10)); (3) requiring itemization of finance or service charges, insurance premiums, delinquency charges, filing fees, etc. (~ 4(a)(2)); (4) specifying and/or limiting the types and maximum amounts of insurance (e.g., life, accident and health, casualty, etc.) which may be required at the expense of the buyer (~ 4(a)(4)); (5) requiring that payments be in sub- stantially equal amounts and at regular intervals (~ 4(a) (6)); (6) requiring that the buyer be given a fully executed copy of the contract, with all blank spaces filled in, at the time he signs it (~ 4(a)(1)); and (7) respecting the manner and methods of repossession and foreclosure sale of consumer goods (~ 4(a)(10)). (iii) Provisions supplementing or superseding the Uniform Commercial Code.- Sections 5 through 12 of the bill supplement or supersede certain provisions of the U.C.C., as respects retail installment sales. Section 5 limits the circumstances under which acceleration of obligations is permitted. The U.C.C. permits acceleration when the obligee in good faith believes that the prospect of repayment is impaired. D.C. Code, §28:1-208. Section 5 as now worded would permit acceleration only when- 1. The buyer has failed to make a payment or has otherwise defaulted in performance under the particular contract; 2. The buyer is evading service of process; 3. The buyer has removed or is about to remove his property from the District of Columbia, so as to defeat just demands against him; 4. The buyer has assigned, conveyed, disposed of or secreted his property, or is about to do so, with intent to hinder, delay or defraud his creditors; or 5. The buyer fraudulently contracted the debt. We recommend that Section 5 be amended so as to broaden somewhat the cir- cumstances under which acceleration is permitted, to allow acceleration in the event of bankruptcy or the commission of an act of bankruptcy. See our Recom- mendation (c) below, pp. 12-13. Section 6 authorizes the making of regulations by the D.C. Commissioners to require a more detailed description of goods or services than is required by the Ti.C.C., so as to facilitate the buyer's establishing that the goods or services he received were not those lie contracted to buy, if such should be the case. Section 7 inserts into the District of Columbia TJ.C.C. a general statement that in case of conflict between its provisions and those of the proposed Retail Install- ment Sales Act, the provisions of the Retail Installment Sales Act shall control. Section 8 provides that consumer goods which are the subject of a retail install- ment contract shall serve as security only for the obligation arising out of the sale of such goods and related collection and default charges, thus prohibiting before-- or after-acquired property clauses. Section 9 prohibits the cutting off of defenses as against a holder in due course or assignee, unless a certificate (in a form to be prescribed by the D.C. Com- missioners) has been signed by the buyer stating that he has received the goods and they appear to be the goods which he purchased (or, in the case of services, that the services have been completely performed). Section 10 requires that the buyer be given a written receipt for every payment made in cash and, upon his written request, a written statement of his account without charge not oftener than once every six months, and otherwise at a charge of one dollar. Section 11 provides that if the expenses of repossession and foreclosure exceed the proceeds of the foreclosure sale, the debtor shall not be liable for the resulting 88-648-68----3 PAGENO="0034" 28 deficiency. This section protects the debtor against owing more after foreclosure than before. Otherwise the debtor's liability for deficiency is preserved. Section 12 provides for recovery of attorneys' fees by the prevailing party in action by the buyer under § 28:9-507(1) for the secured party's failure to comply with the procedures outlined in the T5.C.C. relating generally to repossession and foreclosure. (iv) Other provisions-Other sections provide for: (1) power to delegate and redelegate most of the D.C. Commissioners' functions (~ 13); (2) criminal and civil penalties ($500.00 fine and/or six months imprisonment; loss of service and other charges other than the cash price and insurance-fl 16 and 17); (3) public hearings on any proposed regulations (~ 14); (4) separability (~ 19); and (5) effec- tive date (§ 20). II. RECOMMENDATIONS Since we believe that the bill will protect the public from certain unconscionable or undesirable merchandising practices of a few merchants, without imposing an impossible burden upon the reputable, vast majority of merchants, the Bar Asso- ciation recommends passage of the bill, as amended in the following four respects (which we believe are rather minor, procedural and technical and would not affect the general substance of the bilil): (a) Ninety-day delay in effective date of regulations.-Section 14 of the bill should be amended so as to provide for at least a ninety-day delay in the effective date of any regulations promulgated under the bill after their promulgation. [The purpose of this recommendation is to ensure that merchants will have adequate time to draft and prepare forms (such as retail installment contract forms and revolving charge-account agreement forms) which will comply with such regulations as may be promulgated.] [Such an amendment might be effected by the addition of language at the end of Section 14 as set forth and italicized below: "SEC. 14. No regulation shall be adopted by the Commissioners under the authority of this Act until after a public hearing has been held thereon [1]; and no such regulation shall take effect until at least ninety days after its adoption and promulgation."] (b) Narrowing somewhat the broad delegation of authority-The broad language authorizing regulations "appropriate to carry out the purposes of this Act" should be narrowed to a more specific authorization, as set forth and italicized below (with material to be deleted shown in brackets): SEC. 4. (a) The Commissioners are hereby authorized to make and enforce such regulations as they deem appropriate, insofar as such regulations are consistent with the provisions of this Act, (to carry out the purposes of this Act and] to prevent unconscionable practices in connection with retail installment transactions, including, but not limited to, regulations containing defininitions, whether or not used in this Act. [, insofar as such definitions are not inconsistent with the pro- visions of this Act.] Such regulations may include (, without limitation,] provi- sions- . . ." [The purpose of this recommendation is to provide some limitation on the subject matter and scope of the regulations which may be adopted, while leaving the Commissioners full freedom to adopt regulations consistent with the provisions of the Act. This may serve to remove any doubts as to the constitutionality of a more open-ended delegation of authority, and also to quell fears which might otherwise possibly arise concerning what regulations the Commissioners may conceivably adopt.] (c) Permitting acceleration of obligations in event of bankruptcy or commission of an act of bankruptcy-Section 5 of the bifi should be amended so as to expand the situations in which acceleration of obligations is permitted, to allow acceleration in the event of bankruptcy or the commission of an act of bankruptcy. [The purpose of this recommendation is to provide protection for sellers and their assignees when a debtor, although he has not yet defaulted in payment of the particular obligation involved, yet has so acted as to render the propsect of full payment over a future period quite doubtful. Acceleration upon bankruptcy will aid the seller in obtaining a full pro rata share of the assets which have been turned over to the bankruptcy court, and will not adversely affect the debtor in any way. Acceleration upon commission of an act of bankruptcy will permit acceleration if the debtor: (i) conceals or removes or permits to be concealed or removed any part of his property, with intent to hinder, delay, or defraud his creditors or any of them, PAGENO="0035" 29 or makes or suffers a fraudulent transfer (as defined in § § 67 or 70 of the bank- ruptcy act) of any of his property: (ii) makes or suffers a preferential transfer, while insolvent, as defined in § 60a of the bankruptcy act; (iii) suffers or permits, while insolvent, any creditor to obtain a lien upon any of his property through legal proceedings or distraint and does not vacate or discharge such lien within thirty days from the date thereof or at least five days before the date set for any sale or other disposition of such property; (iv) makes a general assignment for the benefit of creditors; (v) while insolvent or unable to pay his debts as they mature, procures, per- mits or suffers voluntarily or involuntarily the appointment of a receiver or trustee to take charge of his property; or (vi) admits in writing his inability to pay his debts and his willingness to be adjudged bankrupt. Federal Bankruptcy Act, § 3, 11 [J.S.C. § 21.] [Such an amendment might be effected by the addition of language at the end of Section 5 as set forth and italicized below: "SEC. 5. Notwithstanding section 28:1-208 of the District of Columbia Code, payments owed under a retail installment contract or revolvingc hargeaccount- agreement may only be accelerated in the case of a default in payment or per- formance by the buyer, or on the same grounds as would authorize an attachment before judgment under paragraphs (2) through (5) subsection (d) of section 16-501 of the District of Columbia Code [.], or in case of adjudication of bank- ruptcy of or commission of an act of bankruptcy by the buyer."] (d) Providing a civil penalty correlative to the criminal penalty for violation of regulations under the bill.-Section 17 of the bill should be amended as set forth and italicized below: "SEC. 17. In case of failure by a seller to comply with the provisions of this Act, or of any regulation promulgated by the Commissioners under the authority of this Act, except as a result of an inadvertent or bona fide error, such seller shall be barred from recovery of any service charge or of any delinquency, col- lection, extension, deferral, or refinance charge . [The purpose of this recommendation is to provide a civil penalty against the seller for violation of regulations promulgated under the bill, as well as for violation of the bill itself, and thus to correct the anomalous discrepancy between the civil sanction provisions of Section 17 and the criminal sanction provisions of Section 16, under which willful violation of a regulation promulgated under the bill could result in fine and/or imprisonment.] DECEMBER 4, 1967. Hon. ALAN BIBLE, Chairman, Committee on the District of Columbia, U.S. Senate, Washington, D.C. DEAR SENATOR BIBLE: I have for report S. 316, 90th Congress, a bill "To pro- vide for the regulation in the District of Columbia of retail installment sales of consumer goods (other than motor vehicles) and services, and for other purposes." My predecessors in office, the Board of Commissioners, took notice of the case of Ora Lee Williams v. Walker-Thomas Furniture Company (198 A.2d 914), decided on i\'Iarch 30, 1964, by the District of Columbia Court of Appeals, involving a relief recipient who had entered into a series of installment contracts with a local merchant. Each of the contracts provided, in fine print, that the payments on such contracts were to be prorated on all purchases made thereunder, and that no title was to vest in the purchaser until all of the contracts were paid in full. The purchaser defaulted on the last few payments under the last of these contracts, and the seller of the goods repossessed all of the items purchased under all of the contracts. The District of Columbia Court of Appeals, in affirming the judgment for the seller in a replevin action against the buyer of the personal property, after commenting on the seller's full knowledge of the financial situation of the buyer (a relief recipient who had to house, feed, and clothe herself and her seven children on a welfare payment of $218 per month), made the following statement: "We cannot condemn too strongly appellee's conduct. It raises serious questions of sharp practice and irresponsible business dealings. A review of the legislation in the District of Columbia affecting retail sales and the pertinent decisions of the highest court in this jurisdiction disclose, however, no ground upon which this court can declare the contracts in question contrary to public policy. We note that were the Maryland Retail Installment Sales Act, Art. 83, Sees. 128-153, or its PAGENO="0036" 30 equivalent, in force in the District of Columbia, we could grant appellant ap- propriate relief. `We think Congress should consider corrective legislation to protect the public from such exploitive contracts as were utilized in the case at bar." 1 When the foregoing statement by the District of Columbia Court of Appeals `came to the attention of the Board of Commissioners, they directed the Corpora- `tion Counsel to take appropriate action to draft legislation to deal with the problem. The Corporation Counsel proceeded to organize a drafting committee consisting of representatives of the following organizations: Metropolitan Washington Board of Trade. Bar Association of the District of Columbia. `Washington Bar Association. National Business League. Better Business Bureau of Metropolitan Washington. The foregoing soon were joined by representatives of the Washington `Urban League, the United Planning Organization, Neighborhood Legal Services Project, the Community Relations Committee of the Jewish Community Council, and numbers of other persons representing various groups and organizations, many of whom joined together to form an Ad Hoc Committee for Consumer Protection. The bill which resulted from the extensive deliberations of these participants over a period of nearly two years can he said to represent the thinking of a very broad cross section of the community. S. 316 is identical to the bill formulated by these participants. A number of the provisions represent compromises between those participating in the preparation of the bill, and, while it is not unanimously ap- proved by its drafters, nevertheless there is general agreement among them that the bill will effectively deal with the most serious problems arising in connection with the sale cf consumer goods and services on the installment basis or under a revolving charge account agreement. S. 316 would provide essentially "disclosure-type" legislation; that is, it would enable tile District of Columbia Council (as drafted the bill contains references to the Commissioners, which should be amended to reflect the newly reorganized city government) to make regulations requiring sellers under retail installment con- tracts to make full disclosure to the buyers of all of the terms of any such contract. To this extent, the proposed legislation is designed to permit the buyer to protect himself against unconscionable business practices by requiring that he have all the facts placed before him by the seller. The bill does, however, require certain actions and prohibits still other actions for the purpose of affording to a buyer protection against practices which may operate to his detriment. The bill provides specific authority for the regulation of insurance requirements relating to retail installment transactions; the size and interval of installment payments; conditions that may be imposed with regard to cancellation of con- tracts, prepayrnents of debts and refunding of unearned credit charges; and the repossession of goods and rights of redemption to be afforded the buyer. Further, the bill specifically prohibits or modifies certain types of contract pro- visions. It prohibits clauses allowing acceleration of payments, and the so-called "balloon installment"; it forbids clauses that would provide that goods purchased under one contract to be security for other indebtedness arising out of other con- tracts and clauses that would waive the buyer's claims or defenses that he may have against an assignee. One of the bill's most significant features is the manner in which it modifies the doctrine of holder in due course. These provisions, contained in section 9 of the bill, state that no claim or defense which would be cut off by negotiation is to be cut off by a provision in the contract or by transfer or negotiation to any third person of the contract or of a related promissory note unless such contract or note is accompanied by a certificate. This certificate must be signed by both the buyer and the seller or their respective representatives, stating that the consumer goods have been delivered to and received by the buyer or his representatives and appear to be those consumer goods which were purchased. If the contract is one for serv- ices, such certificate must state that they have been completely performed in accordance with the terms of the contract. This section also provides that if a note be taken by the seller under a retail installment contract, such note shall refer to the contract, "and no subsequent holder shall be entitled to hold such note as a holder in due course unless the note or the contract out of which the note arose is accompanied by the ftequired] certificate". Thus, a holder of a note `The United States Court of Appeals. in Ore Lee Williams v. Walker-The inas Furniture compang, decided August 11, 1965 (No. 18604). remanded tile case to the trial court for further proceedings, with particular reference to the poesthie unconscionability of the contracts involved in the case. PAGENO="0037" 31 arising out of a retail installment contract is put on notice of that fact, and is not considered to be a holder in due course unless such contract is accompanied by the executed certificate indicating that the goods have been delivered or the serv- ices have been performed in accordance with the terms of such contract. Section 9 further provides, however, that the execution of such certificate by the buyer does not estop him from asserting against the seller such defenses as the buyer may have against the seller. This would be in addition to any real defenses the buyer may have against the seller or any subsequent holder-those defenses which exist when a negotiable instrument lacks legal efficacy in its inception, as, for example, where there was forgery, where there was fraud in the execution, or where there was an illegality which makes the security void, as opposed to voidable. The need for additional consumer protection legislation in the District of Columbia is a fact that can no longer be seriously questioned by anyone. The minimum needs are those that would permit the regulation of installment transac- tions and revoliving charge account agreements to provide fullest disclosure to consumers. The prohibitions and modifications of contract clauses covered by this bill are also minimum requirements. Accordingly, I endorse S. 316, which, as far as it goes, will in large measure deal adequately with many of the abuses all too frequently occurring in retail installment transactions. However, I also endorse, with certain reservations, a broader measure, introduced as 5. 2589, with respect to which I am submitting today a separate report. I strongly recommend that effective consumer protection legislation covering retail installment contracts and revolving charge accounts be enacted for the benefit of the people of this city. As for the form such legislation should take, I feel that both 5. 316 and 5. 2589 have much to commend them. I am of the view that 5. 316 is preferable to 5. 2589 insofar as it places greater reliance on the District of Columbia Council for the promulgation of regulations necessary for the protection of consumers. On the other hand, 5. 2589 is broader in scope and provides excellent guidelines for dealing with the problems involved. It does not, however, provide for as much Council action as does 5. 316, and thus is lacking the flexibility thatwould be provided by general enabling legislation. In summary of the two hills, I am inclined to prefer S. 2589, particularly if it could he amended to provide for more involvement in the part of the Council in establishing the necessary regulatory controls for consumer protection. Sincerely yours, WALTER E. WASHINGTON, Commissioner of the District of Columbia. * DECEMBER 4, 1967. Hon. ALAN BIBLE, Chairman, Committee on the District of Columbia, U.S. Senate, Washington, D.C. DEAR SENATOR BIBLE: I have for report S. 2589, 90th Congress, a bill "To provide for the regulation in the District of Columbia of retail installment sales of consumer goods (other than motor vehicles) and services, and for other purposes." The purpose of the bill is stated in the first section as follows: "(1) to regulate retail installment sales of consumer goods (other than motor vehicles) and services and to safeguard consumers from unfair, uncon- scionable, or fraudulent advertsing, sales, credit, and collection practices; "(2) to permit and encourage the development of fair and economically sound consumer credit practices; "(3) to further consumer understanding through disclosure of the terms of retail installment transactions and to promote and enhance competition among retail sellers of consumer goods and services; and "(4) to promote and develop programs for the education of retail credit consumers." The means employed by the bill to achieve these purposes is through the authorization of regulatory controls to be adopted by the District of Columbia Council; specific statutory provisions governing content, form, and prohibited clauses relating to retail installment contracts; and the establishment in the District Government of a Department of Consumer Protection to enforce and administer the Act. PAGENO="0038" 32 Exempt from the provisions of the bill are retail installment sales for the purchase of automobiles which are regulated under existing law (D. C. Code, Sec. 40-901 et seq.), and retail transactions in which payments may he deferred without charge to the buyer for up to 90 days. The first title of the bill contains general provisions and definitions. Title II authorizes the Council to make and provide for the enforcement of regulations to safeguard consumers from unfair and unconscionable advertising, sales, credit, and collection practices in connection with retail installment transactions. Such regulations may include matters relating to the execution, form, and delivery of contracts; forms for disclosure of contract terms and methods in determining annual percentage rates; and notices and methods of sales or manner of disposition of repossessed goods. Title III relates to provisions required or prohibited in retail installment contracts. It requires specific, detailed forms, and information designed to provide the consumer with fullest disclosure of the contract terms and the finance charges he is agreeing to pay. Similarly, disclosure requirements are detailed with respect to revolving charge accounts (referred to in the bill as open-end credit agree- ments"). The title requires that a readable and completed copy of the contract be furnished the buyer; it prohibits any seller of assignee from taking or receiving any retail installment contract signed by a buyer in blank or prior to the time all information and terms required to be disclosed have been set forth in the body of the contract and the buyer has been given an opportunity to read it. Title IV contains certain restrictions on retail installment contracts, the most noteworthy of which is the provision rendering void any negotiable instrument made in connection with a retail installment transaction which would cut off a buyer's defenses against a holder in due course. The title also specifically prohibits the following types of contract clauses: (a) acceleration of payment absent default by the buyer if the seller believes himself insecure in obtaining payment; (b) unequal payments or the so-called "balloon payment"; (c) confession of judgment; (d) waiver by the buyer of defenses against an assignee; (e) releasing the seller from certain liabilities relating to legal remedies the buyer may have; (f) authorizing the seller to enter the buyer's premises for purpose of repossession the goods; (g) waiver by the buyer of his right of action against the seller or his representative for illegal acts committed in the collection of payments or the repossession of goods; (h) modifying the terms of expressed or implied warranties; and (i) executing a power of attorney to the seller for the purpose of collecting payments or repossession of the goods. The title also contains a provision which requires that consumer goods subject to a retail installment contract shall serve as security only for the obligation arising out of that contract and no other. This provision is designed to eliminate the evil that can arise in some cases when a default under one contract may lead to the repossession of goods which the buyer has purchased and completely paid for under other contracts. Title V of the bill, relating to payments, requires that clear and specific finance charge information be shown in the contract; that receipts and statements of account be furnished the buyer; that extensions of agreements and refinancing agreements be in writing; and that releases be given the buyer upon completion of his payments. Title VI, dealing with repossession of goods, generally provides close controls over repossession actions. It provides that the buyer in default shall be given a two-week advance notice by the seller contemplating repossession action and allows the buyer rights of redemption. In addition, the title requires the seller to elect whether to repossess the goods in the event of default and forego an action for a deficiency judgment; or, forego the repossession of the goods and bring an action for the unpaid balance. The provision is based on the recognition of the rapid depreciation of consumer goods which give small return on resale following re- possession. Private remedies are provided consumers under Title VII of the bill. The remedies are in addition to any other remedies the buyer may have under law, including action for damages or for conversion. The administration and enforce- ment of the provisions of the bill are covered in Title VIII. which provides for the PAGENO="0039" 33 creation within the District of Columbia Government of a Department of Con- sumer Protection, including a Consumer Information Service, to be under the general supervision of the Commissioner. The bill, in my view, if enacted, would offer the consumers of the District of Columbia a wide measure of protection and would eliminate to a far-reaching ex- tent the exploitative practices now being employed by those relatively few business concerns which use deceptive, unfair, and unconscionable business practices. The reservations that I have with respect to the bill relate to the provisions affecting the holder in due course doctrine and the establishment in the District Government of a department-level agency for consumer protection. With respect to the provisions affecting the holder in due course concept, I am uncertain at this time whether these provisions of the bill, which may seriously affect the negotia- bility of commercial instruments, present the best approach to meeting the prob- lems faced by consumers and yet at the same time allowing for the normal conduct of business and financial affairs. In this regard, I would be pleased to supplement this report to deal more specifically with my position respecting the holder in due course provisions, particularly since I expect to benefit from the views and testi- mony of some of the witnesses who are expected to appear before the Subcommittee on Business and Commerce in the course of scheduled hearings on the~bill. With regard to the provision establishing a new department for consumer protection, I recommend that a general authorization for such a department be provided with the broad authority now granted under the terms of the bill. This would allow flexibility in organizing such agency as experience may indicate is needed. I strongly recommend that effective consumer protection legislation covering retail installment contracts and revolving charge accounts be enacted for the benefit of the people of this city. Sincerely yours, WALTER E. WASHINGTON, Commissioner of the District of Columbia. DECEMBER 4, 1967. Hon. ALAN BIBLE, Chairman, Committee on the District of Columbia, U.S. Senate, Washington, D.C. DEAR SENATOR BIBLE: I have for report S. 2590, 90th Congress, a bill "To provide maximum finance and other charges in connection with retail installment credit sales in the District of Columbia." The purpose of the bill generally is to establish maximum limitations on the amount of credit charges that may be made in retail installment sales and re- volving charge accounts. The first section provides that the Act may be cited as the "District of Colum- bia Retail Installment Sales Finance Charges Act." Section 2 of the bill contains definitions. Inclusive charges permitted in retail installment transactions regard- ing consumer goods are detailed in section 3. These include, beside the permissible maximum finance charges provided under the bill, charges for delivery, installa- tion, repair or other services which are not connected to any credit charge; charges for official fees, taxes, and insurance specifically excluded as a finance charge under the provisions of the bill; and certain other charges relating to premiums, exten- sion, and delinquency fees, attorney's fees, court costs, and expenses incurred to realize a security interest following a default. Maximum finance charges permitted under the bill are specified in section 4, and the section provides that "No finance charge shall be taken, received, re- served, agreed upon, or contracted for in excess of the maximum rates set forth in this section." The District of Columbia Council is given the authority to make rules, regulations, and instructions for the computation of such rates, in addition to other provisions contained in the bill regarding the calculation of rates. With respect to the maximum amounts allowed in retail installment trans- actions, the finance charge may not exceed the following: (a) for financing a total amount not exceeding $500, 20 percent annually; (b) for financing an amount exceeding $500, 16 percent annually. With respect to revolving charge accounts, referred to in the bill as "open end credit plans", section 4 provides the following maximums: (a) in the case of plans in which the service charge is made on the opening balance less payments and re- turns credited during the period, 1~ percent per month on amounts unpaid up to PAGENO="0040" 34 $500, and 1 percent per month on amounts unpaid above S500; and (b) in the case of all other plans, 13j percent per month on accounts unpaid up to $500, and ~ percent per month on accounts unpaid above $500. Section 5 permits retail installment contracts to provide for the payment by the buyer of charge or premiums for credit insurance, delinquency charges, ex- tension charges, reasonable attorney's fees, court costs, and actual and reasonable expenses incurred in realizing on a security interest following default of the buyer. This section, among other things, permits a retail installment contract to provide for the payment by the buyer of charges or premiums for credit insurance of such types, maximum coverage amounts, and rates as the District of Columbia Council may by regulation prescribe. This section does not, however, specifically state in clear terms the authority of the Council to establish maximum rates for premiums or charges for such insurance. It is my view that such clear authority should be included in the bill, by inserting before "rates" in line 19 on page 9 the word "maximum". Section 6 prohibits splitting or dividing retail installment transactions for the purpose of circumventing the limitations on finance charges, and section 7 con- tains remedies for buyers in the case of failure of the seller to comply with the provisions of the bill. An important feature of the bill is that it would impose maximum finance charges on those persons who engage in such business practices as inflating the cash price of items to absorb hidden finance charges in the so-called "easy credit" arrangements. Under the terms of the bill, the finance charge means the amount by which the price exceeds the cash price offered retail cash buyers in the ordinary course of business. The inflated price would then be governed by the maximum finance charges allowed under the bill. Maximum finance charges are needed where exploitation of retail installment buyers is most gross. I am of the view that in general the business community in this city is charging reasonable fees for the extension of credit. I do not believe, however, that at present a valid judgment can he made by me with respect to the reasonableness of the limitations imposed by the bill. There is need for further study with respect to profit and cost factors relating to credit charges in retail installment transactions and revolving charge accounts in the District of Columbia. Accordingly, I request the indulgence of the ConI- mittee to permit me to supplement this report at a later date. Sincerely yours, WALTER E. WASHINGTON, Commissioner of the District of Columbia. DECEMBER 4, 1967. Hon. ALAN BIBLE, Chairman, Committee on the District of Columbia, U.S. Senate, Washington, D.C. DEAR SENATOR BIBLE: I have for report S. 2592, 90th Congress, a bill "To amend section 521 of the Act approved March 3, 1901, so as to prohibit the enforce- ment of a security interest in real property in the District of Columbia except pursuant to court order." The purpose of the bill is to add a new subsection to section 521 of the Act approved March 3, 1901 (31 Stat, 1271), as amended (D. C. Code, sec. 45-601), to read as follows: "(b) Notwithstanding any other provision of law and notwithstanding any provision in a mortgage, deed of trust, or other instrument to the contrary, no action to enforce a security interest in any real property in the District of Colum- bia, including but not limited to mortgages and deeds of trust, shall be effective except pursuant to an order issued by the United States District Court of the District of Columbia." The general intent of this amendment. is to require court action before any foreclosure can be made with respect to a mortgage or deed of trust securing an interest in real property. The need for this legislation has been shown to arise in cases in which unwary homeowners are induced to enter into agreements for installment or credit pur- chases or services and then sign deeds of trust to secure the transaction. Subsequently, upon default, foreclosure is instituted under the deed of trust. PAGENO="0041" 35 This does not require any court action by the trustees and the homeowner may find, too late, that he has unwittingly been victimized in the loss of his home. The amendment made by this bill would eliminate automatic foreclosure under deeds of trust and require court proceedings before any such foreclosure could be perfected. In this way, the homeowner would be given an opportunity to attempt to save his property. Requiring a judge of the United States District Court for the District of Colum-. bia first to issue an order before foreclosure can be completed would, in my view, provide an important safeguard in the protection of District residents. It is an amendment of existing law that does not appear to be burdensome. The value that it would afford the community in protecting the equity of owners of real property would be highly beneficial. This is a valuable piece of legislation and I strongly urge its enactment. Sincerely yours, WALTER E. WASHINGTON, Commissioner of the District of Colnmbia. DIsTRIcT OF COLUMBIA SAVINGS & LOAN LEAGUE, Washington, D.C., November 30, 1967. Hon. JOSEPH D. TYDINGS, U.S. Senate, Washington, D.C. DEAR SENATOR TYDINGS: This is in reference to S. 2592, a Bill which you introduced in the United States Senate on October 26, 1967 and which was referred to the Senate Committee on the District of Columbia. The purpose of this Bill seems to be to prevent foreclosure sales without first obtaining an order of the U.S. District Court for the District of Columbia when the security property is located in the District of Columbia. The District of Columbia Savings & Loan League, Inc., representing the 23 savings and loan institutions in the District of Columbia and seven in the two 1\'laryland counties of this metropolitan area, voted unanimously at its regular monthly meeting held November 28 to oppose this Bill. The Bill does not prescribe any procedure for obtaining the court order and is silent as to whether or not the court would retain jurisdiction after the sale is authorized. We believe it is designed to control the apparent sharp practices of some home improvements people who take second trusts to secure the payment of money due for home improvements. If this is the purpose, other measures would be more appropriate for certainly there is no reason to penalize the legitimate borrower or the legitimate financial institution. Since obligors have an adequate remedy by seeking injunctive relief in the U.S. District Court, in an appropriate case of threatened foreclosure there would not seem to be any need for legislation on the subject. In addition, the cost of foreclosure would be substantially increased if this Bill were to be enacted with the cost borne by the obligor. Also, the time period would be broadened substantially. Because of the in- definiteness of the proposal, it could be assumed that the court would treat such a procedure as an ordinary civil action, requiring service of process, time for answer, a hearing, and other procedural steps, resulting in delays of up to probably six months if there is no objection and quite possibly up to three years if contested. The District of Columbia Savings & Loan League believes no action should be taken on this Bill until the Commission on Uniform State Laws reports out a model consumer credit bill which we understand will be sometime in early 1968. Sincerely, BRUCE BRYAN. Senator TYDINGS. We are delighted at this time to recognize as our first witness the distinguished new Mayor of the city of Washington, the Honorable Walter E. Washington. I understand, Mr. Washington, that you have a prepared statement. We would appreciate it if you would present it. PAGENO="0042" 36 STATEMENT OF HON. WALTER E. WASHINGTON, COMMISSIONER OF THE DISTRICT OF COLUMBIA Mr. WASHINGTON. Thank you very much, Mr. Chairman, for this opportunity. The citizens of the District of Columbia and all of the Nation owe you a debt of gratitude for the leadership which you have displayed in the area of consumer protection, and your opening state- ment indicates that there are a number of problems which we need to address ourselves to. I have a prepared statement which I would like to present. And on portions of it, I am going to ask for further opportunity to deal with, consisting of about two problems which I feel are serious on which I desire to have a little more time to think out. I wifi identify them as I move ahead. I want also to thank you, Mr. Chairman, for advancing the time of the hearing so that I might be able to appear. I wanted to appear, because of the significance of the subject matter. As you know, at at 10 o'clock I am addressing the Council for the first time on the matter of the budget for 1969. I feel that this is an historic event, and I certainly want to be there. So, I am grateful for the opportunity and I, again, thank you for your service to the people of the District of Colum- bia in all areas-especially in this significant area. There is no doubt in my own mind that the consumers-the buyers, both the affluent and the poor alike, both those who live within the city and those of our neighbors who come here from surrounding communities for their purchasing and, I might add, those that come to this big city from all over the Nation and, indeed, from all over the world-are very much in need of the kind of protection that would be provided for them by the bifis under consideration during these hearings. Without question, there is need for more adequate consumer pro- tection in this community. We need to eliminate for the benefit of all the people of the District of Columbia every vestige of unfair, unscrupulous, and unconscionable practices that exploit our citizens. Mr. Chairman, I share with you the observation you made in your statement when you introduced these bills, that these unfair and unconscionable practices are not the general patterns of the vast majority of our businessmen and merchants. Rather, these practices are found among the relatively few sharp operators whose methods have caused such hardship and loss that the time has come when legislation to remedy the situation is now imperatively required so that we can bring an end to their abuses. Although there already exist statutory and regulatory provisions governing some aspects of trade in the District, particularly with reference to automobile installment sales and the home improvement field, we have a general lack of legal protection for consumers entering into retail installment agreements. The thrust of these bills under consideration is to provide that broader protection. I am, therefore, in complete accord with the underlying objectives of these proposed measures. Retail installment contracts in the District need to be brought under more strict control. PAGENO="0043" 37 I believe the consumer should be fully informed of what he is buying7 how much he is paying, and what charges he is being made to pay for the extension of credit. I believe the consumer should be fully protected by law from con- tract provisions that have no place in fair dealing. I believe the consumer who enters into an agreement for goods or services is entitled to receive his half of the bargain and not be left out in the cold because of outmoded legal concepts. I believe the housewife who wishes to make her purchases on the basis of credit should be expected to pay an additional cost for the privilege of stretching out her payments, but I firmly believe, too, that the law should place a reasonable maximum on the amount of that credit charge. These are minimum requirements in today's retail installment market. The consumer, in my view, needs more than just legal protections. He also needs guidance; he needs more consumer education. Consumers should know the advantages of comparative purchasing. Housewives who find themselves paying a dollar's value and receiving less than a dollar's value can be greatly benefited by educational programs, by informational materials, by programs that bring to them an awareness of their important consumer position. The housewives of our community should have an agency devoted to J)rovide them with the information and assistance which they need to become sophisticated purchasers equal to the marketplace. Consumer associations should be encouraged at the grassroots level of the city's neighborhoods, coordinated and organized into a corn- munitywide and, indeed, a regionwide consumer organization dedi- cated to the protection and interests of all consumers. I would certainly like to see the day that we have an organization stretching through Maryland and Virginia trying to protect the inter- ests of the consumers. Such organizations could play a significant role in developing cooperation between consumers and the business community. Some neighborhood-level organizations are already in the process of being formed in the District. I am extremely pleased with their development. Mr. Chairman, these center-city organizations now in their forma- tive stages have been receiving valuable guidance and leadership from consumer organizations whose members are our suburban neighbors on both sides of the Potomac. The help and interest they are giving is very encouraging and indicates that regional coordination of consumer efforts is a distinct possibility. Similarly, the aid and encouragement of the staff of the President's Committee on Consumer Interest has been highly valuable. Much impetus to neighborhood interest in consumer matters has come from the efforts of the workers and volunteers of the United Planning Organization, with the cooperation of many civic groups. These efforts should be greatly encouraged and coordinated so that well- organized and effective consumer interest groups may become strongly established in the District. Moreover, in my view, it is time that the city government must make a start in coming to grips with the problems of the consumer. PAGENO="0044" 38 I have, therefore, proposed today, in submitting to the District of Columbia Council my recommended fiscal 1969 budget for Council approval, a new District, of Columbia Office of Consumer Affairs. I will do that later today. That budget will contain a request for a new District of Columbia Office of Consumer Affairs, and I would just like to stop for a moment and say, Mr. Chairman, that based on the rate received in 1968 in the budget, I would hope that I could find appropriate funds to establish such an office prior to the approval of the 1969 budget, and I, certainly, would like to call upon you to assist me in this regard, because I certainly would like to see an Office of Consumer Affairs in our District Building. Senator TYDINGS. I can assure you of my interest in that, Mayor Washington. I am delighted to see in your statement that you are moving, in effect, on your own, rapidly and without waiting for the rather cumbersome legislative processes of this particular session of Congress. Mr. WASHINGTON. Thank you, sir. I think it is just that important. That was the reason for getting some of the things in. This is very close to me. So I will appreciate your cooperation. We may advance the time by doing it. This new agency will be placed within the Executive Office of the city government and will continuously be under my personal atten- tion. That is the strength with which I put this recommendation forward. Mr. Chairman, this move will bring into being for the first time a specific District governmental agency devoted to consumer interests. Its existence will enable my administration to undertake a program of reaching the consumer public, and provide within city hall an agency to which the consumer can turn for help. I might say that it was just last week that I would have liked to have had such an office. I had a group of housewives walk in with shopping bags full of groceries and other things that they had pur- chased. It. was not simply a matter of food contamination; it was a matter of practices that related to the need for consumer protection. They were honest in their endeavor and serious in purpose. It gave me great resolve to move forward with an Office of Consumer Affairs. The new Office of Consumer Affairs will make studies to docu- `ment the areas that are ripe for consumer protection, and the methods by which suc.h protection should be sought; it will conduct educational and informational programs for consumers; it will undertake the efforts needed for coordination and cooperation with the business community, with consumer associations, and with other local and Federal governmental consumer-related agencies. I view this new proposal as a start in the long-range development of a strong and vital consumer affairs agency within the city govern- ment. Mr. Chairman, I wish to make a few specific notes, one that S. 2589, providing for a District of Columbia Retail Installment Sales Act., includes among its provisions the creation of a District of Co- lumbia Department of Consumer Protection, within which would be established a Consumer Information Service. Such a department, as outlined in the bifi, would have much broader authority than the new Consumer Affairs Office that I am now proposing. While I am PAGENO="0045" 39 not opposed to the creation of an agency with the broad authority granted by the bill, I suggest instead that general authorization be given the city administration for organizing the governmental ma- chinery that ultimately may be found to be needed. It is in that vein that I would hope I could get an early start on such an office, so that I might be able to provide the committee with some experience in setting up the machinery. I am in accord with the general proposition. Senator TYDINGS I think, Mayor Washington, the mere fact you are going ahead and setting up an agency for consumer protection, even on the rather restrictive lines you have suggested would be possible, will mean that you would have the expertise and the machinery already established so that the Congress which could broaden the jurisdiction, undoubtedly will move right in and fill the gap, so to 51)eak. It goes hand in glove. The executive leadership you have dem- onstrated in this regard is a very important first step. Mr. WASHINGTON. I agree with you entirely. That is why I am very anxious to see if I can locate funds from any source to get this very significant Office underway. I would like to be doing it hand in glove with the work of this committee. As I indicated at the outset of my statement, Mr. Chairman, I endorse in principle each of the bills you now have under consideration. J\/Iy predecessors in office, the Board of Commissioners, proposed enactment of a Retail Installment Sales Act identical to that con- tained in 5. 316. The bill was introduced by Senator Morse at the Commissioners' request. This proposed legislation was formulated after such study and deliberation by a special drafting committee organized at the suggestion of the Commissioners. It included repre- sentatives of a broad cross section of the community, business, and financial interests as well as civic organizations. In some ways the provisions of 5. 316 represent compromise approaches, particularly with its treatment of the problems relating to the legal concept of holder in due course in retail installment transactions. On the whole, however, the bill was felt by those who participated in drafting the proposal that it will effectively deal with the most serious problems arising in connection with retail installment sales and revolving charge account agreements. Generally speaking, 5. 316 would permit sufficient regulation of retail installment sales so as to provide the consumer with the fullest disclosure of contract terms and finance charges. It contains specific authority for the regulation of certain aspects of the retail installment transaction, including credit insurance requirements-but not finance charges-and it specifically prohibits certain contract clauses which are believed to be the most unfair and detrimental to the unprotected consumer. This bill has my unqualified support, so far as it goes. Turning to S. 2589, introduced by yourself, Senator Tydings, we find a broader approach that provides for more specific retail install- ment sales controls established by statute rather than by regulation. The District of Columbia Council would have certain regulatory powers with regard to such areas as advertising, sales, and collection practices and with respect to forms and methods dealing with contract provisions, disclosure requirements, and sales relating to repossessed goods. The bill contains specific, detailed requirements relating to the PAGENO="0046" 40 form of credit installment contracts and revolving charge accounts to assure the fullest disclosure of credit charges to the consumer. It also contains provisions that specifically prohibit certain types of contract clauses that exploit the unprotected consumer. There are contained in S. 2589 certain features that I believe are most beneficial. For example, extremely important is the provision regarding clarity of contract terms. Another significant feature is the requirement that in the case of repossession of goods which in retail installment sales depreciate so rapidly as to lose quickly any equitable interest the consumer may have in the goods-that the seller who repossesses must choose either to take back the goods and forgo any deficiency judgment or sue the buyer on the unpaid balance and not repossess the item for which the consumer is in default. The bill allows for private remedies that would discourage attempts by sellers to circumvent the protective features provided for the consumer. In addition, t would enable the District government to seek court action on behalf of exploited consumers. And as I have hereinbefore indicated, we certainly support this bill, and I certainly commend the chairman on these outstanding provisions in S. 2589. Although S. 2589 provides what is in my view excellent guidelines for protection of consumers, I believe that the rule of the District of Columbia Council should be given more consideration. I suggest that the bill be amended in such manner as to provide the Council with broad enabling authority to promulgate regulations needed to provide such protection. This would also allow the Council the flexibility that is usually found necessary to meet new conditions and new problems, without the need to seek further congTesSional action. Another reservation that I have regarding 5. 2589 deals with the provision affecting the doctrine of holder in due course.This provision of the bill would seriously modify this long-established commercial principle insofar as retail installment transactions are concerned. Under the bill, the holder in due course-frequently the finance company in a retail installment transaction-would remain subject to the defenses that the consumer can bring against the retailer. Thus, if the retailer fails to live up to his part of the bargain, the finance company would have to face the fact when it attempted to collect on a note from the consumer who stopped making payments on a bad bargain. I can heartily approve of a change in a legal concept that would result to the advantage of the consumer. But I cannot fully endorse this provision at this time without further study as to the implications it may have regarding normal commercial and financial affairs. I therefore ask the subcommittee's indulgence, Mr. Chairman, to permit me to supplement my report on this bill after making addi- tional study regarding the provision on holder in due course. It is a very significant provision, and I have had limited opportunity to study it. I would want to prepare a special report on this particular aspect. Maximum finance charges is the subject matter covered by S. 2590. The bifi contains provisions establishing the ceiling on credit charges that could be imposed by retailers under installment contracts and PAGENO="0047" 41 revolving charge accounts. It is my view that limitations should be placed upon credit charges. However, I am unable to say at this time what ceiling should be placed on such credit charges without the benefit of a full study of costs and profits that result in the District. Therefore, I cannot now validly make any specific recommendation with respect to credit charge limi- tations. I would certainly appreciate being given the opportunity to supp]ement my testimony at a later date following further exploration of the various local factors relating to the credit picture. And even as late as yesterday, we tried to resolve this matter and were unable to, and I would like, because I cannot now, as I just stated, make a specific recommendation, to be given the opportunity to supple- ment my testimony. And on those two items, Mr. Chairman, I will submit a full report. I hope to get further information on these two significant items. (The requested information was subsequently received and may be found in the appendix on p. 292.) Remaining bill under consideration today, S. 2592, is not specifi- cally related to retail installment sales but does provide what would be an important protective feature to safeguard the rights of home- owners in the District who have been unwittingly or unfairly induced to execute deeds of trust on their property. The bill is intended to require that an order be issued by a judge of the U.S. district court before any foreclosure may take place under a mortgage or deed of trust. Under present practice, a deed of trust may be foreclosed by the trustees without any prior notice to the unwary homeowner, who frequently finds too late that his home has been sold out from under him. This bill is designed to assure the homeowner that such fore- closures will not be simply automatic and that court action will be necessary. Mr. Chairman, the fleecing of unsuspecting consumers has brought anguish and hardships to large numbers of our citizens, particularly to those among the poor who can least afford being exploited. We are aware of the abuses. We are aware of the motives of greed and selfishness that underlie these disgraceful practices. We are sure of our determination that such practices shall no longer be coun- tenanced-a determination shared by legitimate business, by govern- ment, and by the people, and, thank heaven, by you, sir. The start to bring an end to this exploitation is being made. The start is in the rallying of support of the consumers themselves for measures to eliminate the evils. The start is in these hearings and the further consideration that the Congress is showing in consumer affairs. The start is in the inauguration for the District of an office of government dedicated to consumer interests. Mr. Chairman, it is my pledge that the consumers of our city, the housewife who buys for her household, the breadwinner who struggles to maintain a shelter for his family, shall receive my undiminished support in the fight against unfair and unscrupulous exploitation. Senator TYDINGS. Thank you very much, Mayor Washington. Actually, the principal area I was going to question you about, you have already beat me to the punch by actually moving forward PAGENO="0048" 42 in establishing a Bureau of Consumer Protection, or, at least, pro- posing that within the limited confines of your jurisdiction such a bureau be established. Hence, I shall not have to question you about that. I was going to ask you why you had not already made plans to do so. I congratulate you in doing it. I assure you that we intend to prosecute these hearings during the month of December and, hope- fully, we will conclude these hearings early in the winter so that we can move into the main committee and onto the floor of the Sena.te before the spring and, hopefully, too, on to the House of Representa- tives. I look forward to receiving your additional comments. I think one point you made which we will expressly consider is the giving of more areas of responsibility to the Council in order to provide more flexibility in this area. I think those are good points. We are basically concerned with giving you the legislative machinery and the power to protect the consumers which you do not have now, and, perhaps, to put in some guidelines as to its operation. As to the actual figures used for the consumer protection-that is, such as the top interest rate to be charged-we looked into the State of New York and the State of California. We did not just draw those out of a hat. And most of the other aspects of this legislation were taken from States or jurisdictions which actually have such protection in being or in legislation now. There are a few new areas which we are pioneering in brought about primarily because of the devious techniques of some unscrupulous merchants in this area which were exposed by the resourcefulness of some of our local newspaper reporters. We wifi be delighted to have any further comments from you. Mr. WASHINGTON. Thank you so much, Senator Tydings. Senator TYDINGS. Thank you for being with us. Mr. WASHINGTON. I have two gentlemen from my office who can remain and be at your service for any further questions. Senator TYDINGS. I might be helpful if they would remain in the hearing room. Mr. WASHINGTON. They, of course, are familiar with the material. They have been of great help to me in getting the bills analyzed a.nd working on our final statement which, I think, is to the point of what we intend to do, and they put. the responsibility on me to do it., and I intend to accept tha.t responsibility. We want to remain available to you during the progress of the hearings, to support you and the committee at any juncture, and, also, to keep you personally advised of our efforts to seek at an early date the opportunity to establish the Office of Consumer Protection. Senator TYDINGS. Thank you. Mr. WASHINGTON. Thank you. Senator TYDINGS. The next witnesses on our schedule for today include Mrs. Ida Bryant, Mrs. Theresa Clark, Miss Maribeth Halloran, and Mr. J. Kirkwood White. Mr. White is an attorney with the Neighborhood Legal Services Project. We are delighted to welcome you here this morning. Please, if one of you would be kind enough to introduce yourself, and the others. PAGENO="0049" 43 STATEMENT OF MRS. THERESA CLARK, CONSUMER ACTION SPECIALIST, UNITED PLANNING ORGANIZATION, ACCOM- PANIED BY MARIBETH HALLORAN AND 3. KIRKWOOD WHITE, NEIGHBORHOOD LEGAL SERVICES PRO3ECT Mrs. CLARK. Mr. Chairman, Theresa Clark is my name, and I am accompanied by counsel from the Neighborhood Legal Services Project and Mrs. Ida Bryant and Maribeth Halloran. I am a consumer action specialist for the United P1ann~ng Organ- ization. ~/1y specific job is to assist in the coordination of consumer action programs in all of the neighborhood development centers in the city. As stated, with me is Mrs. Ida Bryant, a resident of the District of Columbia, who would like to tell you about an experience she had in purchasing a television set. Mrs. Bryant. Senator TYDINGS. We are delighted to welcome you before this subcommittee, Mrs. Bryant. STATEMENT OF IDA L. BRYANT Mrs. BRYANT. Mr. Chairman and members of the subcommittee, my name is Ida Bryant. I live in Anacostia with my husband and four children. Until recently I was employed as a cashier. My husband works for the Post Office. I am here today to tell you how I ended up owing $417 for a TV set priced at $195 which I bought on credit. I understand that your committee is working on legislation to protect the consumer in `Washington. I believe my case illustrates the need for a new law to protect people who buy goods on time. As it stands now, when you buy something on credit you have to take what the sales- man says on faith. Often you are not told how much you will end up paying or what could happen if you miss a payment. During August 1965, I heard an advertisement on the radio of a furniture company selling TV sets-"No money down and a 10-day free home demonstration." I called the furniture company in response to this ad. They brought out a portable TV set. The salesman said that I would have to pay a $25 tax on the set immediately but that I could have it for 10 days and return it if I did not want to keep it. I paid the $25 in two installments-$12 one week and $13 the next. The salesman said all I would have to pay for the TV set was the price of $195 plus the $25 tax or $220 in total. The salesman asked me to sign a couple of papers which he said were delivery receipts. He told me that I would get copies of a contract later on. I never received any contract from the company. I started using the television set but found that the sound was bad. I was going to send it back to the furniture company before the 10 days were up, when I received a payment book in the mail from a finance company. The payment book had 24 slips marked $13.75 each. It looked like I had already obligated myself to pay so I started making monthly payments to the finance company even though the set did not operate properly. The furniture company refused to make any repairs or adjustments on the television set and told me that I 88-648-6S------4 PAGENO="0050" 44 should call up the finance company if I had any complaints. The finance company said that it had nothing to do with whether or not the television set worked correctly. They told me that I had signed a financial document and promised to pay money to the finance company. I made payments steadily for 12 months and decided to add up the amount that I had paid. It came to $165. I thought I only owned $30 more but when I added up all of the payments in the book still to be paid I found that instead of owing $30, I owed $165 more. I did not feel that I should pay any more for the television set because it was origi- nally priced at $195; and because some of the sound tubes were bad I stopped making payments. -~ In September 1966 I got a summons to go to court for the balance owing on the television set. I took the summons down to the court and the clerk advised me to ifie a written answer stating that I did not believe that the finance company's claim was just. I wrote an answer and sent a copy to the lawyer for the finance company. The clerk told me that a notice would come in the mail for me to go to a hearing in the court. I never received the notice. I heard nothing about the claim until January 1967, when the finance company began to call on my brother-in-law's job and threatened to have him fired. My brother-in-law also signed for the TV with me when the set was delivered. I called the finance company's lawyer, and he said that if I had gotten no card for a hearing, they had no right to call on my job or attach my pay. I heard nothing more about the claim until April 10, 1967, when my supervisor told me that my salary had been garnisheed under a~ court judgment for $252. This $252 judgment plus the $165 that I ha.d already paid would bring the price of the TV set to $417. My employer told me that they would have to send the garnishment to New York where our salaries were paid and as soon as they found out about the attachment they would probably fire me. On April 11, 1967, I went to the neighborhood law office in my neighborhood for advice and the lawyer told me he would ifie a motion to get the garnishment off my wages. The motion was granted and the garnishment was removed from my salary. We are now waiting to go to trial on the plaintiff's claim. I really believe that the furniture company and the finance company were out to deceiVe me. I thought I had asked the proper questions of the salesman and I understood that the set would cost $195 plus $25 tax. It really makes me mad that I was never told about any finance charges or interest or any other charges. I was told I could pay on a monthly basis, but no one told me that I would owe money to a finance company and that the finance company would refuse to make repairs on the television set. If I had known in advance what kind of a deal I was getting myself in for I would probably have sent the television back and gone to a store that would tell me in advance what kind of a deal they were giving on television sets. I do not believe that the average customer is stupid. If he knows in advance what he will pay, he can choose whether to deal with a particular company. He will also know whether or not he can afford the deal. If a buyer does not know in advance about finance charges and other extras he will often end up having the property he bought PAGENO="0051" 45 repossessed or finding out that his salary is being garnished under a court judgment. Also, it seems to me that the rate of interest that I was to pay for the television set was way too high. I think that the television was used in the first place. Congress ought to enact laws to make it more difficult for sellers to cheat consumers. I hope that you will recommend that Congress pass the bill now before you. Thank you very much for letting me appear before your sub- committee. Mrs. CLARK. Did you try to contact the store concerning the TV set? Mrs. BRYANT. Yes; I did. At the time, they got the set and kept it for about 3 weeks. I had to pay money out of my own pocket in order to have it fixed. Mrs. CLARK. Is this company still in existence? Mrs. BRYANT. No; it is not. Mrs. CLARK. In this statement you have heard examples of some of the unfair practices in some of the District of Columbia retail installment stores. There is one that has "bait and switch" advertisements, wherein an offer is made to lure the consumer, then the salesman switches to something more expensive; second, failure to disclose contract terms, including total price; and, third, immediate negotiation with the finance company; fourth, obtaining signatures on a contract by repre- senting that consumer was only signing a receipt for keeping the tele- vision on approval basis; and, fifth, the buyer receiving no copy of contract. And, sixth, the seller going out of business. Buyer has no legal recourse against finance company, because it had not sold her the television set. And, seventh, default judgment. We have additional evidence to prove that the sales practices of this and other companies include deliberate attempts to sell only the educationally deprived people who have no choice and must agree to their unfair practices. We know that unfair home improvement contractors follow District inspectors. There are neighborhoods where five or six families have been victimized by the same home improvement company and many of them have lost their homes as a result. The experiences of Mrs. Bryant are common among low-income consumers. Each day, thousands of consumers are abused on the high- risk marketplace by unfair merchants or in the homes by unscrupulous door-to-door salesmen. That is why the bills introduced today must become law. They are not a cure-all, but they do offer some relief to the staggering abuse of the consumer. Before I became assistant to the Coordinator of Consumer Action, I worked in a neighborhood development program. Here, along with other members of the Consumer Action staff, I visited thousands of homes, victims of consumer abuse, worked day in and day out with them as groups in consumer classes, worked with them in their homes as individuals, to aid them in solving their consumer problems. I wish you could have been with us the day that we visited the home of a grandmother who called and asked if we had a bed we could give her. PAGENO="0052" 46 Her back had begun to give her trouble as a result of her sleeping on the floor. We entered the apartment, and we could see the pallet. on the floor covered with clean white sheets. The elderly woman explained that she had purchased a bed, a television set, and a chair from a store. For 3 years she had paid $35 per month for the mer- chandise. When her daughter became ill, she had to take her three grandchildren to care for. She went to the store, explained her situation and asked that her payments be cut in half. The store said, "No; you pay the full amount, or we repossess." She tried sending the partial payment, but the store would not accept. Several times the store tried to repossess the furniture, but when the grandmother saw' the truck outside she refused to let them in. One day a knock came on the door, the grandmother checked the front through the window and saw no truck. She asked who was at the door, but did not really understand what the person said and opened the door anyway. At that moment, a man braced the door open and beckoned for the truck which was parked up the street. Within minutes the company had repossessed all three pieces she had bought from them, even though she had paid more than $1,200 on the bill, and the store continued to bill her for the unpaid balance. Thousands of cases like this might give you some idea how badly these bills are needed which would say that a seller cannot repossess and collect a. balance and also that a person can only enter your home to repossess as a. result of your giving him permission or by court order. These bifis would also prevent the seller from using add-on contracts, which mean that you do not own anything until you have paid for everything. There is a big problem of consumers who have no legal recourse when the products or services which they purchase from a fly-by-night company are unsatisfactory. Their contract has been sold to a third party, a loan company, which has no responsibility to the buyer. This part of the bill certainly needs to become law, because it eliminates the legal practices which a third-party finance company enjoys now and shifts the risk from the consumer to the finance company, where it belongs. I have seen hundreds of cases where consumers have been talked into buying merchandise they did not need, could not afford, and did not want by overwhelming, high-pressure salesmen. Senator TYDINGS. I must apologize for interrupting. I wonder if you would be kind enough to let me recess the hearings for about 15 or 20 minutes. I have to appear before another committee of which I am a member. I am the leadoff witness there. They are getting started. What I plan to do is to recess this hearing for some 10, 20, or 30 minutes, and then I will come hack. There are many questions that I want to ask you and the others. Your testimony has been most enlightening up to this point. If it would not be too inconvenient, I will recess for this short period of time. (Recess.) Senator TYDINGS. We will reconvene the hearings before the Senate Subcommittee on Business and Commerce of the Senate Committee on the District of Columbia on S. 316, S. 2589, S. 2590, and S. 2592, PAGENO="0053" 47 relating to protecting the consumer in purchases in the Washington, D.C., area. Before getting back to the hearing, I am delighted to welcome Mr. King, of the Oxon Hill Elementary School, particularly since these are my constituents. I might say to these young ladies and gentlemen that this is one of many Senate hearings which are now going on simultaneously through- out the Senate Office Buldings here in Washington. As a matter of fact, I am on three committees which are meeting simultaneously. Unfortunately, I can only be at one at a time. The majority of the work which goes into the drafting, amending, defining, and final work in legislative enactment takes place in committee hearings such as this. The passage or rejection of legislation takes place on the Senate floor, together with occasional amendments. The principal work of the Congress of the United States goes on at hearings such as this. This particular hearing which is being conducted this morning is one where we are learning of the problems which can face purchasers who buy goods on time or on credit in the District of Columbia when such purchases happen to be sold by zealous, unscrupulous, fraudulent, or dishonest people. The poorer, particularly, the less educated of our citizens-although even the best educated can be taken also-are sometimes required to pay two or three times what they should for goods, which are mal- functioning and of poor quality. Now there is no recourse, no protec- tion for these citizens. The purpose of these hearings is to point out the problem.s and lay the groundwork hopefully for the enactment of legislation by the Congress to protect the citizen wherever he happens to be, who buys goods in the District of Columbia under what we now know as retail installment sales. Before the hearing was unfortunately recessed we were listening to Mrs. Bryant and Mrs. Clark describing some of the tragic situations which have occurred in the District. Mrs. Claik, I again apologize for recessing the hearings. I was the lea doff witness in another hearing, and had to get to it to get it started. I wonder if it would be too much for you to start again and retrace the tragic story about the furniture, to go back a couple of pages and go over that again, because this is so typical of what happens all over the United States and more particularly in those areas where the less fortunate have to live. I think it would be interesting for the people from Oxon Hill to hear that story. Mrs. CLARK. Before I do so, Mr. Chairman, may I request per- mission to have inserted into the record at this point a statement by Christine Hardy, who is unable to appear. Senator TYDINGS. Yes, it will be made a part of the record at this point. (The statement of Christine Hardy follows:) STATEMENT OF CHRISTINE HARDY Mr. Chairman and members of the subcommittee, my name is Christine Hardy. I appreciate this opportunity to appear before you to discuss the need for laws to protect the buyer in the District of Columbia. I live in Anacostia. PAGENO="0054" 48 I am 23 years old and am the sole support of my three children. I work as a countergirl in a carry-cut shop. Like my neighbor Ida Bryant, I brought a television set from a furniture company and ended up being sued by a finance company for $248.00, after I had paid $231.00 on a set that was priced at $229.00. I want to tell your subcommittee about the facts of my case because I think it shows what can happen when a store goes all out to deceive a buyer. I believe we need legislation in this City to make it illegal for a seller to offer one kind of a deal and then turn around and try to collect on something that was never made known to the buyer in the beginning. In September 1965 I heard an advertisement on the radio offering a ten-day free home demonstration for television sets with no payment for four months. I called the store the next morning and explained that I wanted a portable Philco TV. A couple days later a sixteen year old boy came out to deliver the television set. He showed me a paper and asked me to sign it. He said if you do not want to keep the set bring it back and he would refund a down-payment charge of $33.75. I asked why I had to pay $33.75 since the advertisement claimed that a buyer would get a ten-day free home demonstration. The boy said that the $33.00 was just a deposit or delivery charge. The paper which the delivery boy left appeared to be a contract but it was not completely filled in. Two days after the set was delivered I went to the store and asked for a filled in contract. The store refused to give me another contract and told me that everything I agreed to was already on my contract. The price of the set was listed at $229.00 with sixteen payments of $16.50 each. I was told nothing about any finance charges or to whom I would make my payments. Several days later a payment hook arrived in the mail from a. finance company. This book had twenty-four payment slips each marked $16.50. I called the furni- ture company after getting this payment book and asked what the story was. I was told that the contract I had signed had been transferred to the finance com- pany and that the furniture store would have nothing more to do with me. I started making my regular monthly payments. After five or six months I added up all the payments in the book and found that it would come to over $400.00. I decided to make only twelve payments which together with my downpayment would come to approximately $231.00. I thought that this would be enough since the contract said only $229.00. After I stopped making payments the finance company called me at home and at work. They told me to keep my payments up or they would come out and pick the set up. I told the man who called that the contract said only $229.00. I cannot tell you exactly what the man told me over the phone because I do not want to use profanity in front of a Senate Committee but essentially what he said was the hell with the contract, you owe me $400.00. Several months later I received a summons on my job in which the finance company claimed that I owed them $248.00 plus 15 percent attorney's f cc and court costs. Like Mrs. Bryant, I went to the Clerk's Office and was advised to file my own Answer. Later on I found out that I could get a lawyer at the Neighbor- hood Law Office. He filed a more detailed Answer for me and we are now waiting trial on the finance company's claim. I hope that your bill will do something to protect people like myself. I honestly believed the advertisement which I heard on the radio. I know I signed a contract and I am willing to pay the amount set forth in that contract. Apparently, some- thing went on behind the scene in my case because the finance company claims that I owe $400.00. I do not believe that sales companies should be able to get away with this. Also, I do not believe that finance companies should be able to claim that they have nothing to do with the television set but are merely col- lecting on a contract which I signed. I believe that most consumers are intelligent enough to be able to act on clear and honest information at the time they go into a store. When there are hidden charges and other extras, a person cannot make a good judgment about where to buy. It seems to me that the poorer a person is the more he has to pay to buy equipment for his home. Senator TYDINGS. You may now proceed. Mrs. CLARK. I was telling them about the case of a grandmother, and I stated that I wished that you could have been with us the day that we visited the home of the grandmother who had called and asked if we had a bed that we could give her. Her back had begun to give her trouble as the result of sleeping on the floor. As we entered PAGENO="0055" 4g the apartment, we could see the pallet on the floor covered with clean white sheets. The elderly woman explained that she had purchased a bed, a television set, and a chair from a store and for three years she had paid $35 per month for this merchandise. When her daughter became ill, she had to take her three grandchildren to care for. She went to the store, explained her difficulties and asked that her payments be cut in half. The store said, "No, either pay the full amount or we will repossess." She tried to make partial payments, but the store would not accept. Several times the store tried to repossess the furniture, but when the grandmother saw the truck outside she refused to let them in. One day a knock came at the door, the grandmother saw no truck on the street-looking through the window. She asked who was at the door, but did not understand what the person said. She opened the door anyway. At that moment a man braced the door open and beckoned toward the truck which was parked~ up the street and within minutes the company had repossessed all of the three peices she had bought from them, even though she had paid more than $1,200 on the bill. The store continued to bill hei for the unpaid balance. Thousands of cases like this might give you some idea of how badly these bills are needed that would say that a seller cannot repossess and collect the balance, also that a person can only enter your home to repossess as a result of your giving him permission or by court order. These bills would also prevent the seller from using add-on contracts which mean that you do not own anything until you have paid everything. Senator TYDINGS. In other words, they took back the grandmother's furniture which she had paid $1,200 for, and then they sued her and tried to collect the balance, some $200 or $300, even though they had taken her furniture away and she had nothing for herself and the three children to sleep on but the floor. Mrs. CLARK. Yes, sir; that is right. These are problems where consumers have no legal recourse. Senator TYDING5. That is a technique called "balloon payments." That is, when you buy a television set, for example, or a bed, and you are told that you only have to pay $10 a week for, say, 52 weeks, but they put in the fine print in the contract that the last payment instead of being $10, is $100, and if you do not pay the $100, then you loose all of your payments you have made, which may be $500 out of $600, as well as the furniture itself. So, you wind up with no furniture, no money, and a debt. Mrs. CLARK. Yes, sir. There is the big problem of the consumers having no legal recourse when the product or service they have purchased from a fly-by-night company is unsatisfactory, because the contract has been sold to a third party loan company which has no responsibility to the buyer. This part of the bill certainly needs to become law, because it elimi- nates the legal protection a third-party finance company enjoys now and shifts the risk from the consumer to the finance company, where it belongs. Senator TYDINGS. Let me explain, because I think this is impor- tant: We have as a part of the commercial code a law which goes back PAGENO="0056" 50 hundreds of years, which says that if you buy an item or goods from a merchant and sign a note and subsequently do not pay entirely in cash, say you pay $10 in cash, you must sign an I 0 U for the balance, then you owe $40 more, or a total of $50 for item. The merchant can then sell you an absolutely bad radio, which he knew has never worked and never will work, and is perhaps not even a radio. And if that merchant takes that I 0 U and sells it to a. bank or to a finance company, that bank or finance company can collect the $40 from you, the consumer, and it makes no difference whether that radio was not even a radio or even worked. You have to pay that bank or that finance company the full $40 no matter how completely fraudulent the transaction was and is completely bad material, simply because of this old anachronism in the commercial law which protects absolutely the bank or the finance company and really tells the consumer to be damned. This is one of the areas that we are looking into now. Mrs. CLARK. I have seen hundreds of cases where consumers have been talked into buying merchandise they did not need, could not afford, and did not want by overwhelming, highipressure salesmen. I was in a housing apartment, visiting a young mother who had asked for help. We had secured furniture and children's clothing for her. I was there working with her on budgeting her income. The door bell rang, and when the young mother answered, a maga- zine salesman entered. Within 10 minutes, even though that mother did not have shoes for her children to wear, that salesman had talked her into buying magazines. Just before the contract was signed, I called the mother into the backroom, explained quickly the unbeliev- able high price she would be paying for the magazines, and suggested that she tell the salesman she had changed her mind and was not interested in the magazines. The bills being considered here today would give that consumer a 3-day cooling off period in which to cancel a sales contract she was talked into through high-pressure salesmanship. The consumers need this protection. Other parts of the bills which are very, very important to the con- sumers are: (1) Require not only that sellers make clear to consumers and customers all interest and finance charges-in other words, uniform disclosure-but also regulate the amount of finance cha.rges, credit insurance, and other charges which can be added to the purchase price; (2) Give the homeowner a right to a hearing in court before the holder of a. mortgage on his home can foreclose and sell the property and (3) Requiie that every retail sale arising from home solicitation must be accompanied by a notice-of-cancellation form. This is J)articularly important to the educationally deprived consumer since he seldom knows the name or the address of the company or the salesman which comes to his home and sells him mer- chandise. The whole structure of the buyer-seller system is based on the premise that the buyer and the seller have equal bargaining knowledge and experience. This could not be further from the tiuth. The seller is a sophisticated, well-educated, experienced businessman. Often the PAGENO="0057" 51 buyer is inexperienced and educationally deprived. This 1)Oiflts UJ) the need for a Consumer Protection Department which the bills call for the establishment of. Here the consumer could take his complajnt, and the Department would be authorized to administer and enforce provisions of all consumer-protection bills. Because of the education and action programs of the consumer components of the neighborhood development centers, which involve the indigent aftd educationally deprived, consumers are becoming aware of their being victimized in their marketplace. They are getting good and angry. They want some like of protection, and they are look- ing to you as lawmakers for that protection. I can understand why you who are legislators cannot possibly conceive of such consumer abuses as we have mentioned here today. By the very virtue of being who you are and doing what you do, these things could never happen to you. No high-risk salesman or unscrupulous businessman would dare to victimize you, but for some consumers it is an everyday happening, a way of life. For these consumers I urge you to make these bills law. I thank you. Senator TYDINGS. Thank you very much, JVlrs. Clark. I think your testimony and that of Mrs. Bryant has been extremely helpful. There is no question in my mind that there are many thousands of tragic examples of just what you have pointed out, of people who are unable to help themselves, who are the victims of fraud, fraudulent procedures, high-pressure sales tactics, and pay hundreds and hundreds of dollars more than they should for material. And under the com- mercial law, they, the innocent consumers, are deprived of their day in court. I can assure you that we are going to delve into this deeply and hopefully have legislation in this area early in the second session of this Congress. We are going to continue hearings next Tuesday, as previously stated, and next Wednesday and perhaps more the week before Christmas and then on into the new year. We are going to have representatives of the offices of the peoples' services testify to help us go over, in detail, the legislation which we have proposed to limit or alleviate the problems which have been illustrated before us today. I have to get back to the hearing I mentioned earlier. I do thank you for being with us and your helpfulness in this matter. We will stand in recess until next Tuesday at 10:45 o'clock. (Whereupon, at 10:35 am., a recess was taken until 10:45 a.m., Tuesday, December 12, 1967.) PAGENO="0058" PAGENO="0059" CONSUMER PROTECTION LEGISLATION FOR THE DISTRICT OF COLUMBIA TUESDAY, DECEMBER 12, 1967 U.S. SENATE, SUBCOMMITTEE ON BUSINESS AND COMMERCE, OF THE COMMITTEE ON THE DISTRICT OF COLUMBIA, Washington, D.C. The subcommittee met, pursuant to recess, at 11 a.m., in room 6226, New Senate Office Building, Senator Joseph D. Tydings (chairman of the subcommittee) presiding. Present: Senator Tydings. Also present: Chester H. Smith, staff director; James S. Medill, Howard A. Abrahams, assistant counsels; and Robert A. Burt, legis- lative assistant. Senator TYDINGS. We will convene the hearing of the Subcommittee on Business and Commerce of the Committee on the District of Co- lumbia of the Senate. We are continuing the hearings this morning on S. 316, S. 2589, 5. 2590, and 5. 2592, relating to consumer protection in the District of Columbia. We are delighted to have a number of distinguished witnesses with us this morning. Our first witness is Prof. Egon Guttman, professor of law, Howard University, appearing on behalf of the Ad Hoc Committee on Con- sumer Protection. We are delighted to welcome you and those you have with you and please ask that they sit with you. Mr. GUTTMAN. May I introduce Mr. Benny L. Kass, who is asso- ciated with me? Senator TYDINGS. We are delighted to welcome you here. Mr. GUTTMAN. Mr. Kass will present a preliminary statement. STATEMENT OF BENNY L. KASS ON BEHALF OF THE AD HOC COMMITTEE ON CONSUMER PROTECTION Mr. KASS. Mr. Chairman, Professor Guttman will actually present our complete statement. The Ad Hoc Committee on Consumer Protection is a local coalition organization. We are delighted to say that the statement submitted today is, in principle, supported by the following organizations: Jewish Community Council; Council of Churches of Greater Wash- ington; National Consumer League; American Home Economic Association, District of Columbia Association; Washington Urban (53) PAGENO="0060" 54 League; American Veterans Committee, District of Columbia chapter; John F. Kennedy Lodge, B'nai B'rith; Office of Urban Affairs, arch- diocese of Washington; Southwest Community Relations Council;. District of Columbia City-Wide Consumer Council; American Jewish Committee; American Federat.ion of State, County, and Municipal Employees, Local No. 1; Ad Hoc Group of Law Professors Teaching in Law Schools in the District of Columbia; Consumer Protection Committee of the Greater Washington chapter, Americans for Democratic Action; and National Council of Negro Women. Senator TYDINGS. That is quite an impressive list. Thank you very much. We shall now be glad to hear from you, Professor Guttman. STATEMENT OF PROF. EGON GUTTMAN, PROFESSOR OF LAW, HOWARD UNIVERSITY, ON BEHALF OF THE AD HOC COMMITTEE ON CONSUMER PROTECTION Mr. GTJTTMAN. Mr. Chairman, I would like to thank you for this opportunity to a.ppear before you. As Mr. Kass has pointed out, we are a local coalition organized for the purpose of obtaining a better deal for the consumer. Our concern today is with legislation 5. 316, 5. 2589, 5. 2590, and 5. 2592. Mr. Chairman, we regTet that the serious problem of the door-to- door salesman embodied in 5. 2591 is not, a.t present, before your committee. We respectfully request permission to be heard when that bill is called up for consideration, which we hope will be within the very near future. When such proposed legislation has become enacted law, we will focus on its implementation by local mercha.nt.s, being throughout mindful that education is our ultimate objective. Mr. Chairman, before we even begin to discuss particular bills with you, we would like to make one general observation. Although con- sumer education is important, it is not the only solution. If all buyers were sophisticated, there would he no need for us to testify this morn- ing. We are concerned with all types of buyers, and thus we are aware of the existence of multifarious types of evil, protection from which requires not only educ.ation but also legislation. The law merchant is indeed an ancient law embodied in our common law. One of its ba.sic doctrines is caveat emptor-let the buyer beware. We wish to go on record that in today's economy, in today's society, we can no longer wholly support such a doctrine. There is no longer a place in our law for such a doctrine-unqualified and absolute. Yet were we to suggest that the doctrine read caveat vendor-let the seller beware, the entire business community, although already living with such approach to some respect-that is, as to warranties in sales, the doctrine of unconscionabiity as applied by the courts, and so forth- would be pounding at your door and ours, objecting to the broadness of our remarks. And yet why should caveat emptor be less unfair? All that we ask, Mr. Chairman, is that a situation of equality between buyer and seller be created, by protecting the buyer from some of the more extreme actions of unscrupulous sellers. Thus nothing we support is invidious to legitimate business, but on the contrary, is already a guideline to such legitimate 1)usiness, and by which it acts. PAGENO="0061" 55 We feel, however, that consumer protection can only be achieved through legislation; the responsibility rests squarely on the Congress. We regret that up to now the Congress has not shown a very great interest in the plight of the consumer in the District of Columbia. rllhe Ad Hoc Committee on Consumer Protection participated in the drafting of S. 316-a process which started more than 3 years ago. The bill, when it was finally introduced, languished in committee until last week. But we are encouraged by your interest, Mr. Chair- man, and by the interest expressed by Mayor Washington when he testified before your committee. We certainly hope you will continue to urge the enactment of some form of consumer protection legislation. Turning to the hills themselves. We support S. 316, introduced by Senator i\/Iorse, as the basic, minimum protection. This bill is a compromise measure, supported by the Washington community. There is no opposition to the provisions of that bill other than that some of the consumer groups represented in the ad hoc committee feel it is not strong enough to adequately protect the consumer. The ad hoc committee today reaffirms its support of S. 316. We expect and hope other grouj)s, including the representatives of the business community, will continue to do the same. Thus the least the Congress can give to the District of Clumbia is S. 316. A reading of S. 316 and of the bills introduced by yourself, Senator Tydings makes it clear that there are no differences in principle between the bills. Differences, if any, go to the implementation of the basic principle-the protection of the consumer in a retail installment sales transaction. It is our understanding, Mr. Chairman, that Senator Morse, another well-known champion of the rights of the residents of the District of Columbia, introduced his bill at the request of and with the support of the then District of Columbia Commissioners. It is our hope that he will endorse the stronger consumer protection legis- lation that you are supporting. Let us now examine some of the differences between the two approaches taken by these bills. I think basic to this is: 1. The Congress and the City Council: S. 316 would authorize the Commissioners (now the City Council) to make and enforce such regulations as they deem appropriate to prevent unconscionable practices in connection with retail installment transactions. (See sec. 4a(1)-(1O).) S. 2589 sets forth specific guidelines to accomplish this. We favor giving more responsibility to our new City Council. This is in keeping with our objective of local determination over local matters. Prior to reorganization the District of Columbia business community, strongly urged an approach by enabling legis- lation. We expect them to continue to support this approach. 2. A Department of Consumer Protection: The provision of regula- tions by direct or by delegated legislation requires the means to enforce such regulations. Most of the buyers affected by the types of sales transactions here involved are in the lower educational and economic bracket. They are therefore unaware of and if aware cannot afford the cost of protection. S. 2589 provides such protection in the form of a District of Columbia Department of Consumer Protection. We especially welcome its power to enforce the rights of a buyer by appropriate court action. Although S. 316 does not provide for such a Department of Consumer Protection, we have no reason to believe PAGENO="0062" 56 that the business community does not also endorse the establishment of such a department. 3. Finance charges: The most obvious distinction between the two approaches adopted by the various bills under consideration to the protection of consumers in retail installment sales can be seen in relation to finance charges. S. 2590 sets forth a methodology for de- termining these charges. Although we can support the approach, we cannot endorse the high rate of interest which is embodied in S. 2590. It is our understanding that, without specific legislation, the City Council lacks power to determine finance charges. S. 316 is silent in this regard. Senator TYDINGS. Let me interrupt you there. If the amount in the bill were to he the top limit, then would you rather have it silent? Mr. GIJTTMAN. No; I think that it is possible in our processes that power may be delegated to the City Council in the District of Columbia to make regulations so that a reasonable finance charge may be im- posed by regulation. In this way, also, it will not have to go back, necessarily, to the Congress time and time again to fix a reasonable charge but, within the upper limit, as indicated, the City Council would be able to maneuver. This, too, leads us to support enabling legislation so that the City Council will be able to make regulations fixing reasonable finance charges. And, now, if I may go to point 4. Repossession: As we understand 5. 316, section 11 limits the demand which may be made on the defaulting buyer for expenses in reposses- sion, to the amount realized from the disposition of the collateral. The section provides however that nothing therein is to be construed to relieve the debtor of liability for the deficiency, if any, outstanding after the collateral has been sold. This section does not prohibit the seller to repossess and still collect more money. Under 5. 2589, how- ever, the seller is put to an election between alternate remedies whenever the buyer is in default. The seller may either repossess without subsequent deficiency judgment, or he may sue for the unpaid balance without the right to levy on the goods involved. He may not do both. We support the approach in 5. 2589 in putting the seller to his election, insofar as it forces the seller to consider the item purchased as his prime collateral for the credit sale. In no way does the ad hoc committee want to suggest that a buyer not pay his lega.l obligations. But if a buyer is economically unable to continue his payments, the seller's basic collateral is the item he has sold him. Why place a defi- ciency judgment over the buyer's head in addition to taking away the goods? That is why we wifi support 5. 2589. Especially, since in many cases, considerable payments have been made on these goods prior to default. We understand that the approach in 5. 2589 imple- ments existing legitimate business practices, but we feel that this bill is not clear enough to achieve this objective. As a result, as we read 5. 2589, a seller, realizing that the collateral has deteriorated and the value wifi not cover the deficiency in the article he has sold, will go to court, and as a result, he might be able to levy on items not involved in the credit transaction which might be of value. PAGENO="0063" 57 Senator TYDINGS. Should he not be able to do so? Mr. GTJTTMAN. Well, the reason why the buyer was unable to pay was his economic difficulties. Senator TYDINGS. If he has other assets? Mr. GTTTTMAN. If he has other assets? Senator TYDINGS. And he has an obligation-he has contracted to buy something. Mr. GUTTMAN. We are not making a plea for that, but if there is a difficulty, is it not true that in a sale usually the seller looks to what he sells as his collateral? Senator TYDINGS. What you are advocating is that, if a person has a contract and there is any collateral, the only way that the seller can collect is to take possession of the collateral. Mr. GTJTTMAN. Exactly, because that is what he considered of value when he sold it. Senator TYDINGS. Would not that break down commerce if it were followed to its logical conclusion? You would break down the entire commerce involving the sale. Mr. GUTTMAN. It may be possible to reach a compromise in the form that recourse against the item sold is primary, because it is against the collateral. In any case, I believe that the general business practice is to fix the price in such a way that the item still remains the prime collateral and that, primarily, recourse will be against the collateial rather than against all other assets. Senator TYDINGS. Thank you. Please proceed. Mr. GTJTTMAN. 5. Holder in due course: S. 316 adopts a certifica- tion procedure whereby a third party taking a note cannot enforce it as a holder in due course unless the retail installment contract is accompanied by the buyer's certification that he has received the goods purchased and that they appear to conform to his contract. A note, accompanied by a properly signed certificate, is fully negotiable and the transferee may be able to enjoy the status of a holder in due course if he satisfied the requirements of the Uniform Commercial Code section 28: 3-302. S. 2589, for all practical purposes, eliminates the holder-in-due-course concept from paper taken in retail install- ment sales transactions. We cannot support the certification procedure. It is unrealistic to assume that buyers, of any level of sophistication, will understand all of their defenses when they sign such certificate. Senator TYDINGS. For all practical purposes, that note would be just one more note that the buyer signed at the time of the sale. Mr. GTITTMAN. Exactly. That is why we cannot support this pro- cedure, even if he is to sign a certificate 2 or 3 days later, because, in many instances, the default or the defect does not really arise until months later. The consumer we are trying to protect is at the mercy of the merchant asking him to sign something he probably does not understand. Accordingly, we support the approach of S. 2589. It appears to us further, that legitimate financing companies should have no real objections to the abolition of the holder-in-due-course concept to paper arising from such retail installment transactions. It is our understanding that a recent Federal Trade Commission study has shown that approximately 60 percent of the volume of credit transactions carried on in one of the busiest shopping areas in the PAGENO="0064" 58 District of Columbia is self-financed. So that, in fact, the seller does not need the protection. It is further our belief, based upon inquiries to those involved, that most banks in the District of Columbia will buy retail paper with recourse to the dealer concerned and that most banks will insist on the existence of an account relationship between themselves and the dealer before they would purchase paper from him. In other words, they have a close relationship with the dealer, whose paper they are purchasing. Since, in addition, most banks will only buy paper on an approved form, as drafted by themselves and handed to the businessman from whom they are prepared to buy, the status of such banks as holders in due course becomes doubtful, and if it becomes suspect in the light of recent cases, and, if attacked, leaves them generally with recourse against the seller whom they know and with whom, as indicated, they have an account relation- ship; that is, who is their customer. In many cases in the District of Columbia, the finance companies do not pay the total amount due on the note to the dealer, not only discounting the note but holding back part of the amount which they have undertaken to pay for the note until the event of the buyer paying off at least 75 percent to 80 percent of the outstanding amount on the note. It is thus clear that legitimate financing agencies of retail installment sales transactions have no need for the protection afforded a holder in due course. This protection is most often claimed by finance companies in regard to paper bought at high discount from dealers of dubious financial stability. A very recent example is the Maryland case of the Financial Credit corporation v. Williams, 229 A. 2d 712, Maryland 1967, where the purchased papers were discounted 80 percent, and the Maryland courts properly held that such purchaser was not a holder in due course, especially since he bought these notes from a home improvement concern that had been in the newspapers as having swindled the persons with whom they conducted business. If it be argued that to deny the status of holder in due course to those who extend financial support to retail installment sales transactions would affect existing business methods, we can but adopt the statement of the Supreme Court of Florida in Mutual Finance Company v. Martin, 63 So. 2d 649 (Sup. Ct. Fla. 1953) where the close relationship between the finance company and the seller led the court to deny the status of holder in due course to the finance company: It may be that our holding here will require some changes in business methods and will impose a greater burden on the finance companies. We think the buyer- Mr. and Mrs. General Public-should have some protection somewhere along the line. We believe the finance company is better able to bear the risk of the dealer's insolvency than the buyer and in a far better position to protect his ~11te1'est against unscrupulous and insolvent dealers (at p. 653). I should like to add some additional points in this connection: It has often been argued that there has been no need shown for such legislation, the type that is proposed in 5. 316 and 5. 2592. It is true that it has not been possible for the ad hoc committee to obtain information as to the number and the seriousness of cases per- taining to each and every point raised in these bills. This is due to organizational difficulties that we have in obtaining such information. However, the few cases that have arisen in the District of Columbia are Ora Lee Williams v. Walker Thomas in 350 F. 2d 445, District of PAGENO="0065" 59 Columbia Circuit Court, 1965; United Securities Corporation v. Bruton, 213 A. 2d, 892, District of Columbia Court of Appeals, 1965; Russell v. Universal Acceptance Corporation, 210 A. 2d, 834, District of Columbia Court of Appeals, 1965, and the recent case of Oliver v. United Mortgage Company, Inc., 95 Daily Washington Law Reporter, 1297, August 7, 1967. So the evil exists here, and so far the courts have not taken a firm stand to protect the consumer. Many more cases must exist which, due to a lack of understanding or financial support, have not reached the courts or which may have been settled out of court through the efforts of Neighborhood Legal Service, Legal Aid Society, or various political and local organizations extending assist- ance to these persons of low income. And certainly the high discount rates as exemplified in the case of Oliver v. United Mortgage Company, Inc., 95 Daily Washington Law Reports 1297, August 7, 1967, where the person needing $2,100 was required to make out a note for $3,530, and there was a brokerage in it by an adjuster who received $2,100, the adjuster taking $430 for his pains and $130 for his services. In other words, he discounted it for $2,700, and yet the taker of that note, the ultimate purchaser was held to be the holder in due course. And then there is Financial Credit Corporation v. Williams, 229 A. 2d 712, Maryland 1967, that I mentioned, the 80-percent discount. These cases show that the evil does exist, not as to legitimate business but as to the doubtful fringe element. It is clear that nothing in this legislation will harm legitimate business interests which have lived within the principles of the legis- lation. Such legislation will, however, force the dubious characters to change their worm holes. There are many details in these bills that require, I submit, closer and further analysis. Unfortunately, we have not had enough time to do a thorough research job. It is our intention, especially of the law professors teaching in the District of Columbia, to undertake a section-by-section analysis of these bills, and this may require the submission of some added wording to these bifis. For example, what is the basis of the interest of an unpaid balance? Is it the amount just paid or is it the amount outstanding when the installment due is paid? Many of us have received notes or invoices or statements from concerns after we have paid off the total balance. Of course, the legitimate business concern, usually, is prepared to give us credit notes to wipe out that so-called service charge and interest charge. Many are the times, I would think, that this would be, if it were shown up, a usurious interest charge. And then there is the recent Arkansas case which held that the finance charges and carrying charges were nothing more than interest rates, and, therefore, would be subject to the usury law. That case was entitled Hare v. General Contract Purchase Corp., 249 SW. 2d 973, Arkansas 1952. I doubt very much whether the courts in the District of Columbia would take such a progressive step or view. In any event, what we would like to do is to offer our services to the committee, to assist in the drafting of some of these clauses that we feel are not very clear. 1.03 in 5. 2589 is one such, because, as I read it, in effect, it would mean completely wiping out the Uniform Commer- 88-648-68-----5 PAGENO="0066" 60 cial Code from our statute books. We fought hard to get that code into our statute books. I think it would be better to draft it by stating: 1.104 (1) The following acts are hereby repealed [setting out the particular acts or provisions in such acts to be repealed~ (2) This act does not repeal the Uniform Commercial Code being §~ 28:1-101 et seq. of the District of Columbia Code, but in respect to transactions falling within the provisions of this act, this act shall control in so far as such provisions are inconsistent with those of the Uniform Commercial Code. (3) Except as provided in this section all acts and parts of acts inconsistent with this act are hereby repealed. Finally, I would like to put in evidence an analysis of the two approaches adopted by S. 316 and S. 2589, S. 2590 and S. 2592, pre- pared by Mr. Kass for the ad hoc committee. Senator TYDINGS. Without objection, we will insert that in the record at this point. (The document entitled "Ten Principles" follows:) TEN PRINCIPLES (An analysis of Senator Morse's bifi (S. 316) and Senator Tydings' bills (S. 2589 2590, 2591, and 2592) relating to consumer protection legislation) The Ad Hoc Committee on Consumer Protection has endorsed the following ten principles as the minimum protection which any consumer credit legislation must contain: 1. Standardization of terms and form of retall installment contracts, including. full disclosure of terms and enumeration of rights and remedies of the parties. a. Senator Morse-would authorize the Commissioners (the City Council) to make and enforce such regulations as they deem appropriate to accomplish principle #1. (~ 4a (1)-(10)). b. Senator Tydings-specifically spells out these points in the legislation. itself. Generally speaking, the disclosure requirement roughly parallels the disclosure format of the Truth-in-Lending Bifis, with some modffications~ Revolving charge account agreements are subject to annual rate disclosure. 2. Reasonable limitation of finance charges and other fees, costs and penalties. a. Senator Morse-contains no provision limiting finance charges, or other fees. b. Senator Tydings-limits finance charges, delinquency charges, court costs and attorney's fees that may be imposed on consumers. (S. 2590.) This bill would require that interest charges not exceed 20% per annum for the first $500, and 16% per annum for all debts above that amount. Revolving charge account agreements (open end credit plans) are limited in that service charges can not exceed 13~% per month on the unpa.id balances not exceeding $500,. nor 1% per month on unpaid balances exceeding $500. 3. Provision that the only collateral for a contract shall be the goods covered. by the contract. (Ora Lee Williams clause.) a. Senator Morse-requires this in § 8. b. Senator Tydings-~ 4.104 (5. 2589) is identical to the Morse proposal. 4. Regulation of allocation of payments to buyer's several contracts with one seller so that first contract will be paid off at original rate and each subsequent contract wifi be paid off in turn. a. Senator Morse-provides that Commissioners (City Council) shall have authority to issue regulations governing this principal (§ 4a(9)). b. Senator Tydings-no provision made, since prohibition against add-on security clauses (§ 4.104) could be held to prohibit formal consolidation of obligations. Consolidation of payments for convenience is not prohibited, as long as the consolidation does not violate § 4.104 or S. 2590, relating to finance charges. 5. Prohibition of "add-on" contracts and "balloon notes". a. Senator Morse-Balloon notes are covered in § 4(a) (6), where Corn- missioners (City Council) are authorized to issue regulations requiring that payments, other than the down payment, under retail installment contracts,. be made in substantially equal amounts and at regluar intervals. "Add-on" contracts are prohibited by § 8 (see principle 3). PAGENO="0067" 61 h. Senator Tydings-language for both "balloon notes" and "Add-on" contracts is similar to Senator Morse. The main difference between the two bills is that Tydings does not leave this up to the City to regulate, but specifically controls the problems from the Congress (§ 4.103(B); § 4.104). 6. Strict regulation of installment selling by salesmen who solicit buyers in their homes, including licensing of salesmen, clear labeling of cash price, and requirement that cash price be same as that for same article in seller's store. a. Senator Morse-the bill is regrettably silent on this principle. b. Senator Tydings-this principle is not covered. 7. Right of buyer to cancel contract prior to delivery of goods or within a specified time, such as 48 hours. a. Senator Morse-no such provision. b. Senator Tydings-this is the subject of 5. 2591. Where door-to-door solicitations result in sales, a buyer is given a three-day "cooling off" period in which to cancel his contract at no loss to himself. Exceptions include: (1) home-improvement sales contracts-cancellation by buyer per- mitted within three days or before good-faith performance of any services, whichever is earlier. (2) buyer must return the goods to seller if contract is cancelled, and. has duty to take reasonable care of the goods in his possession prior to cancellation and until the tender to seller. 8. Provision that where installment contract is sold by the seller to finance company or bank, the installment buyer's rights and defenses will be good against the finance company or bank (e.g., breach of warranty). This would affect the traditional holder in due course concept, (h-d-c). a. Senator Morse-bill adopted a certification procedure, whereby the third party taking a note cannot enforce it as a h-d-c, unless the retail install- ment contract is accompanied by the buyer's certification that he has received the goods purchased and that they appear to conform to his contract. A note-accompanied by a properly signed certificate-is fully negotiable and the assignee enjoys the position of h-d-c. (~ 9b). b. Senator Tydings-~ 4.102 of 5. 2589 provides that third parties shall take instruments arising in connection with retail installment transactions subject to all defenses which the buyer could raise as against the seller. This provision, for practical purposes, eliminates the h-d-c concept in retail installment sales transactions. It does not limit a seller's ability to obtain financing, however, because the instrument remains assignable. 9. Limitation of secured party's right to accelerate payments and/or repossess. collateral. a. Senator Morse- (1) acceleration of payments-~ 5 permits this only in the case of a default in payment or performance by the buyer, or on the same grounds which would authorize an attachment before judgment, i.e.: (a) buyer is evading service of ordinary process; (b) buyer has removed or is about to remove some or all of the property from the District; (c) buyer ha.s assigned . . . or about to assign his property with intent to hinder, delay or defraud his creditors; (d) buyer fraudulently contracted the debt or incurred the obligation. (2) repossession-~ 11 limits the demands which may be made on the defaulting buyer for expenses which. do not exceed the amount realized. from the disposition of the collateral. The section provides, however, that nothing in it is to be construed to relieve the debtor of liability for reasonable costs in connection with the collection of a deficiency allowed to be recovered under the Act. b. Senator Tydings- (1) acceleration-basically same as Morse proposal, but need substan- tial default in payment of performance by buyer to permit acceleration of indebtedness (~4.103 (A)-S. 2589). (2) repossession-in order to give reasonable protection to the buyer's equity in rapidly depreciating consumer goods, the seller is given an election of alternative remedies: (a) repossession without subsequent deficiency judgment, or (b) action on the unpaid balance without retaking the goods. (~ 6.101-106, 5. 2589). PAGENO="0068" 62 10. Limitation of amount of deficiency judgment after forced sale (see discussion in #9). In addition to these ten principles, Senator Tydings' bills would accomplish the following: 1. 5. 2589 would create a D.C. Department of Consumer Protection. Such a Department would be created under the Act, for purposes of: (a) administering and enforcing the Act; (b) conducting studies and investigations into consumer problem areas; (c) conducting educational programs. 2. S. 2592 provides that security interests in real property-such as mortgages or deeds of trust-can only be foreclosed through court proceedings. Presently, in the District of Columbia-as developed by the recent Washington Post series on second mortgages-automatic foreclosures are common and often work to the extreme disadvantage of the homeowner. Under S. 2592, such auto- matic foreclosures would be prohibited, and the homeowner would be given his day in court to protect himself and his interests. Although the Washington community-business and otherwise-will generally support the four bills, the following areas will be hotly contested: 1. elimination of the holder-in-due-course concept; 2. cancellation rights in door to door sales contracts; 3. regulation of finance charges. BENNY L. KASS. Senator TYDINGS. If you would submit language for the proposed amendments, we would be delighted to have it. We appreciate very much your being here. Mr. GUTTMAN. Thank you very much. Senator TYDINGS. We will have a 2-minute recess. (Short recess.) Senator TYDINGS. We will reconvene the hearing. Our next witness is Mr. Frank A. Gunther, chairman of the Law and Legislative Committee for the District of Columbia Bankers Association. We will be glad to hear from you now. We are delighted to welcome you, Mr. Gunther. STATEMENT OF FRANK A. GUNTHER, PRESIDENT, SECURITY BANK, AND CHAIRMAN, LAW AND LEGISLATIVE COMMITTEE FOR THE DISTRICT OF COLUMBIA BANKERS ASSOCIATION Mr. GUNTHER. Mr. Chairman, I am Frank A. Gunther, president of Security Bank and chairman of the Law and Legislative Committee for the District of Columbia Bankers Association. I was not aware that 5. 316 was up for consideration at this hearing. I would like to say that I was privileged, as a representative of the District of Columbia Bankers Association to participate in a number of conferences over a series of months in the Corporation Counsel's office, and we arrived at what we thought was a series of compromises in putting together the divergent views of what we thought was a pretty good bifi. And in the form it is, we feel it would be a workable bifi. However, I would like to direct my statement to S. 2589. First I wish to make it clear that our association is wholeheartedly in accord with the intent of this bill, as set out in section 1.101(B). Since the Washington banks sell only banking services and, to my knowledge, have not been accused of the kinds of activities which this bifi is intended to correct,the banks do not have a direct interest. PAGENO="0069" 63 There are, however, certain sections of the bifi which would appear to make quite difficult the discounting of retail paper arising from installment sales of consumer goods and services for the merchants or others who furnish services. Since we feel that it may be farily pre- sumed that a majority of merchants, home improvement contractors, and other suppliers of retail services doing business in Washington to operate in an ethical manner and are not guilty of fraud and deceit, fraudulent advertising, or reprehensible sales, credit, and collection practices, the subcommittee might wish to assess the effect of some of the provisions of this bill, as written, upon the reputable type of entrepreneur. I refer particularly to the following sections: "4.102-Negotiable Instruments Prohibited": Normally, negotia- tion of an instrument, payable to order or bearer, arising out of a retail transaction, would not cut off any right of action or defense which the buyer may have against the seller. The heading of this section, however, and the wording seem to indicate that a discounting bank, due to lack of negotiability, would not be a holder in due course, with the unrestricted right to proceed against the buyer who executed the note. I call the attention of the subcommittee to the fact that, as of June 30, 1967, Washington banks held retail paper amounting to $42,413,000; and that if this legislation including provisions adversely affecting negotiability, this important segment of the Washington banking business will probably be diminished. Whatever damage re- sults will fall primarily on the ethical sellers with small or moderate volume and on the people who do business with them in good faith~ Generally speaking, the large department store and chains do not dis- count retail paper with banks, nor, as a matter of fact, do the types of merchants and other operators which this legislation is intended to reach. "Section 3.107-Completion Certificate Invalid Unless True": It appears the imposition of very severe penalties against the seller who accepts a signed completion certificate would be a more practical way in which to handle a situation wherein the buyer is induced to sign when improvement or construction work has not actually been com- pleted. This section seems to say that in no case could the purchaser of home modernization or improvement people trust the authenticity of a signed completion certificate. Also, in this type of work, I am informed that there are frequently honest differences of opinion as to when a job has been completed in every detail. Senator TYDINGS. As a practical matter, I speak as one who represented banks when I practiced law. When it comes to *these papers without recourse, which you are acquiring from home-improve- ment operators, we have in many types of industries the requirement that reserve funds be set aside so that the bank never gets in on something like that. Is that not true? Mr. GUNTHER. That is true in some banks. I can only speak for my own bank, because I am not aware of the details of operation of the other banks here. We buy no paper without recourse, but we do not set up reserves. Senator TYDINGS. I know that insofar as this legislation is con- cerned, it would not affect your bank. PAGENO="0070" 64 ~v1r. GUNTHER. I am talking on behalf of the combined banks here. I might say that out of that $42 million in retail discount paper they hold, that about $14 million of it is without recourse, and two- thirds of it is with recourse. Senator TYDINGS. But even of that $14 million without recourse, is that not with longstanding accounts of consumers having sub- stantial balances in your own bank? You say that in your bank you do not have those. With others, however, from practical banking experience, would you not unless you have a longstanding business relationship with them, require recourse? i\'lr. GUNTHER. We would. Some of the banks buy without recourse, and, probably, do set up reserves out of the discount factor, and, perhaps, are pretty well protected in that way. Senator TYDINGS. So that, actually, in this case, the purchaser of the paper is protected? Mr. GUNTHER. With or without recourse, the bank should have the right, as a holder in due course, to proceed against the maker of the note. Senator TYDINGS. Regardless of how much is involved? Mr. GUNTHER. I would say that the law now contains adequate remedies for the buyer against the seller. A reputable neighborhood seller of hard goods may discount $100,000 worth at a bank and have a net worth of $25,000. Obviously, he would not be good for all of the paper that he discounts, but the occasional notes that goes bad he, presumably, could take it up. Senator TYDING5. Could you give me a breakdown of the $42 million: how much of it is good with recourse-that is, with recourse and how much is without recourse, and then a breakdown of the balance of $14 million, how much they require as a reserve balance? Mr. GUNTHER. I think we can obtain that information for you, but I do not have it available here. Senator TYDINGS. That would be very helpful, Mr. Gunther. (The information follows:) SECURITY BANK, Washington, D.C., February 16, 1968. Hon. JOSEPH D. TYDINGS, Chairman, Subcommittee on Business and Commerce, Senate District Committee, U.S. Senate, Washington, D.C. DEAR SENATOR TYDINGS: In the course of my,testimony for the District of Columbia Bankers Association before your Subcommittee, December 12, 1967, on S. 2589, I mentioned that the Washington banks hold approximately $42,413,000 of retail paper discounted. This is exclusive of automobile paper. Several of the banks have found it difficult to supply an additional breakdown of this figure, but applying the percentages reported by banks of over $33,000,000 of such paper, it appears that approximately $9,000,000 is with recourse to dealers, with the re- mainder ($33,413,000), without recourse to dealers. I trust that this information will meet your request for a further breakdown. Sincerely yours, FRANK A. GUNTHER, Chairman, Law and Legislative Comm ittee for the District of Columbia Bankers Association. Mr. GUNTHER. "Section 6.105-Recovery of Deficiency Prohib- ited": If the proceeds of the sale of repossessed property are not sufficient to retire in full the indebtedness incurred in connection with PAGENO="0071" 65 the purchase of the property, then I fail to understand why the buyer does not still owe the unpaid balance. "Section 1.201 (1) (a)": I have been unable to obtain an explanation from several sources contacted as to the mechanics of computing the nominal annual rate "determined by the actuarial method (U.S. rule)." This was apparently taken from the wording of S. 5, the so-called Truth-in-Lending Act of 1967, but in the committee report on S. 5, it is simply stated that this is a well-recognized term in the mathe- matics of finance and has also a long judicial history under the U.S. rule. I will interpolate.. I have been in the banking business 42 years, and I have never heard of such. I cannot find anybody who does under- stand it. We appreciate having been given an opportunity to make these comments on S. 2589 and hope that the subcommittee will give con- sideration to the possible adverse effect which some of its provisions may have upon honest purveyors of goods or services. Senator TYDINGS. We are going to have to recess until 2 o'clock this afternoon. My presence is required on the Senate floor, on a matter which also relates to the District of Columbia. The leadership requests that I go on this morning. We are going to have to recess, accordingly, until 2 o'clock. We will be happy to have you put your other statement in the record in its entirety, just as though orally given, if it would be inconvenient for you to come back at 2 o'clock. Mr. GuNTHER. I will be very happy to come back. We are far more concerned with 5. 2592 than the other one. Senator TYDINGS. Fine. We will come back then. We will now recess until 2 o'clock. (Whereupon, at 11:45 am., a recess was taken until 2 p.m., this same day.) AFTERNOON SESSION Senator TYDINGS. We will resume the hearings on S. 316, S. 2489, S. 2590, and S. 2592, relating to consumer protection in the District of Columbia. Mr. Gunther will resume. STATEMENT OF FRANK A. GUNTHER-Resumed I~'1r. GUNTHER. Mr. Chairman, I appreciate the opportunity to come back. This statement is on behalf of the District of Columbia Bankers Association, in regard to S. 2592. The District of Columbia banks are quite aware of the motivation behind this bill, and we certainly agree that it is a laudable objective to try to correct the flagrant type of abuses which have received wide publicity here in recent months in the mortgage or deed-of-trust field. We feel, however, that a bill to correct these abuses should not be so sweeping as to include the Washington banks and their customers in the added costs and delays which would result from enactment in its present form. We are not aware of any claims of abuses or wrongdoing involving real estate loans made and owned by federally insured banks or savings ~nd loan associations in the District of Columbia. Those abuses which PAGENO="0072" 68 have been alleged may have been confined to second, third, or even fourth trusts, placed by or bought and sold by unregulated lenders. We feel that there has been no demonstrated need for the application of this code amendment to real estate loans made by reputable, regulated lenders. It is our position that to impose this unnecessary provision in respect to such loans held by legitimate lenders is to impose an addi- tional cost that will ultimately be borne by the borrowers. As illustra- tive of my point, it is my impression that in the State of Maryland, where a first trust must be foreclosed through a court procedure, there is an additional expense of not less than $400 and up to two or three thousand dollars ultimately borne by the borrower, expense that would not be incurred in the District of Columbia. This includes such items as court costs, attorney fees, et cetera. We would certainly make no objection to any provision which would require notification to the borrower or homeowner of a pending or threatened foreclosure, thereby allowing ample time to seek remedies under existing law. This is a practice that is invariably followed by our member banks. The sub- committee might well take note of the possibility that in the present tight money market when home loans are difficult to obtain and when the normal out-of-the-city sources of money for home loans have almost dried up, the imposition of additional restrictive provisions affecting legitimate real estate loans and legitimate lenders may result in further aggravating the already critical shortage of home mortgage money. For reasons stated above, the District of Columbia Bankers Asso- ciation opposes S. 2592, unless it is amended to exclude security inter- ests in real estate held by federally insured financial institutions in the District of Columbia. I do not speak for the savings and loan associations of Washington, which are all federally insured, but I am assured by officials of the District of Columbia Savings & Loan League that they share fully our views in this matter, have officially acted within their organization, and have communicated their position to the committee. We offer for consideration-and with apologies if this is not proper- the following suggestion for amendment of the bill patterned on title 26, section 610, dealing with the requirement for money lenders' licenses: The requirements of this section shall not be held to apply to deeds of trusts or mortgages securing loans made by national banks, licensed bankers, trust companies, savings banks, or building and loan associations, as defined in sections 47-1701 to 47-1709 of the District of Columbia Code. Thank you for giving our association an opportunity to express its views. I would like to add, too, that I have left out anything which might not sit well with the judiciary. Anyone who is familiar with the time element involved in the District court actions would realize that if a mortgage is foreclosed that it could very well delay the foreclosure for up to 2 years, and in the meantime the property would go to pot. I really hesitated to put that in the written statement, because I do not want to do any injury to the picture of the courts here. The action is so slow that we have had cases of other types in the courts which have been heard in 18 months and another 6 months PAGENO="0073" 67 before the court of appeals gets to considering the decision in the matter. Senator TYDINGS. I think that the point you are making is a good one with respect to loans in federally secured banks as you point out in second, third, and even fourth trusts. I had some troublewith your amendment, however, because I do not know whether or not it is con- stitutional or class legislation. I think that the point that you are mak- ing that perhaps the language of the bill might be limited to second, third, or greater periods of time trusts or lesser trusts would be worth while considering, because banks, savings and loan associations do not deal in second mortgage money. They deal in first liens against real estate. That would take care of your problem. Mr~ GUNTHER. We do not feel-Mr. Chairman, as you know, being connected with the banking group, there are times when in order for a debtor to secure a loan that is perhaps not all it might be, a bank will take-and we have taken and do hold some second liens, but they are not necessarily the ordinary course of business. Senator TYDINGS. When you do it, you do it with the realization of the danger of the risk. It is not one which is recommended by banking authorities. Mr. GUNTHER. Yes. Senator TYDINGS. It is certainly prohibited by the savings and loan insurance associations. I think that your banking institutions would be protected under the normal course of operation if they deal in second and third trusts-then, they might have to take added precautions, because that is a far more dangerous risk, to be lending the depositors' money on. Mr. GUNTHER. We do not lend it on second or third trusts. But in order to save a situation that might be getting a little bad, we do, occasionally, take a second lien on real estate. I think that would be true of any bank in the city. Thank you very much, Mr. Chairman. Senator TYDINGS. Thank you, Mr. Gunther. I will read into the record the definition of the annual percentage rate. This definition has been rewritten to achieve greater clarity. The old definition described what was essentially the actuarial method for determining an annual rate, but it did not use the term "actuarial method." Many had difficulty in determining the intent. The new definition rather than describing the actuarial method, merely indicates it is the method to be followed. This is a well recognized term in the mathematics of finance and has also a long judicial history under the U.S. rule (Story v. Livingston (38 U.S. 359) 1839). There are at least seven methods for computing the "simple" annual rate on the declining balance and though they all produce nearly similar results, the actuarial method is considered to be the most accurate. This method assumes that a uniform periodic rate is applied to a schedule of installment payments such that the principal is reduced to zero upon completion of the payments. The actuarial rate is such periodic rate multiplied by the number of periods in a year. The definition also permits a creditor to simplify the computation by ignoring slight irregularities in the payment schedule, such as a deferred first payment, or one odd-sized payment. This will greatly simplify compliance while maintaining reasonable accuracy. That is from the document entitled "Truth in Lending, 1967," report of the Committee on Banking and Currency, U.S. Senate, on S. 5, Senate Report No. 392. That is in response to your question. PAGENO="0074" 68 Mr. GUNTHER. Mr. Chairman, I do not understand it, and I heard every word of it. Senator TYDINGS. I guess that your lawyers will have to get a copy of that decision then. Thank you very much. Our next witness is Mr. Seymour D. Wolf, on behalf of the Jewish Community Council of Greater Washington. We are glad to have you here and wifi be glad to hear from you now. STATEMENT OF SEYMOUR D. WOLF, REPRESENTING THE JEWISH COMMUNITY COUNCIL OF GREATER WASHINGTON Mr. WOLF. Mr. Chairman, my name is Seymour D. Wolf. I am a business executive, and I serve in a volunteer capacity as first vice president of the Jewish Community Council of Greater Washington, and as chairman of the council's community relations committee. I appear before you as an officer of the Jewish Community Council, and I testify on the council's behalf. I am also privileged to serve as president of the Better Business Bureau of Metropolitan Washington. However, I want to make it very clear that I am not representing the Better Business Bureau in my appearance here today. The Jewish Community Council welcomes the opportunity to testify this morning on some of the issues in four bifis dealing with consumer protection in the District of Columbia: S. 316, S. 2589, S. 2590, and S. 2592. The council, which is composed of 138 Jewish organizations, synagogues, and institutions in the National Capital area, is already on record in support of legislation which would enhance the protection of consumers in the District of Columbia; we reaffirm our position here this morning. For several years, representatives of the Jewish Community Council have diligently participated in legislative drafting sessions in the office of the District of Columbia Corporation Counsel. Thesa sessions resulted in the bill which Senator Morse first introduced on September 1, 1966 (S. 3795), and which now bears the number S. 316. As this committee knows, Senator Morse's bifi represents the thinldñg of a very broad cross section of the community, ranging from the Metropolitan Washington Board of Trade to the Ad Hoc Committee for Consumer Protection. Then, on October 26, 1967, you, Senator Tydings, introduced four bifis designed to create even stronger protection for the District con- sumers. We regret the decision of the subcommittee not to consider at this time S. 2591, which deals with the right to cancel retail sales. We hope the Senate will give speedy consideration to such legislation, since the practices of some door-to-door salesmen constitute one of the most serious problem areas in the retail installment field. With respect to the legislation under consideration this afternoon, it is our sincere desire that some form of general legislative protection against fraudulent and unconscionable practices in retail installment sales be enacted for the District of Columbia. At the present time, there is no such protection. Accordingly, we support, as a basic mini- mum of protection, the provisions in Senator Morse's bifi for the regula- PAGENO="0075" 69 tion of retail installment sales of consumer goods (S. 316); the Senate- and indeed the Congress of the United States-can in good conscience enact no less. With the provisions of S. 316 as a floor of consumer protection, then, we would like to discuss briefly several issues on which your bills differ from S. 316. (1) First, S. 316 essentially incorporates as implementation pro- cedure, requiring the City Council to issue regulations pursuant to the new law. S. 2589 specifically spells out the protection in the legislation itself. While we commend Senator Tydings on his deep concern for the rights of the consumer, we respectfully submit that we favor the implementation procedure spelled out in section 4 of 5. 316. Recently, due to the efforts of the chairman, the entire District Committee of the Senate, and the Congress itself, Washington received a new governmental structure. We now have a Mayor- Commissioner, and a City Council. It is our hope that any consumer credit legislation would provide for the direct involvement of this new government. For this reason, we support title VIII of S. 2589, which would establish a Department of Consumer Protection under the general supervision of the Mayor-Commissioner. Furthermore, it is our belief that the implementation procedure would require the City Council not only to issue regulations, but also to exercise con- tinuing watchdog functions over the implementation of their regu- lations. Thus, if Congress adopted this procedure, it would in effect allow the government of the city of Washington to exercise local control over local matters-another step in the ultimate realization of our home-rule dream. (2) A second maj or point of difference between the two bills lies in their approach to the holder-in-due-course problem. Senator Morse's bifi would adopt a certification procedure, whereby a third party taking a retail installment note or contract cannot enforce it as a holder in due course unless the retail installment contract is accompanied by the buyer's certification that he has received the goods purchased and that they appear to conform to that which he contracted to buy. A note-accompanied by a properly signed certificate-is fully negotiable and the assignee enj oys the full protection of a holder in due course. Senator Tydings, your bill would, for all practical purposes, eliminate the holder-in-due-course concept in retail installment sales transactions. The Jewish Community Council supports the principle that the seller should not be permitted to avoid his responsibility of providing quality goods and services to the buyer. It is to the achieving of this principle that both bills are aimed. We are not entirely satisfied with the certification approach, however; defenses do not always arise when the consumer goods are first delivered. Nor are we confident that the buyer whom we are most eager to protect will truly appreciate what he is signing. We recognize, however, that the approach taken by 5. 2589 is a most controversial one. We believe that elimination of holder-in-due-course protection clearly reflects the opinion of many experts in the field that there is a significant difference between the need for negotiability of commercial paper in the sale of consumer goods and, for example, in PAGENO="0076" 70 the sale of realestate or in transactions among businessmen themselves. Yet, your committee must carefully determine whether the remedies proposed are in fact needed for treatment of the evils that are to be removed. It would be important to know how many stores in the District of Columbia actually negotiate or assign their retail install- ment notes or contracts. If the number is small, then we would not like to see the bill falter in committee because of the controversial issues which may really have no significant relationship to the matter at hand. Accordingly, we urge the committee to make a careful study of this point. (3) A third difference between the two bifis lies in the area of repossession of goods. We firmly endorse the principle which would provide a seller-in case of buyer's default-an election of alternative remedies. To echo the words of Mayor Washington when he testified last week before this subcommittee, a significant feature of these consumer protection bifis is the "requirement that in case of re- possession of goods-which in retail installment sales depreciate so rapidly as to lose quickly any equitable interest the consumer may have in the goods-that the seller who repossesses must choose either to take back the goods and forgo any deficiency judgment or sue the buyer on the unpaid balance and not repossess the item for which the consumer is in default." (4) A fourth major difference between the two bifis lies in the prob- lem of regulation of finance charges. Senator Morse's bifi is silent on this matter. Your bill, S. 2590, Mr. Chairman, would limit finance charges, delinquency charges, court costs, and attorney's fees that may he imposed on consumers. We are concerned, however, with the percentage limitations which 5. 2590 places on finance charges. They may be too high a price for the consumer to pay; they may be too low a charge for the merchant to be able to function. Moreover, we feel there may be lessons to be learned for the extension of credit on a short-term basis-that is, retail installment sales-from experiences and policies in the extension of credit on a long-term basis. Accordingly, we respectfully urge this committee to study the entire credit situation in the District of Columbia, with a view toward determining whether limitations on the magnitude of finance charges are either desirable or possible, and to make recommendations based on the findings of such a study. Finally, Mr. Chairman, recognizing the problems and difficulties entailed in efforts to decide whether any fair percentage rate can be determined for finance charges, we believe that the very least that the law must do is make mandatory the disclosure of all costs of consumer credit. Therefore, the Jewish Community Council supports legislation which would require full disclosure to the buyer of all charges; we believe it important that the buyer knows exactly-in dollars and cents-what the merchandise or services he is purchasing will cost him. This knowledge-coupled with the consumer education that is so important as a followthrough to legislation-will allow the buyer to engage in comparative shopping, one of the goals of our free and private enterprise system. We appreciate the opportunity to testify today. It is the position of the Jewish Community Council that consumer protection legisla- tion should be a priority item for the Congress of the United States. PAGENO="0077" 71 Senator TYDINGS. I wonder if you would mind answering a few questions. With regard to the first point you made, namely, that S. 316 leaves everything pretty much up to the Council, and that my bill spells out certain added areas in which the public should be protected, do you think we should have a floor on protection for the public or leave it entirely up to the City Council? Mr. WOLF. Perhaps, this is a reflection of what has been the situa- tion with no city council. We think that this is an area that deals. specifically with this community and that the Commissioner in this community, our Mayor, should be given that privilege, of making adjustments through legislation. We look at S. 316 as perhaps the guideline for it. Senator TYDINGS. In the area of the holder-in-due-course doctrine, are you aware that the State of Massachusetts has had since 1961, a consumer protection system which, basically, has this same type of protection. So far as the holder-in-due-course doctrine is concerned, and where it has dealt with fraud, or the quality of the goods, there has been no great burden on the finance companies or the banks that buy the paper. Mr. WOLF. I am not familiar with the Massachusetts law. Senator TY~DINGS. Do you have any knowledge of any specific industry which might be hurt by this particular language? Do you know of any finance companies that could not protect themselves? Mr. WOLF. I am not exactly sure. In my own business, I know we deal with many companies that provide home furnishings to cross sections of the population in the Washington area. I know that many of them do finance their own sales. Whether it is only completely with recourse, I am not sure. Senator TYDINGS. Do you think there is an added factor when you put a provision such as this one in the legislation that has the lender or the finance company really policing it; for the minute that they start getting bad jobs in repossession, they crack down on the sales- men or the retail installment sales people and say "Look here, we are not going to handle your paper if you do business like this. We do not want to be bothered." Do you not think that is a matter which is a protective factor to the public? Mr. WOLF. I think it is. In respect to the legislation that is under consideration, on page 2, we point out that this does not affect, to a large percentage, the business community. We think perhaps it should be left as it is-that is, the law. However, I do think that it may disturb traditional business practices. I am not one who thinks that because they are traditional they are always right. I do not know how much study has gone into that, nor am I familiar with the effects you have described as occurring in Massachusetts. Senator TYDINGS. You indicate that you feel that the finance charges might possibly be too low to enable the merchants to func- tion. Are you aware that these are the finance charges in the State of New York and the State of California? And, further, that these two States together have almost 20 percent of the population? Mr. WOLF. I am aware of it. Senator TYDINGS. How can you make a statement that it would be too difficult for the businessman to function knowing that in the States of California and New York those interest rates are at that rate? PAGENO="0078" 72 Mr. WOLF. I do not think we made that statement. Senator TYDINGS. Let me read what you say here. You indicated that you did not think we should have a set amount. You state: We are concerned, however, with the percentage limitations which S. 2590 places on finance charges. They may be too high a price for the consumer to pav~ they may be too low a charge for the merchant to be able to function. How can you make such a statement, knowing that the merchants in the States of New York and California are able to ~function? Mr. WOLF. I do not think we are saying that, Senator Tydings. I think we are saying that it may be too high for the consumer to pay. We leave that to future determination. Senator TYDINGS. You state: We are concerned, however, with the percentage limitation which S. 2590 places on finance charges. They may be too high a price for the consumer to pay; they may be too low a charge for the merchant to be able to function. How can you make the statement that they may be too low a charge for the merchant to be able to function, knowing that the two largest States in the Union, with between them about an equivalent of 20 percent of the national population, have similar laws under which their merchants are able to function? Mr. WOLF. We really left it up-we suggested that we leave it up to the local determination. Senator TYDINGS. You're really then not saying it is too low? Mr. WOLF. I do not, really. We were trying to offset one statement with the other, trying to point out that we were not taking a specific position on a set percentage. Senator TYDINGS. What makes you say that they may be too high for the consumer to pay? Do you have any reason to base that on? Mr. WOLF. I think, from my own business experience, too frequently the merchants depend on profits derived from credit that they extend, while I, personally, believe that a good deal of his profit should be primarily derived from the sale of merchandise. Senator TYDINGS. Do you not think that if we are to protect the public we might be wise to put in a ceiling to protect the public, and then if the Council wants to lower it that would be up to them, rather than just leaving it unstated? Mr. WOLF. I think that might be the course, if the Council were permitted to operate within that range. I think so. Senator TYDINGS. Thank you very much, Mr. Wolf. You have presented a very clear, precise, and well thought-out statement. It has been a great help to us. Mr. WOLF. Thank you, sir. Senator TYDINGS. Our next witness is Mr. Larry Silver, Deputy Director of the Neighborhood Legal Services Proj ect, who is ac- companied by a number of associates. We will be glad to hear from you and your associates, Mr. Silver. Mr. SILVER. Mr. Chairman, we have some witnesses on the way and some who are unable to come. Miss Halloran will address you in just a few minutes and will indicate what witnesses we have here with us and who will be here this afternoon. Present with me at the moment is Mr. J. Kirkwood White and, as I have mentioned, Miss Maribeth Halloran, who are counsel, and Mr. Nathaniel Vaughn, Mrs. Josephine Bailey, and Mrs. Maggie Jamison. PAGENO="0079" 73 STATEMENT OF LARRY SILVER, DEPUTY DIRECTOR OF LAW REFORM, NEIGHBORHOOD LEGAL SERVICES PROJECT OF THE DISTRICT OF COLUMBIA; ACCOMPANIED BY J. KIRKWOOD WHITE, MARIBETH HALLORAN, COUNSELS; NATHANIEL VAUGHN, JOSEPHINE BAILEY, AND MAGGIE JAMISON Mr. SILVER. Mr. Chairman and members of the committee, I am Larry Silver, Deputy Director of Law Reform, Neighborhood Legal Services Proj ect of the District of Columbia. I have been with the Neighborhood Legal Services Proj ect since September 1965, and I have worked in the community as a neighborhood attorney at 1343 H Street NE., our office No. 7, for over 1 year before joining the staff of our Law Reform Unit. I am pleased to have this opportunity to present my views on S. 316, S. 2589, 5. 2590, and 5. 2592. Before discussing these bills, I wish to convey to you the regrets of our Director, Julian R. Dugas, who is unable to be here today, and I wish to also to convey to this committee his gratitude for being invited by this committee to testify on the legislation now before it. Today, I have with me four people who are anxious to tell you of their experiences in the District of Columbia consumer marketplace, We have brought with us written statements from other consumers, which I am submitting for the written record. As I have previously stated, accompanying me also are two neighborhood lawyers with our program, Mr. Kirk White and Miss Maribeth Halloran, who have more specific comments regarding the legislation now pending before this subcommittee. Before commenting on the bill, I would briefly like to tell you about our organization. We are one of the 299 legal services projects, funded by the Office of Economic Opportunity. NLSP is a semiautomonous component of the United Planning Organization, the community action agency of the Washington, D.C., antipoverty program. We have established nine neighborhood law offices in the low-income areas of Washington to deal with the legal problems of the poor in matters of consumer rights, welfare and veteran benefits, public and private housing, and juvenile and some criminal matters. Twenty-five staff attorneys work in these offices, dealing with the aforementioned prob- lems. Approximately 16 of our caseload involves clients engaged in legal disputes with their creditors over the purchase of consumer goods and services. I firmly support 5. 2589, 5. 2590, and 5. 2591. Consumers, middle income, and poor, in the District of Columbia are in trouble. They-particularly low-income buyers-are often forced to deal in a segment of the marketplace frought with sharp, uncon- scionable, and fraudulent practices. These practices are found in every stage of the consumer transaction-from advertising and sales tech- niques, through the executive of contracts, and ending in the collec- tion process. Senator TYDINGS. Excuse me for a minute. Why do we not go ahead and hear now from Mr. Nathaniel Vaughn. We would be delighted if we might hear from him now. Mr. SILVER. We can submit my complete statement for the record. Senator TYDINGS. Please do. It will be made a part of the record at this point. (The prepared statement submitted by Mr. Silver reads in full as follows:) PAGENO="0080" 74 STATEMENT OP LARRY SILVER Mr. Chairman and Members of the Committee, I am Larry Silver, Deputy Director of Law Reform, Neighborhood Legal Services Project of the District of Columbia. I have been with the Neighborhood Legal Service Project since Sep- tember, 1965 and I have worked in the community as a neighborhood attorney at 1343 H Street, N.E., our office #7, for over one year before joining the staff of our Law Reform unit. I am pleased to have this opportunity to present my views on 5. 316, 5. 2589, 5. 2590, and 5. 2592. Before discussing these bills, I wish to convey to you the regrets* of our Director, Julian H. Dugas, who is unable to be here today and I wish also to convey to this committee his gratitude for being invited by this committee to testify on legislation now before it. Today, I have with me four people who are anxious to tell you of their experi- ences in the District of Columbia consumer market place. We have brought with us written statements from other consumers, which I am submitting for the written record. Accompanying me also are two neighborhood lawyers with our program, Mr. Kirk White and Miss Maribeth Halloran, who have more specific comments regarding the legislation now pending before this subcommittee. * Before commenting on the bill, I would briefly like to tell you about our organi- zation. We are one of the 299 legal services projects, funded by the Office of Economic Opportunity. NLSP is a semi-autonomous component of the United Planning Organization, the community action agency of the Washington, D.C. anti-poverty program. We have established nine neighborhood law offices in the low-income areas of Washington to deal with the legal problems of the poor in matters of consumer rights, welfare and veteran benefits, public and private housing, and juvenile and some criminal matters. Twenty-five staff attorneys work in these offices, dealing with the aforementioned problems. Approximately 16 of our caseload involves clients engaged in legal disputes with their creditors over the purchase of consumer goods and services. I firmly support 5. 2589, 2590, and 2591. Consumers, middle-income and poor in the District of Columbia are in trouble. They-particularly low-income buyers-are often forced to deal in a segment of the market place fraught with sharp, unconscionable, and fraudulent practices. These practices are found in. every stage of the consumer transaction-from advertising and sales techniques, through the execution of contracts, and ending in the collection process. The experiences you will hear related by the witnesses accompanying me and those described in the written statements are in many ways typical of those that could be told you by thousands of low-income consumer buyers in our metro- politan area. These are stories that expose the conditions facing the low-income consumer that exist today in the District of Columbia. Thus, these unconscionable and fraudulent practices impose financial hardship on the buyers who can least afford such hardship. The advertising and sales practices of not all, but some, sellers and notably those doing a large segment of their business with the poor, are deliberately de- designed to catch the unwary and less sophisticated buyer. We often see in these techniques, deliberate attempts to prey on those who are most vulnerable. The home-improvement contractors who follow in the footsteps of housing inspectors and the loan-sharks who peddle loans to homeowners who are about to lose their homes by an extra-judicial foreclosure sale, are well-known examples of exploita- tive techniques. Home improvement contractors cater to the well-meaning motives of home owners in low-income areas to improve their property to make their homes look like Georgetown houses. Time and time again in the north- east area of the city I have seen homes with aluminum siding fronts and I wonder at the human tragedy which assuredly is associated with this effort at self improve- ment.. These individuals, relying on the misrepresentations of ruthless agents of home improvement companies, some of which are now under investigation by the U.S. Attorney's office, have been duped into entering transactions which in most cases will result in the loss of their homes. The bait and switch sale is another ex- ample of predatory practice. This technique consists of an advertising lure touting fantastically appealing offers followed by an attempt to switch the baited buyer into making a more expensive purchase. The switch often takes place before the buyer recognizes it. Other sellers induce purchases at exhorbitant prices by painting glowing ifiusions that merchandise can be "earned" by referring friends to the same seller. One of the most frequent uses of this scheme has been in the sale of AM-FM intercom systems for homes. Here a representation was made that for each PAGENO="0081" 75 referral a $100 discount would be offered. None was forthcoming. Of course, the particular buyer's obligation to pay for his goods exists independently of any promise by the seller to compensate the buyer for referrals, but this legal fact is unknown to most buyers. Sometimes a seller refuses to honor the referral com- mission scheme; more often the seller through fine print clauses is able to impose such onerous conditions on entitlement to commissions that performance by the buyer is impossible. The prices are high, often exorbitant, in this segment of the market place. We have all recently seen evidence of unconscionably high prices in the home- improvement area. I have also seen cases where 7th Street, N.W. or H Street, N.E. or Anacostia merchants have charged buyers prices for furniture that are five times higher than their own costs. A recent survey shows that the so-called "credit houses", that is stores making a large percentage of their sales on an installment basis to low-income buyers, mark-up their prices for furniture and appliances on the average of approximately 205%. The same survey shows that buyers trading with reputable merchants can expect to pay an average mark-up on furniture of approximately 166% and on appliances, roughly 140%. The exorbitant price problem extends to finance charges. Because of a legal quirk, District interest laws generally do not apply to retail installment sales. We have seen buyers who have been charged 35 to 50% interest on retail purchases. Compare the more normal 16 to 20% charged by reputable merchants. The highest interest rates like the most exhorbitant prices are imposed on buyers who are least able to protect themselves. Disreputable sellers take a final chunk from consumers' pockets through sub- stantial charges for consumer insurance. Often the buyer is given no option but to purchase insurance that lowers the seller's own risk. Frequently consumer insur- ance policies are such that they insure exclusively to the benefit of the seller. What I have been saying about prices equally applies to other essential contract terms. Consumers are dependent on the good faith of the seller with whom they deal. Many merchants maximize the advantageous position given them by their superior bargaining power and sophistication and induce buyers to sign contracts containing onorous conditions in fine print clauses. Such clauses disclaim oral representations made by sellers, waive legal rights of the buyers, and permit creditors to accelerate the entire sum owed on an installment contract even though the buyer has not defaulted. Through fine print clauses sellers extract the buyer's consent to the use of forcible methods in repossession, and to the entry of the buyer's home without his permission. Completely one-sided security interests in goods purchased over the entire life of single account from the same seller are set forth in fine-print clauses. Most buyers sign a conditional sales contract and the attached promissory instrument without any realization that the note will be sold to a third party finance company to whom they will be making payments. Negotiation of the contract to a third party is contrary to the expectations of many buyers who believe they will continue to deal with the same friendly merchant who initially induced them to purchase goods. Many sellers treat the negotiation of consumer paper to a finance company as equivalent release of their own obligations imposed by law or contract. The buyer who complains to his seller that his 30-day old sofa has collapsed is frequently met with the seller's total disclaimer of any obli- gation to repair. The buyer who is allowed to return his merchandise ten days after purchase has his anxious inquiries for the return of his $50 down payment totally ignored. Even worse is the situation where the seller's business folds or becomes insolvent overnight. Under present law the negotiation of an installment contract to a finance company has due consequences to the buyer's ability to defend himself in a suit on the contracts. The buyer who, for example, stops paying because his seller refuses to honor a warranty, cannot raise his defense when he is sued by the finance company. In too many cases the buyer is called into a fight by a finance company in which he, the buyer, has to stand in the ring with both hands tied behind his back. Let me describe for you a situation in which I was recently involved as attorney for an indigent client. He had purchased a television set from a small store in northwest Washington, D.C. He had incurred an obligation for this set of approxi- mately $600. The set, however, was nonconforming the contract description; and it was immediately returned to the seller. The clients, unrepresented by counsel, had to sue in small claims court for the return of the down payment. They thought this had terminated the transaction. Little did they realize they 88-648-68-6 PAGENO="0082" 76 had signed a negotiable instrument which was now in the hands of a finance company. Thinking the transaction was terminated, with the TV set having been returned to the seller, they ignored the payment book and were later sued. Mean- while the seller, who had received money from the finance company for the note, went out of business. Unless there is proof that the finance company had knowl- edge of the defects of the underlying transaction, the finance company will be entitled to recover the full amount of the indebtedness. I have explained time and again to my clients the law in the area. Yet they cannot understand why the law permits them to be saddled with a $600 debt when they are even without the use of the TV set which they had purchased. They feel they have been swindled, and that the legal system is completely inadequate to enforce their expectations with which they entered the transaction. Where the buyer's goods are repossessed, he may be credited with a re-sale price that is but a small percentage of the original contract price. Repossession, loss of the goods purchased, is followed by suit for a deficiency judgment that, coupled with collection costs and attorney's fees, is often the same as or even higher than the amount of the unpaid balance of his account at the time of his default. Garnishment and harassing collection practices accompany the creditor's final efforts to extract money from the buyer. How can these practices be stopped? Consumer education is a partial solution. Another partial, but peculiarly effective solution, can be effected through sub- stantial legislative reform aimed at correcting the current inbalance in the rights and bargaining positions between sellers and buyers. Unfortunately, we believe that S. 316 is a weak and insufficient response to the abuses that occur in the retail market. What began in a commendable spirit of concern about consumer problems and commercially reasonable remedies ended as a compromise bill that fails to focus on the worst problems in the retail market. S. 316 does not regulate finance charges. S. 316 does not change the statute of frauds to require contracts to be in writing and signed by the buyer. I question whether it contains sufficient authority for the council to delve into the most unfair advertising and sales techniques. S. 316 does not sufficiently protect buyers from onerous fine-print clauses. It fails to provide the means to correct abuses in repossession. The sanctions it proposes are too weak to produce any substantial deterrent effect. It provides no administrative remedies for its viola- tion. It does not give the administrator the tools for investigation and enforcement that will he so necessary to the department's successful performance. The most important failure of S. 316 lies in its treatment of the problems caused by negotiation of installment paper to finance companies. The remedy proposed by S. 316 is that finance companies be required to obtain a certificate from the buyer that he has received his goods and they appear to be the same goods that he purchased. The certification process fails to provide a means for the buyer to raise many of his most important defenses-e.g., fraud and breach of warranty where the defense is not readily apparent on initial cursory examination, breach of contract, alteration of essential contract terms, etc. In addition, current prac- tices can serve as a useful basis to predict that some sellers and finance companies will defeat the intended protection of the provisions by misleading buyers as to the significance of the certificate. I support S. 2589, 2590, and 2591 because these bills contain strong and effec- tive provisions in precisely the areas in which S. 316 is weak. These bills provide strong remedies for some of the worst consumer abuses. S. 2589 changes the statute of frauds to require all retail installment contracts to be in writing and signed by the buyer. I support the provisions of the bill requiring the disclosing of carefully defined contract terms. I support disclosure of finance charges as an annual percentage rate. We expect these requirements for uniform disclosure to stimulate comparative shopping habits in the community. I believe that uniform disclosure of all contract terms wifi influence all buyers in both their choice of sellers and credit arrangements and their ability to judge the feasibility of a given installment purchase. The restrictions on contract terms contained in Title IV of S. 2589 represent a more thorough attack on the fine print contract than S. 316. S. 2589 contains all the protections offered by S. 316, relating to balloon payments, acceleration clauses, add-on security interests and waivers of buyer's defenses against contract assignees. But, in addition S. 2589 prohibits acceleration of a debt before-substan- tial default, confessions of judgment, waivers of claims for illegalities in collection and repossession, and disclaimer of warranties. These additions are too impor- tant to the rights of consumers to be neglected. I believe that section 4.102 of S. 2589 restricting the use of negotiable instru- ment in retail installment contracts represents the most effective solution to the PAGENO="0083" 77 problems caused buyers when their installment obligations are sold to finance companies. This section is justified in fact by the more reasonable re-allocation of risk on the finance company who is often the seller's partner in the joint-enterprise of retail installment selling. Title VI affords significant protections to buyers after their default. The optional notice of seller's intent to repossess can result in a saving of time and money for both seller and buyer. The restrictions on collections costs contained in this title represent a remedy that is both fair and reasonable. I firmly support the election between repossession and a claim for the unpaid balance imposed by § 6.105. Because of the rapid depreciation of most consumer goods, the buyer's simultaneous loss of all equity in his purchase and liability for amounts close to his unpaid balance violates concepts of fairness. I support S. 2589 because of the strong private and public sanctions imposed on violators. Finally, I support this bill because of its creation of a consumer protection department, with strong tools to produce compliance with protections given consumer by the bill. The use of civil penalties and injunctions to enforce consumer protection was overlooked by S. 316, but I believe that they will be most useful to the public authority. I firmly support S. 2590 with its essential limitations on finance charges, delin- quency charges, insurance charges, court costs, and attorney's fees. The finance rate ceilings contained in the bill correspond to charges now made in the District by reputable retailers. Finally, I support S. 2592 requiring the foreclosure of deeds of trusts through judicial process. Buyers have a right to be heard in defense of their property- but all too often this right is overridden by fast sale. This provision produces a necessary equality of treatment between the deed of trust and the more traditional mortgage. The need for this legislation has been most effectively pointed out by the excellent articles by David Jewell and Leonard Downie in the Washington Post exposing the frauds and abuses existing in the home-improvement and loan areas. Some of these cases were handled by attorneys with our project. In summary, Mr. Chairman, I support without reservation S. 2589, 2590, and 2592. These bills provide the protection now needed by all buyers, and most particularly poor buyers, from the abuse that we in NLSP know to exist. These abuses destroy the faith of the poor in our legal system when they are faced with situations where they have no recourse against an insolvent merchant or home improvement contract. There are thousands of individuals in the District who have been the helpless victims of such practices, and who feel that their expecta- tions of honest dealing with which they confronted local merchants are not enforced by the courts. In short, beset by wage attachments and other woes as a result of dealings with unscrupulous merchants, they perceive the courts and our legal system to be their enemy. The commendable efforts to expose consumer problems by governmental agencies, notably the FTC, diligent newspaper men, interested citizen groups, and now members of Congress, are, we hope now about to bear fruit in the form of this essential consumer protection legislation. Senator TYDINGS. Thank you. We will now hear from Mr. Nathaniel Vaughn. After that we wi]I have to take a short intermission. Mr. VAuGHN. Mr. Chairman, my name is Nathaniel Vaughn. I am a resident of the District of Columbia. I am the father of two sons. My wife and I bought a home in Southeast Washington for $7,500 20 years ago. I am the only one in the family working. In October 1965 the District of Columbia inspectors came to my home and listed the following things which needed to be repaired or replaced. 1 Defective drain pipes, gutters, and downspouts. 2. Flushing apparatus in water closet. 3. Leaky faucet in water closet. 4. Putty around front windows. 5. Glass panes in windows and doors. PAGENO="0084" 78 A few days later a man from a home-improvement company, who was recommended to us by a neighbor, came to see us. I did not call this company. I showed this salesman the list of improvements which the District of Columbia inspectors left. The man talked so nice and showed us how his company could also do many other things including consolidate my bills for a few dollars more. As a result, my wife and I decided to let this company do the following things also: 1. Put in new kitchen floor and put tile over it. 1. Replace back door. 3. Consolidate bifis which amounted to $300. 4. Plaster walls in boilerroom and kitchen. 5. Replace hand rail on stairway. 6. Repair banister on front porch. After listing all of the work to be done, the salesman told my wife and me that our total bifi including everything would be $3,000. He did not mention any other company financing the work. We thought that we would be making our monthly payments to them. He did not say anything about interest rates or extra charges for credit. He said our monthly payments would be $68. He did not tell us when the payments would start or how many monthly payments we would have to pay. As a result, my wife and I thought that the $3,000 included the work, materials and all other charges. We assumed that we would pay $68 each month until the $3,000 was paid. About 3 days later a man came with a contract for us to sign. He told us there was no need to read it because he had taken care of everything. My wife asked him if the jobs should not be itemized with prices of each job. Senator TYDINGS. If I may interrupt you there. I would like to have the privilege of hearing the rest of your statement. I have to go to the floor to vote. I wifi be right back and we wifi continue the hearing. If you wifi pardon the inconvenience, we wifi recess for a few minutes. (R&~ess.) Senator TYDINGS. I apologize for the interruption. Mr. Vaughn, will you continue, please. Mr. VAUGHN. He took the contract out of her hand and pointed out what he wanted us to see. He told us to sign the contract, and we did. Later my wife called the company asking for an itemized list of jobs and prices. The company sent a list of the jobs to be done, but no prices. One day the salesman said to my wife, "You know, you don't own this home." My wife immediately went and got a piece of paper showing that we do own the home. This man told my wife that he had to have that piece of paper to take downtown. He said that he would bring it back the next day. He never brought it back. This means that they now have the deed to our home. One night the salesman came by and said he wanted us to sign some insurance papers. He said that insurance would cost $250. We told him that we did not need any insurance. He talked for a while and led us to believe that we almost had to take out the insurance. He said that he was in a hurry and told us that we did not need to read the contract. We signed. PAGENO="0085" 79 One day a man came for us and told us that some papers had to be `signed downtown. He took us to a bank and notary public at 11th and H Streets NW. Before we got there the man said, "If anyone asks you if the work has been completed, tell them yes." I asked him why, because the work had not been completed. He said, "Well you know we are going to complete the work, and it will cut out a lot of red- tape." We did exactly what the man told us. About 3 months later we received a bill from a banking and trust company in Maryland for $5,250 instead of $3,000. The monthly payments were $76.66 instead of $68. We had no idea as to what this bill was for. Finally we called and were told that the bill was for the work done on the house. I told the man that we had not signed any contract for $5,250. He told me that the extra money was what the bank charged to finance the work. If I had been told this before, I would have never signed such a contract. When we realized that we had been taken, we got a lawyer. He told us not to make any payments. After 3 or 4 months we learned that our home was about to be sold from under us. We then had to borrow $400 to pay the back payments in order to save our home. None of the work has been completed. We have been told that this home improvement company is out of business. At present we are paying $76.66 each month on a $5,250 bill for work that has not been done. We are also paying $25 per month on the $400 we borrowed to keep from losing our home. By the way, the neighbor who recommended this company to us has since then lost her home for that same reason. Senator TYDINGS. What was the name of the bank involved? Mr. VAUGHN. The banking company? Well, it was Peoples Con- tracting Co. Senator TYDINGS. That was the Home Improvement Co. Do you know the name of the bank that you pay your payments to now? Mr. VAUGHN. Well, at present we have paid it to two different banks, but they won't accept our money. So I don't know nothing. We have to make our money out in money orders, and we keep it ourselves, because the bank that we have, my wife has all the names, and they told us they couldn't take it until further notice. So we are not paying any more. We are just getting our money orders, and keep- ing it ourselves. Senator TYDINGS. You are not making any payments now? Mr. VAUGHN. To not any bank. Senator TYDINGS. Are you making any payments to anyone? Mr. VAUGHN. We do not know who to make it to. Senator TYDINGS. When did you stop making your payments? Mr. VAUGHN. September. Senator TYDINGS. Do you have any lawyers? Mr. VAUGHN. Yes, sir. Senator TYDINGS. Who? Mr. VAUGHN. That lady there. Senator TYDINGS. Miss Halloran. Miss Halloran, what was the bank involved? Miss HALLORAN. Right now we don't know who the present holder of the notice is. We are trying to find out. I cannot remember who PAGENO="0086" 80 the two banks were, Mr. Vaughn. I hesitate to say without knowing the exact name. Mr. VAUGHN. Yes, ma'am that is the way it is with me. Miss HALLORAN. There were two banks who at one time held the notes: Now, we don't know- Senator TYDINGS. Two different banks held the same note? Miss HALLORAN. That is right. We guessed in fact one or both probably never really held the notes, but were holding them for collection on the account of the real holder of the note. Senator TYDINGS. Can you give us the names of the two banks, and get us a copy of the note, so we can get those people in here? Miss HALLORAN. I would be glad to, Mr. Chairman. Senator TYDINGS. I would like to run this down. Miss HALLORAN. I will be glad to do that. Senator TYDING5. Let me see if I understand your statement, Mr. Vaughn. I gather that in October the building inspectors came and told you there were certain repairs that had to be made on your house which you purchased some 20 years ago-rather minor repairs. Then you were sold a repair job for appro~mately $3,000 by a home- improvement operator. You then signed some papers which you thought was insurance, went down to the bank and signed some addi- tional papers, and the next thing you knew you were paying $5,250 instead of $3,000, and before you were through with the lawsuits, there was a possibility that your own home would be lost and in the process you had to borrow an additional $400. You are now making payments on two different loans just to keep the home that you originally bought. Mr. VAUGHN. And no work is completed-the work has never been done. There is no work done. Senator TYDINGS. Thank you very much, Mr. Vaughn, for being with us. We appreciate it Who do we have next? Miss HALLORAN. Mrs. Bailey. Senator TYDINGS. Mrs. Bailey. We are delighted to welcome you here. We would like to hear your statement. Mrs. BAILEY. Mr. Chairman, my name is Mrs. Josephine W. Bailey. I live in the District of Columbia. I am 53 years old and retired on a disability pension from my Government job. I would like to tell how my husband, a retired Government employee, and myself were tricked by a salesman from a well-known seller who sells mattresses door to door. In August 1966, a salesman sold us a mattress and box spring which he said cost $199, for $264-plus a $12 downpayment. The mattress was so hard we could sleep on it only for one night. When I tried to get the company to take it back they refused. All this happened like this. In July or early August a lady kept caffing on the phone telling me how the company had very good mattresses for $35 or $38. She said this included double beds, too. After a lot of calls, probably five, as best I can remember, I told her I needed a mattress for our bed because our old one was worn and she sent a salesman to the house the next day, August 15, 1966. PAGENO="0087" 81 He had a suitcase with him with a little sample mattress in it which he said was the type mattress you got for $38. It was poor looking as it was covered in ticking like a pillow. He said it was a good mattress but he had a much better mattress which was specially made and was on sale then. He showed us a colored picture of a very nice looking mattress and kept talking how good it was. He asked to see our bed so that he could order a mattress made for us if we decided to buy. He measured the bed and looked at the mattress and box spring. He told us that we needed a new box spring too as ours was worn, and said their special sale price was only $199. He told us the mattress had one side for winter and one side for summer, made so that it would be warmer in winter and cooler in summer. Then we went back downstairs and he kept talking and asked us questions like how much we weighed, and how tall we were so that they could make the mattress to suit us. He said everybody was buying, even doctors. While he was talking he had some papers, two white regular size and one short white paper. He got the first signature on a paper. I can't remember which was signed first. Then he telephoned someone and told them to start making the mattress. He had us sign a long white paper which he filled in with $200 owing and then began to ask us credit questions. from a second regular size white sheet. When he had us sign one of the regular size white sheets I wanted to stop as I was not sure this was right since he was rushing us so, but he said the order was not cancellable and showed the short white sheet which my husband signed which was marked "noncancellable." He kept talking about what a good price and deal this was and that it could not be stopped now and got us to sign the last regular size white sheet at the bottom. There was a lot of filled-in things on this sheet about credit things but some blank spaces at the bottom before our signature. When my lawyer later got a copy of a note from the company, it looked like it was the bottom of that page, but I am not positive. The mattress was delivered within a week. We could only sleep on it for one night. It was so hard it felt like boards with padding over it. I called the company and they refused to take the mattress back. I told a man there that I couldn't use it. He said that wasn't his problem, that we had bought the mattress and had to pay for it. The payment book also came around then, from a finance company in Maryland, and it added to $264. The salesman said the mattress cost only $199. I went to a lawer in my neighborhood. He made them take the mattress back and return the note. I hope the Congress can do something to stop this bad business as I know of other people who have been cheated in this way. Senator TYDING5. Who is your lawyer? Mrs. BAILEY. Lawyer Cunning. Senator TYDING5. Thank you very much, Mrs. Bailey. We appre-~ ciate your being before us to testify. Is Mr. Whitaker here? Miss HALLORAN. Senator Tydings, the next witness will be Mrs. Meg Jameson, who has submitted a written statement. PAGENO="0088" 82 Senator TYDINGS. Mr. Whitaker won't be here? Miss HALLORAN. No. Senator TYDINGS. We will incorporate his statement in the record. Miss HALLORAN. I would like all those written statements to be submitted for the record. Senator TYDINGS. Do we have Miss Mildred Howard's statement to go into the record? Miss HALLORAN. Yes; please. There are a couple of anonymous statements that we would also like to go into the record. The authors of the statements did not want to disclose their names. Senator TYDINGS. We will put in the hearing record at this point the statements of James Whitaker, Hattie Mae Williams, Mrs. Boone, and Mildred Howard. (The statements referred to follow:) STATEMENT OF JAMES WHITAKER My name is James Whitaker and I live in the District of Columbia. I have a wife and five children of whom I am the sole support. I began dealing with WT company, located on Seventh Street, N.W. in 1960. Over a period of five years, I signed twelve different contracts for various articles of furniture. The articles I purchased ranged from a used washing machine to a stereo set and included two television sets-one replacing the other, beds, a living room set and bedroom furniture. Of all the articles of furniture I purchased, I saw only one of the television sets and a bedroom suite prior to their being delivered to my home. All of my contacts with the company were through the collector who came to my home about three or four times a month to obtain payments on previous contracts. He would merely ask me if I needed any furniture and if I said "yes" he would have a piece of furniture delivered without my prior selection as to type, color, etc. A few days later, he would come with the contract for me to sign. I remember on one occasion I asked him to bring me a sofa. A few days later a used sectional sofa, which was spotted and stained, arrived. When I told the delivery man I did not want the soiled sofa, he told me he could not take it back to the truck and to see the collector. When the collector came with the contract, I told him I did not want the sofa, but he said "he would take care of me", which I assumed meant he would either charge me a lesser price than the $200.00 I paid for it or bring me another sofa. He never did. On another occasion, I asked for a bedroom suite and the collector sent me a hollywood bed with broken legs. He again told me he would "take care of me". I never received any copies of the contracts which I signed and which I later discovered had strange parts to them. I found out about these parts in the Spring *of 1965 when after getting my balance down to $200.00, I was talked into buying another television to replace the television they sold me for $300.00 and had broken down. The collector brought a black and white Philco television to my home and charged me $400.00. I got into financial difficulties and could not meet the payments. I, then, received a paper from the Court saying that the company wanted back all the furniture I purchased over a five-year period. I took this paper to an attorney who explained that the contracts I signed had a pro rata provision so that I could never pay off any contract until all the con- tracts were paid. He later explained to me that some of the contracts which I once owed $200.00 or $300.00 on four or five years ago, I still owed a few dollars. He showed me a paper sent to him by the company where they figured all the percents which kept me from paying off any of my contracts. He showed me where I still owed $.13 on the first contract ($50.00 for dishes) which I signed five years before. This was true even though I paid about $1,800.00 to the company over a period of five years. Now the company wants back every article I purchased from them. I do not think I should have to give back more than the last purchases or two for which I have not paid. My attorney also showed me that I was being cheated on the price of articles I purchased. For instance, he showed me a paper where the company admitted PAGENO="0089" 83 that they sold me a bedroom suite for $200.00 that cost them $64.00; a used washing machine that cost them $75.00 new, was repossessed from another cus- tomer and sold to me for $170.00; a used high fidelity that cost them $142.00 new, was repossessed and sold to me for $340.00; a cocktail table that cost them $6.50 and was sold to me for $30.00. This was typical of all the transactions. I think that this company should be regulated. I bought from them because they gave me credit while I was on welfare, but I do not think I should be charged three or four times more in the case of the used articles than their worth. STATEMENT OF HATTIE MAE WILLIAMS Mr. Chairman and members of the subcommittee, I appreciate the opportunity to appear before you to support the Consumer Credit Bill which you are discussing. My name is Hattie Mae Williams and I live in Southeast Washington with my husband and three children. A collection company in Washington has tried to make me pay $426.00 for a series of courses at a local detective academy which I never took. I knew you were interested in cases where people are taken advantage of in credit deals to show the need for your bills which would reform the law to protect the consumers. I will tell you the facts of my case to show what happens when a company sets out to take advantage of the average housewife. During March 1967, a local detective academy placed an advertisement in my mail box. At the time I was interested in further education and I called up the academy to find out more about their courses. In April a salesman from the academy came to my house. He described the courses in methods of investigation and interrogation and offered to take an application from me. While I was inter- ested in the courses I wasn't sure at that time whether I could afford to go to school or to be away from my family during the day. I agreed to fill out the appli- cation form with the understanding that I would not be obligated to take the course or to pay any money. The salesman assured me that the paper which I signed was merely an application to take courses at the academy and would not obligate me to pay any money. The salesman left me with a contract which said I should pay $357.30 in weekly installments of $8.80 if I decided to take the course. A few weeks later the detective academy called me at home and said that I was accepted for the courses. I was told to report for class during May. I told the person who called that I would be unable to attend the school in May and that I would call back later to let them know when I would be available. The academy sent several letters asking when I was going to start the courses. After receiving the letter I would call and tell them that I was unable to start. Later I decided not to take the courses at all because I wasn't sure that I could find employment as a private detective. I kept getting threatening letters and phone calls from the academy telling me that I had to pay money even though I wasn't going to school. Later on I got a bill from a collection company for $426 owed to the detective academy. I did not recall signing any contract, only an application for enrollment. I received no course materials or books. I attended no lectures, I got nothing of value from the academy. I was convinced that the salesman meant what he said that I would not be obligated to pay anything if I did not attend courses. I think the application form that I signed probably was a disguised contract saying that if I were accepted for courses I would promise to pay some amount of money to the detective academy. The credit company is still sending me dunning letters about the $426 bill. I was afraid that they would try to garnishee my husband's salary so I went to the Neighborhood Law Office for advice. The lawyer wrote a letter to the credit company denying that I owed any money and suggesting that the company stop sending me letters. The letters continue to come but I hope that we won't have to go to court. I have and will continue to refuse to pay hard earned money for nothing. The trouble is I know there are lots of people who end up paying for nothing when they get threatening letters and phone calls from credit companies just to avoid being sued or garnisheed and losing their jobs. Many people are afraid to stand up to collectors and credit companies even when they know they are right because the collectors threats are so frightening. Sometimes people are told they PAGENO="0090" 84 will be arrested on their jobs by the U.S. marshals or the furniture they bought on credit will be taken out of their homes by force and burned in the streets. I hope that the honest business men in this community will support your bills because if the bills pass, the liars and the cheaters will have to go out of business and this will mean more money for the honest merchants. STATEMENT OF MRS. BOONE Mr. Chairman and members of the subcommittee, my name is Mrs. Boone and I would like to tell you my experience in buying a television. In December, 1965, I purchased a color television set from a store on 7th Street, N.W. I gave them $100 down and was to pay the balance of $962.00 in monthly installments of $40.00. I was not always on time in making the payments but I had paid $443.40, when in January, 1967, the store repossessed the television. They did not give me any notice that they were going to repossess and on the day they did take the set I was not at home. My twelve year old daughter was the only one at home. They told her they wanted to enter my house to deliver a television set they repaired for me. She let them in. On their way out they took the color television. I went to Neighborhood Legal Services Project, and a lawyer there tried to have my television returned. When the store refused, the lawyer sued them. The store is demanding $619.00 plus 15% attorney's fees in a counterclaim. They want this sum even though I have already paid 5443 and have lost the TV. After I bought my set from this particular store, I saw the same set on sale in other stores for $499.95. We also found out that the manufacturer suggested a selling price of $549.95. For this same set the store is trying to get me to pay over $1,062. STATuMENT OF MILDRED HOWARD Mr. Chairman and members of the subcommittee, my name is Mildred Howard. I live in the District of Columbia and am the mother of three children. I saw an ad in the Daily News showing many TV's. No prices were shown but monthly payment was $2 a week. I called up the store. They asked my residence, salary, who I rented from, and who my credit references were. The store called back, said my references had been approved and made an appointment for a salesman to come to my house that evening. The salesman came within a short time. He had a catalog with pictures and I picked out a 19 inch Philco TV. I told him I was renting a TV now for $12 per month so I had no trade-in. He told me TV renters were crooks and that my payments would be no more than $9.50 a month. He said the TV would cost $199, pins $96 for financing for a total of $295. He asked me for names of any of my friends who would also be interested in buying a TV. I didn't know anyone who needed a TV, so I gave him no names. The Daily News ad and the salesman said a free stand came with the TV, but when I got the contract, I had to pay $15 for the stand. It was more money than the stand was worth. I got the TV and later I got a payment book from a finance company saying that I had to pay $16.50 a month for 2 years. When I added up these payments they came to $396. I called a lawyer who said not to pay any money and to stop using the TV and store it in a safe place in my house. The lawyer sent a letter to the store and they came to pick up the TV. The delivery man tried to pass off some kind of paper on me. But I said I wouldn't sign anything and that I wanted my contract and note back. I went to the phone to call the lawyer and the delivery man produced the original con- tract. and note. He gave me these papers and I let him have the TV. They haven't contacted me since. I believe they would have tried to make trouble for me except that they knew I had a lawyer. I now trade with another store who sold me an Admiral TV just like the other one for S139 with a free TV stand included. Sen ator TYDINGS. Mrs. Jamison, we are delighted to have YOU with us this afternoon. We would very much like to hear from you. Mrs. JAMISON. My name is Maggie B. Jamison. I live with my husband and our eight children at 1317 South Capitol Street SW., PAGENO="0091" 85 Washington, D.C. I work at night as a short-order cook earning $55 per week. My husband is a steam boiler engineer and takes home $89 per week. I went to school through the seventh grade; my husband finished only the fourth. One day last year I saw an ad in the Daily News by a local store for a color television, offering a trade-in on old sets. I called the telephone number and made arrangements to get a new TV and trade in my old one. I asked for a color Philco. They told me the price would be $599 and I would have to pay only $5 a week. But, when they did deliver the TV (and take mine as a trade-in) it was altogether different. Before I knew what they were delivering they asked me to sign a piece of paper telling me it was just a delivery receipt. Also they told me to sign my husband's name, for insurance, in case the television got stolen. I told them my husband did not give me `authority to sign his name, but they assured me he would not have to pay anything, so I did. When the men left my 15-year-old discovered that the television was not a Philco but some kind we had never heard of. That was my first clue that things were not as they should have been. Then I never received a copy of the contract they were supposed to mail. They did send me a payment book, but it was blank-my price was written on the tickets. I began making payments of $5 a week according to the original agreement and paid a total of about $80. But the seller called and said I had to pay $10 a week because I had signed a contr'act agreeing to pay $20 every 2 weeks. He threatened that if I did not keep up the payments he was going to garnishee my husband's and my wages. Next thing I knew, the seller called on my husband's job. My husband told them he had not signed any contract and did not want any trouble-and that they should come pick up their television. They finally came, took the new television and returned my old one which was not working any more. I thought that would be the end of it but then a District of Columbia finance company wrote a letter to my husband in care of his employer saying that we owed more than $700 for the television. They also called me four or five times at night while I was at work and threatened to have me fired if we did not pay. Then my husband and I both got a summons to come to court. The finance company was suing us for $725 plus interest costs and attorney's fees. I called the finance company and told them we did not have the television. The man asked me to come into this office and talk it over. When I went down there he told me to pay $125 and I could forget the rest. But I told him I did not have that much money and did not think I owed it anyway. He said to leave the summons with him-he would take care of it. So I went away from the finance company thinking that was it. Next thing I knew my wages were attached. My boss asked me what I was going to do about it and suggested I see a lawyer. I went to the Neighborhood Legal Services project and after several weeks I learned that the finance company had dropped the case against me. Senator TYDINGS. Thank you very much, Mrs. Jamison. We appreciate your being here and giving us the history of that unfortunate incident. For the record, I want to say I certainly am impressed with the work of the Neighborhood Legal Services here in Washington, D.C. PAGENO="0092" 86 It makes me even more proud of my fights and votes over OEO,. gentlemen, Miss Halloran. One of you perhaps might relate our proposed legislation to the problems which you have heard set forth before us this afternoon. Miss HALLORAN. All right. Mr. Chairman, I would like to go briefly through the three statements you have heard, and relate them to both Senator Morse's bill, 5. 316, and your own package of bills, to see how either or both bills would have affected the problems. Mr. Vaughn's problem, of course, originated with the home im- provement contract. The home improvement contract is within the scope of both S. 316 and 5. 2589. They are both potential sources of regulation for home improvement contracts, although home improve- ment contractors are licensed in the District, and there is some basic regulation over them. The licensing requirements also include require- ments for the form and substance of the contracts. That is one reason why I think some of the basic disclosure requirements of S. 2589 exempt home improvement contracts, because it is felt that home improvement regulations are already sufficient in that area. The regu-. lations cover such questions as signing planning contracts, of course prohibiting it, stating disclosure requirements of the price, the specifi- cations for the contractor, and other important or essential contract terms. Mr. Vaughn signed a note, and insofar as his note related to his home improvement contract, both bills would speak to the note; the difference is this. S. 316 would require, before the noteholder can enforce his note as a holder in due course, that he obtain from the homeowner or buyer a certificate. Mr. Vaughn testified that he was told to ff1 out a completion certifi- cate, and that it was only a matter of redtape. I think this is a good indication of one of the ways that 5. 316 system would break down. On the other hand, 5. 2589 does not involve this problem, because the noteholder would be subject to the defenses that Mr. Vaughn may have been able to raise against his contractor, who, incidently, is out of business. His problem is a good ifiustration of a lot of problems of buyers in the District of Columbia, because they find when they are sued by a finance company that their seller is out of business. The normal recourse that they might have is foreclosed to them in that instance. They are forced to bear the risk of their seller's solvency and continued existence in business. Mr. Vaughn signed a completion certificate. 5. 2589 provides that the certificate of completion would not be presumptive evidence of completion. I think that it would have some effect on Mr. Vaughn's case when he would go to trial and take on the problem of trying to prove that he signed it-when at the time he signed it work was actually not completed. In addition, although I know the bifi is not under consideration right now, 5. 2591 would have affected his problem. It affords a cancel- lation right in the instance of home improvement contracts. Mr. Vaughn would have a minimum of 3 days or the time that the work began on his contract, whichever time is earlier. The time thing is that Mr. Vaughn's case is a good illustration of one of the reasons whyS. 2592 is felt to be important. His house, he learned, PAGENO="0093" 87 was going to be put up for sale. It was a fast sale. It made him particu~ larly vulnerable to other people who were peddling loans. He had to go out and borrow money to protect his home, and in doing that got him- self into an additional problem of a loan made at usurious interest. S. 316 would affect this particular legislation-or this particular problem in just a very minor way, and that is the potential that it might have for regulations governing home improvement contracts, and the situation where Mr. Vaughn might have signed-might have refused to sign a certificate that it wasn't completed, and thus bar any action by the finance company under the special status of holder in due course. Turning to Mrs. Bailey, her problem essentially arose from a home solicitation situation. Just to dispose of this quickly, again, S. 2591 would have given her a cancellation right. Both S. 316 and S. 2589 would speak to the disclosure requirement. Mrs. Bailey complained that she was not disclosed actual terms of the contract-there were blank spaces in the contract that she signed. S. 2589 prohibits the signing of contracts when there are blank spaces in it. And in fact says that the contract is not enforceable until the buyer has received a copy that has been completed and signed by the buyer. S. 316 requires disclosure only. It does not have the additional requirement that-or the additional provision that the contract is not enforceable until the contract copy is received, nor does it prohibit blank spaces. Mrs. Bailey had a note problem. She would be treated in a similar fashion as I have just described in Mr. Vaughn's situation. Her note would have been enforceable under S. 316 if there had been a certificate that she had assigned the company the note. Mrs. Bailey bought her mattress in a bait and switch situation. The bait and switch advertising sales technique would be covered by S. 2589. There is authorization to the council to regulate in this very essential area of advertising and sales practices. 5. 316, of course, does not speak to the problem. In addition, Mrs. Bailey was involved in a referral sale, which would be covered under the advertising and collection, or sales technique provisions of S. 2589. Mrs. Jamison-her problem would have also been affected by S. 2589 in a very vital way, and that is that the note would not have been enforceable in the special guise of holder in due course. But in addition, 5. 2589 contains the regulations or authorization for the Council to regulate in the area of advertising practices. She was lured into a contract in which it was represented that she would have to pay a certain price, and she ended by paying much more, of course, than she thought she was paying. The disclosure requirements of S. 2589 and S. 316 would have also affected the problem. Both bifis would have required the essential terms of the contract be disclosed to the buyer. S. 2589 would have, in addition, required her to receive a copy of the completed contract and perhaps it would have helped her problem at that point. S. 2589 speaks to collection practices, which I think is very im- portant. In her case she was harassed by letters from the finance company and also the finance company called her husband on his job. Many people feel that the practices in collection of finance companies are unfair to the point of harassment and should be regulated. PAGENO="0094" 88 I think that the way the bill is set up currently is a good way to treat those problems, and that the Council would be able to take the time to study the problem, and make such fair trade standards or whatever they think is advisable. Mrs. Jamison had a. television that was repossessed. At the time that it was repossessed, shortly following the repossession, she was sued, or there was a claim made for essentially the amount of her unpaid balance. This was true even though she had already lost the television. Senator TYDINGS. Plus the payments she had made, too. Miss BIALLORAN. ies, sir. The problem is she did not get adequate credit for the television that had been repossessed. S. 2589 would force the seller to an election between repossessing and suit on the unpaid balance. It would have helped Mrs. Jamison, and it would have protected the equity she had, to have the seller put through this election at the time that he decided to repossess. S. 316 does not speak to this problem, except insofar as it has a provision that says that the costs of collection cannot exceed the amount of unpaid balances at the time of default. The final thing about Mrs. Jamison is that she was charged a finance charge of almost 30 percent. 5. 2591 would have affected her problem by setting a maximum finance charge which in this situation would have been 16 percent. Mr. Chairman, Mr. White and I are here now if you have any additional questions that you might ask. We would be happy to answer them. Senator TYDINGS. All right. Let me ask you one question: In Massachusetts they have a law which encompasses the same principle as does our bill, insofar as the use of the holder-in-due-course doctrine is concerned; namely, that it cannot be used as a defense against bad goods or failure to deliver consumer goods. They find that in Massachusetts a J)ractice has developed which would get around the impact of the statute. What happens is that the buyer borrows the money directly from the finance company at the same time that the installment sales contract is signed. In other words, he does not sign just an installment sales contract and have that assigned over, purchased by the finance company. He signs the install- ment sales contract, a.nd then he signs directly a. note to the finance company; Thus he is no longer-the finance company is no longer in possession of a holder-in-due-course, but is in position of a~ direct borrowing. And this could become fashionable practice in the District as it is in Massachusetts if our statute is adopted. I wonder whether or not you feel that we should consider an amend- ment which might. include any instrument the proceeds of which are known to be used for the purchase of consumer goods. In other words, to carry the rate of defense not only against an instrument purchased from a seller of the consumer goods, but any purchase which is secured by consumer goods sold under a retail contract of sales agTeement. Miss HALLORAN. Of course, that would encompass the traditional chattel mortgage thing. I know what the problem is. In fact, you have it another way, and that is encouraging availability of credit through credit unions, and through other sources-will have the effect of buyers borrowing their money from one source, and spendmg the PAGENO="0095" 89 money in another place-the bifurcation transaction that we now have all lumped in one. Senator TYDINGS. We will get into chattel mortgages in some cases-but only to a moderate degree. What makes a chattel mortgage, if it is secured by an item sold under fraudulent conditions to the purchaser. Miss HALLORAN. My first comment is I think it is a difficult area. Senator TYDINGS. A what? Miss HALLORAN. I think it is a very difficult area. I have a hesita.ncy to strike into the area of chattel mortgage. The traditional loan from a bank on an automobile-well, I suppose that really does not have any effect on it, because I am talking about purchase money chattel mortgages, which is the type of thing you are talking about. I do not know. I think it is an area we should look into, because I know the problem Massachusetts is having, and I know it is an easy way to evade the effect of this protective legislation that you would like to enact regarding holder-in-due-course. I think I would support that kind of a provision in spirit. Senator TYDINGS. What you are saying is it might be more com- plicated than appears on the surface. Miss HALLORAN. I think it might be. Senator TYDINGS. Extending commercial banking practices where a purchaser goes right to the bank when he wants to buy a television set-he might pay cash to the seller, but would go right to the bank, borrow under a chattel mortgage type situation. Miss HALLORAN. I think, though, you could distinguish the two situations-one where finance company and seller are really engaging in a joint enterprise-where the seller likes to use a preferred finance company. The seller is perhaps getting some kind of a rebate on the financing arrangement that is being made through his friend at the finance company. Distinguish that situation from the credit union situation, a simple purchase money type of loan, based on the potential ties between seller and finance company. Senator TYDINGS. I think perhaps we will recess at this time, since we are going to have another day of hearings tomorrow. Let me say I am very appreciative of you, Miss Halloran, and your associates for being with us, and for the tremendous public service you have rendered in pointing out some of the problems which the poor con- sumer faces. Miss HALLORAN. Senator Tydings, I would like your permission to submit an analysis of some of the more difficult provisions in our bill. Senator TYDINGS. I would appreciate that. We might call you back again if some more problems arise, which no doubt they will. Senator TYDINGS. We will now recess until tomorrow morning at 10 o'clock. (Whereupon, at 3:45 p.m., the subcommittee was recessed, to reconvene at 10 a.m., Wednesday, December 13, 1967.) PAGENO="0096" PAGENO="0097" CONSUMER PROTECTION LEGISLATION FOR THE DISTRICT OF COLUMBIA WEDNESDAY, DECEMBER 13, 1967 U.S. SENATE, SUBCOMMITTEE ON BUSINESS AND COMMERCE, OF THE COMMITTEE ON THE DISTRICT OF COLUMBIA, Washington, D.C. The subcommittee met, pursuant to notice, at 10:10 a.m., in room 6226, New Senate Office Building, Senator Joseph D. Tydings (chair- man of the subcommittee) presiding. Present: Senator Tydings. Also present: Chester H. Smith, staff director; Owen J. Malone, counsel; James S. Medill, Howard Abrahams, assistant counsels; and Robert A. Burt, legislative assistant. Senator TYDINGS. We will call the Subcommittee on Business and Commerce of the Committee on the District of Columbia to order. This is the third day of the continued hearings being held on 5. 316, S. 2589, 5. 2590, and 5. 2592, relating to consumer protection in the District of Columbia. We are fortunate in having a very distinguished list of witnesses this morning, in our deliberations on these propcisals, and I am delighted to welcome to this committee to testify at this time Miss Betty Furness, Special Assistant to the President of the United States for Consumer Affairs. Miss Furness, we will be delighted to have you and your legislative counsel come forward. We are delighted to welcome you before the Senate Committee on the District of Columbia. Miss FURNESS. Thank you very much, Senator Tydings. My office was extremely delighted the day that we read that you had proposed these bills, and 1 am very pleased to be invited to come here today to make some comments on them. STATEMENT OF BETTY FURNESS, SPECIAL ASSISTANT TO THE PRESIDENT FOR CONSUMER AFFAIRS; ACCOMPANIED BY LESLIE V. DIX, DIRECTOR FOR LEGISLATIVE AFFAIRS Miss FURNESS. Mr. Chairman, I have had an analysis prepared on selected sections of the bills being considered by the committee, and I would like your permission to have that inserted into the record. Senator TYDINGS. Without objection, that may be done. (The analysis referred to follows:) (91) 88-648-68-----7 PAGENO="0098" 92 THE WHITE HOUSE, Washington, December 12, 1967. Hon. JOSEPH D. TYDINGS, Chairman, Subcommittee on Business and Commerce, Committee on the District of Columbia, U.S. Senate, Washington, D.C. DEAR CHAIRMAN TimINGS: It is kindly requested that this letter and the enclosure be placed in the record as supplemental comments to my testimony before your Committee on S. 2589, S. 2590 and S. 2592. If enacted, these bills will constitute landmark innovations on behalf of con- sumer protection in the District of Columbia and by improving the quality of the marketplace, will benefit the honest and reputable competitors for the retail business of the area. Sincerely, BETTY FURNESS, Special Assistant to the President for Consumer Affairs. Enclosure. SELECTED COMMENTS ON 5. 2589, A BILL To PROVIDE FOR THE REGULATION IN THE DISTRICT OF COLUMBIA OF RETAIL INSTALLMENT SALES OF CONSUMER GOODS (OTHER THAN MOTOR \`EHICLES) AND SERVICES, AND FOR OTHER PUR- POSES; 5. 2590, A BILL To PROVIDE MAXIMUM FINANCE AND OTHER CHARGES IN CONNECTION WITH RETAIL INSTALLMENT CREDIT SALES IN THE DISTRICT o~ COLUMBIA; AND 5. 2592, A BILL To AMEND SECTION 521 OF THE ACT Ap- PROVED MARCH 3, 1901, So As To PROHIBIT THE ENFORCEMENT OF A SECURITY INTEREST IN REAL PROPERTY IN THE DISTRICT OF COLUMBIA EXCEPT PUR- SUANT TO COURT ORDER 5. 2589 GENERAL PURPOSE The general purpose of this Act is to provide for the regulation in the District of Columbia of retail installment sales of consumer goods (other than motor vehicles) and services. Comment The general purpose of 5. 2589 is fully consistent with the Administration's goal of making the District of Columbia a model for urban communities; the Admin- istration's recognition of the need to extend consumer protection; and the Ad- ministration's drive to secure full disclosure for the consumer in the marketplace thereby furthering the free enterprise system and the promotion of economic stability. 5. 316 and 5. 2589 are similar bills but in a number of significant areas the pro- tection provided by 5. 2589 and companion bills 5. 2590 and S. 2592 is stronger and more comprehensive than the comparable provisions of 5. 316. While enact- ment of 5. 316 would be a progressive step forward, it does not furnish acceptable minimums when compared with the other bifis. TITLE I-GENERAL PROVISIONS AND DEFINITIONS This Title provides rules of construction and states the purposes of the bill. Comment Re Section 1.1O1(B)(1), (2), (3) and (4), statements have been made that among the background causes for the recent riots in American cities are to be found frustrations arising out of sharp practices suffered by consumers in some of the urban marketplaces. Action to eliminate such possibilities must be taken for the poor and disadvantaged in Washington, D.C. to relieve similar pressures. Both the consumer and the fair and honest business community are adversely affected by overreaching. The lack of consumer confidence can have a depressing effect on the entire economy of the District. Rational consumer decisions, which require full disclosure of all transactions, stipulations and alternatives are among the best of protections for the free enterprise system. The protection afforded consumers by this bill will extend to persons living beyond the District because of the many consumers who shop in the city but reside in the adjoining jurisdictions. Successful redress of consumer grievances in the District of Columbia can point the way for similar consumer protection PAGENO="0099" 93 legislation for those States which have not yet provided their citizens with such laws. Re Section 1.201(7) the finance charge does not include charges or premiums for credit life, accident, and health insurance. Comment Credit life, accident, and health insurance costs to the debtor should be included or the principle of full disclosure is negated. The consumer should be able to com- pare the credit costs of prospective creditors, with all charges included in the computation of the approximate annual percentage rate. Since insurance costs are measurable expenses, the prospective buyer must be told of such costs if he is to know his total money outlay for credit. Testimony given at hearings before the Subcommittee on Antitrust and Monopoly Legislation, Senate Committee on Judiciary which began November 27, 1967, give evidence that premiums charged in many jurisdictions are excessive, although advices from the Superintendent of Insurance for the District of Columbia report that the average premium charged for credit life insurance in Washington, D.C. is $.49 per $100 per annum-the lowest or equaling the lowest in the Nation. TITLE 11-REGULATIONS AND GENERAL AUTHORITY TO COMMISSIONER AND COUNCIL Title II provides for administration of the statute by the issuance of imple- menting regulations by the Council after public hearings have been held thereon, and enables appropriate delegations of authority to carry out the functions vested in the Commissioner or the Council by the Act. Comment Title. II remedies a serious omission in the present powers of the Government of the District of Columbia by enabling the Council to move against fraudulent practices suffered by consumers. Of great potential benefit to the consumer is the wide authority given the Council to issue implementing regulations defining and proscribing certain kinds of objectionable advertising, sales, and collection practices with particular emphasis on regulations governing false, misleading, and deceptive advertising. Protection of the consumer begins by aiding him in making correct decisions prior to entering places of sale. A prerequisite to full disclosure in the marketplace is truthful disclosure in the media that brings him to the merchant so advertising. TITLE Ill-PROVISIONS OF RETAIL INSTALLMENT CONTRACTS Title III prescribes minimum standards for `retail installment contracts as to composition and disclosure, prohibits the signing in blank of agreements and. insures an additional safeguard of rendering completion certificates invalid unless true in the case of home improvement contracts. The detailed disclosure require-. meats of this Title are basically similar to the Truth-in-Lending bills as intro- duced in the 90th Congress in both the Senate and the House. Inclusion of such provisions in S. 2589 is fully consistent with the Administration position on full, disclosure. TITLE IV-RESTRICTIONS ON RETAIL INSTALLMENT CONTRACTS Section 4.102, notwithstanding Sections 28: 3-301 through 307 of the District~ of Columbia Code, prohibits any instrument or series of instruments payable to order or to bearer which when negotiated will cut off as against third parties any right of action or defense which the buyer may have against the seller. Comment Commendably, S. 2589 takes the sensible course of recognizing that the "holder in due course" doctrine shall not apply to retail installment sales. This follows the example of Massachusetts where the holder in due course rule was abolished in 1961 (see Mass. Genl. Laws Ch. 255, Sec. 12C). The burden of proof should be on those credit lenders who may argue that retail credit will be damaged by such a step. In Massachusetts there has been no flight of consumer credit capital from the state, or any diminution of credit business. Additionally, Section 4.102 will provide several beneficial effects not only in improving the consumers position but raising the general tone of the marketplace: PAGENO="0100" 94 The factor singled out by the great majority of those interviewed in a study made by the University of Pennsylvania Law School (see "Translating Sym- pathy for Deceived Consumers into Effective Programs for Protection," University of Pennsylvania Law Review Volume 114, Number 3, January 1966) and characterized as the "largest problem in the consumer fraud area" is the ability of finance companies or agencies to acquire by purchase install- ment debt paper free from the responsibility for any of the fraudulent practices perl)etrated by the selling dealers. Without the benefit of section 4.102 the risk of dealer fraud rests squarely with the consumer since the financing agencies can purchase the installment note free of consumer de- fenses. Although it has been said that the consumer chooses to purchase from dealers who will defraud him, this fact should not decide where the burden should rest because the finance company in the first instance selected t.he questionable dealer before it entered into arrangements to buy his installment. paper. The finance company or holder in due course has avenues of investiga- tion by which to ascertain the dealer's reliability and to make certain that his business ethics, products, advertising and sales techniques are not fraudu- lent or misleading. Additionally, the holder can protect himself by dealing on a full recourse basis which requires the dealer to be liable to him for buyer default by executing a repurchase agreement, binding the dealer to buy hack repossessed merchandise or requiring the dealer to set aside funding to protect himself against any contingencies. The improvement in the relationship between the finance company and the seller should prove to be an important indirect benefit to consumers. The finance company is better able to bear the risk in this proposal to shift the risk of dealer misrepresentation from the consumer to the holder. Loss of money on any particular transaction with the dealer can be re- couped in subsequent transactions. The consumer on the other hand could find himself bankrupt by a major loss sustained from a dealer in a single transaction. The shifting of the risk of fraud to the holder would not only make it more difficult for fraudulent dealers to operate but should also result in the gradual elimination of financing agencies whose failure to check on retail outlets make such fraudulent practices against consumers possible. 5. 316, instead of abolishing the "holder in due course" rule, purports to protect the consumer by requiring him to sign a contract indicating that the goods he receives conforms to the contract. This provision affords little protection. Only a consumer possessing legal training will ever understand the consequences of signing such an instrument. Most importantly, and typically, the fraud or product defect is usually not discovered at the time the original contract is signed or the goods delivered. Obviously, if discovered, the consumer would not sign the contract or accept delivery. Section 4. 103(A) prohibits any provision in retail installment contracts pro- viding for the acceleration of the time when any part or all of the indebtedness becomes payable other than a substantial default in payment or performance by the buyer, etc. Comment A common contractual provision which is often subject to the abuse found in the balloon payment (in~fra), is the authorization to give the dealer or seller the right to accelerate payments at his election or whenever he decides himself inse- cure. Enactment of this language will be in keeping with a number of existing retail installment sales acts which prohibit provisions permitting the creditor arbitrarily to accelerate any part or all of the amounts owing. Some jurisdictions permit such acceleration only upon the debtor's default as the language here permits (see Curran, Trends in Conswner Credit Legislation 312-22, Chart 19, Cols. 4, 5). The hardship and budgetary damages sustained by families suddenly required to liquidate a debt before the planned-for date often forces them into further turbulent economic problems even leading to bankruptcy or even the destruction of the family as an economic unit. Section 4.103(B) prohibits any schedule of payments under which any one installment, except a down payment, is not equal or substantially equal to all others or under which the intervals between consecutive installments differ sub- stantlall\ except rn certain specified circumstances PAGENO="0101" 95 Comment Prohibition of the commonly termed "balloon payment" is essential in any legislative program to protect the consumer interest and is designed to equalize the creditor and the prospective debtor at the bargaining table. Permitting balloon payments allows creditors to snare consumers through unusually low payments for a long period of time but with a large payment at the end of the term which may force the debtor into default, forfeiting both the goods and all his payments made to date, or make him, through refinancing, negotiate new installment arrangements. Such refinancing is always expensive to the debtor and lucrative for the creditor. Prohibitions or severe restrictions on balloon payments are fairly common in existing consumer-credit laws throughout many States. Some, however, make provisions for special employment situations as S. 2589 proposes to do in that an exception is allowed if the payment schedule is adjusted to the seasonal or irregular income of the buyer or to accommodate the nature of the buyer's em- ployment such as buying an automobile from his employer to use in demonstrating or selling as his livelihood. Obviously, continuing surveillance is necessary in this area to prevent abuse. The District's Department or Office of Consumer Affairs is empowered to do this under other provisions of the Act. Section 4.103(C) would prohibit any confession of judgment or any power or warrant of attorney to appear for the buyer or for any surety or guarantor for him to confess judgment. Comment One of the most objectionable practices still allowed in some jurisdictions in consumer credit transactions is that of requiring the prospective debtor who buys on credit to sign an authorization of entry of confession of judgment at the time he makes his purchase. Many consumers, if indeed not most, do not realize that where such confessions of judgment or cognovit notes are permitted they have authorized the finance company to record a judgment on the property purchased and as soon as a monthly payment has been missed, the entire unpaid balance becomes due. Additionally, the confession of judgment authorizes any attorney or any court to obtain a levy on the consumer's property without notification. Usually the consumer also expressly waives any stay or exemption laws now in force or to be thereafter enacted. The confession of judgment does not provide the consumer with any opportunity to present defenses in his behalf before execution is issued on the judgment. Under the holder in due course rule if the note has been negotiated, its holder may be in an invulnerable position. Unfortunately, even if defenses are available to the unfortunate debtor caught in such situations, most consumers are usually unwilling to pay the expense to raise the defenses available to them. Most States have enacted legislation dealing with cognovit clauses but in differing degrees. According to the latest information available to this office, seven States specifically allow use of the confession of judgment but with certain limitations on consumer-credit transactions. Twenty-three States, while allowing a confession of judgment, place various procedural limitations on it. Fifteen jurisdictions have voided the cognovit note as it is proposed in 5. 2589. Section 4.103(D) through (U). These provisions prohibit any contractual provisions by which the buyer agrees not to assert against the seller or against an assignee a claim or defense; relieves the seller from liability for any legal remedies; grants authority to seller or assignee to enter the buyer's premises and repossession; and waives any right against the sellers, assignee or other person acting on behalf of either, for any illegal act committed in the collection of pay- ments or in repossession of goods. Comment Commendable provisions which help to equalize the bargaining position of the creditor and prospective debtor in negotiating a contract of debt. Certainly the poor and disadvantaged, often times illiterate buyer, and probably most of the more furtunate consumers are not able to detect provisions which are one-sided in the advantages afforded the creditor. All consumers need the pro- tection of the law in insuring the absence of inequitable provisions in sales contracts. Section 4.103(11) prohibits any provision limiting, excluding, modifying, or in any way altering the terms of expressed or implied warranties made in con- nection with the original sale. PAGENO="0102" 96 C'o ?nment When a consumer buys an article he assumes typically that it will perform as. represented. In those instances where he signs a waiver such as is voided by this subsection, he fOrfeits his right to enforce the terms of any express or implied warranty. Again, it is the unscrupulous few who permit such practices, to the detriment of the entire business community. Prohibition of these practices will jirotect not only the consumers but will benefit the honest and reasonable businessman who refrains from such sharp practices. Section 4.104 limits the use of consumer goods as securities for a retail install- ment contract to the obligation arising out of the sale of such goods, etc. Such goods shall not be made to secure any past or future advance or obligation of the buyer to the seller, etc. Comment A growing body of case law withholds enforcement of sales contracts or sever- able clauses when such contracts are ifiled with provisions favoring the seller- creditor to the disadvantage of the debtor (see Section 2-302, FCC and case citations therein referenced; more recently, American Home Improvement, Inc. v~. Maclver, 105 N.H. 435, 201A Atlantic 2nd 886 (1964) and Williams vs. Walker-Thomas Furniture Company, 350 Fed. 2nd 445 (1965)). In the celebrated Williams' case in 1965 the District of Columbia Court of Appeals in remand of the lower court held that "unconseionability has generally been recognized to include the absence of meaningful choice on the part of one of the parties (in this case the buyer-debtor) together with contract terms which are unreason- ably favorable to the other party." Section 4.104 will void the taking of unwarranted security measures in the District of Columbia against the unknowing and disadvantaged by the few sharp operators who exploit such people. TITLE V-PAYMENTS Sections 5.101 through 5.106 provide for rules of the payment of installment debt including receipts; payment procedures for payment in full before maturity; determination of the date of prepayment; extensions of otherwise due dates; refi- nancing; the acknowledgment of payments of installment debt and the release of security. Comment Full accord is given in support of the principle of written dated periodic full disclosure of all aspects of payment under installment contracts. It is noted that in payment in full before maturity under Section 5.103 the amount of any refund credit shall be calculated by the so-called sum of the digits method or Rule of 78-a lucrative source of additional income for the lender or creditor. Perhaps implementing regulations and the consumer education program envisaged as part of the duties of the Office of Consumer Education will make it clear to con- sumer-debtors that refinancing of consumer debt is expensive and costs more than to persist in the payments and the discharge of debt under the oringinal contract. TITLE VI-REPOSSESSION This Title provides rules governing repossession in the District of Columbia including notice; service; buyers' rights of redemption; resale and application of proceeds; and the prohibition of the recovery of deficiencies. Comment By adoption of the "election-of-remedies" doctrine, the bill provides that a secured creditor who repossesses collateral, disposes of it, and then realizes less than the balance due, is prevented from suing on the debt for recovery of the balance. The wisdom of the arguments favoring the election-of-remedies doctrine is graphically illustrated by examination of the records of the hearings before the House Banking and Currency Committee involving a finance company in its repossession activities involving members of the Armed Forces (see Hearings, House Committee on Banking and Currency, 89th Cong. 1st Sess. Part I, June 9, 16, 17, 18; and July 14, 1965). Moreover, most low-cost items, and many of higher cost, particularly in the household goods area, are of little value to the secured creditor as collateral, since they have low resale value. Title VI represents a com- mendable improvement in t.he consumer credit law of the District of Columbia. PAGENO="0103" 97 TITLE VIl-PRIVATE REMEDIES Sections 7.101 through 7.105 provide private remedies for failure to comply with the provisions of the bill or any of the regulations promulgated by the Council and generally take the form of penalties or forfeitures. Comment These provisions as protection to the consumer in incurring installment debt are supported except that it is averred that the consumer should not have to prove by a `preponderance of the evidence" (virtually an impossible feat on information available to the average consumer) that the errors in charges, etc. must be the result of a "bona fide, non-negligent error." Since the seller or assignee presumably has the skills to avoid errors in credit charges, it is argued that he should have to meet such forfeitures as the cost of doing business if and when they are detected by the consumer. The overcharges or injustices sustained by consumers hurt them just as much whether or not violations are "bona fide, non-negligent or otherwise." TITLE VIJI-ADMINISTRAT1ON AND ENFORCEMENT Sections 8.101 through Section 8.204 provide for the creation of the District of Columbia Department of Consumer Protection, subject to the general super- vision of the Commissioner. The Department is authorized and directed to function as therein stated in the enforcement of the bill and the implementing regulation. Comment This Title provides importantly for the vigorous administration and enforce- ment of the proposed bill. The victimization of consumers is often accomplished by sharp creditors who calculatingly stay ahead of cumbersome regulatory machin- ery in the enforcement of unconscionable contracts, relying upon the default judgment and the inability of many consumers to assert their legal rights. Title VIII appears to ensure effective administrative remedies designed to force creditors to obey the law and desist from the sharp practices outlawed by this enlightened piece of legislation. Predictably, the more outrageous credit practices will be discontinued by the enactment of 5. 2589. Consumers need the representation contemplated by this Title and the enforcement powers given the District Government. This office defers to the Commissioner who in previous hearings indicated a preference for an Office of Consumer Protection vis-a-vis a Department. 5. 2590 GENERAL PURPOSE The general purpose of this Act is to provide maximum finance and other charges in connection with retail installment credit sales in the District of Columbia. Comment Since this bill is a companion bill to S. 2589, the general comments made on 5. 2589 concerning the need for additional consumer protection and the Admin- istration position supporting increased consumer protection, full disclosure, and fair practices in the marketplace in the interest of reputable businessmen are also applicable to 5. 2590. The consumer protection which S. 2590 provides is an essen- tial part of the total consumer protection plan embraced by 5. 2589, S. 2590 and S. 2592. Under present D.C. law only direct money loans are regulated by the usury statutes. While the D.C. interest rate ceiling of 8% is among the nation's lowest, the usual retail installment credit sale is not so covered due to the operation of the time-price-differential doctrine. The traditional view has been that usury laws do not apply to credit sales, since, as the argument goes, a seller may hold out one price for a cash sale and any other price he chooses for granting the privi- lege of "buying now" and "paying later." For years this view has been defended on the theory that the debtor needing to borrow money is, because of his necessity, in need of the protection of the usury law whereas a buyer of goods is not in a comparable position because he can refrain from making the purchase if he finds the time-price too high. Historically, this distinction appeared before the tre- PAGENO="0104" 98 mendous expansion of modern-day universal buying through the device of con- sumer credit or, in the days when the interests of the merchant class were con- sidered paramount. The time-price-differential doctrine is now under attack for failing to recognize the facts of economic life. The consumer should not only be granted the protection of the usury statute when he negotiates a loan to facilitate a purchase but also when he makes the same purchase on credit granted by a dealer or seller of goods. Though S. 2590 does not abolish the time-price-differential doctrine, it. does, commendably-, place a ceiling on the cost of retail installment credit. It will nar- row the present disparity between the more fortunate consumers who can obtain low-cost money loans, or draw on savings to pay cash for retail purchases and the consumers who have been forced to pay unregulated installment rates plus the extra charges which are so often larded into the credit sales contract particu- larly by those who specialize in selling to the disadvantaged. SECTIONS 3, 4, AND 5 These sections control the amounts permitted to be charged including finance charge ceilings of 20% on the first $500 and 16% per annum on amounts in excess of $500 per annum with respect to closed end installment, accounts. For revolving charge accounts 18% per annum on the first $500 and 1% on amounts in excess of 8500. Comment It is recognized that the ceilings represent the rates charged in New York and California. From t.he consumer point of view, however, it is suggested that the rates are still too high for retail credit charges, in view of the profits earned, not only from credit sales but from t.he profits on the merchandise as well. No longer is credit offered merely as a convenience to the buyer temporarily short of ready funds. Instead, credit. is aggressively sold in many stores. Hence, t.he deduction that the sale of credit must be highly profitable. This office will defer, however, to the judgment of the Department of the Treasury as to a Federal position on the rate ceilings proposed in S. 2590. S. 2592 GENERAL PURPOSE The general purpose of this Act is to amend section 521 of the Act approved March 3, 1901, to prohibit the enforcement of a security interest in real propert.y in the District of Columbia except pursuant t.o court order. Comment Since this bill is introduced as a companion bill to S. 2589, some of the general comments made on S. 2589 concerning the need for additional consumer protec- tion a.nd the Administration position supporting increased consumer protection are also applicable to 5. 2592. The protection which 5. 2592 would provide ha.s the support of this office. Strong evidence for the need of this bill was provided in the recent articles in the Washington Post and the Federal Trade Commission report to the Senate Com- merce Committee dated November 28, indicating that many low-income consum- ers are being led fraudulently to enter into mortgage transactions on their homes. These deals enabled the mortgagee to foreclose without any court hearings. Without prior w-arning, some Washingtonians literally awakened to find their homes no longer their own. 5. 2592 would give the consumer the needed protection of a court hearing at which he could raise his defenses, if any, and would forestall the use of automatic foreclosures with their traumatic effects. Miss FURNESS. As I am sure you know, the President is determined to make the District of Cohunbia a model for urban communities across the country. He feels, as I do, that the ~ation's Capital should become a showplace-a working, efficient showplace. It should be, and it can be, a leader in housing, in education, in job opportunities and employment, and, as your consideration of these bills testified, in consumer prot.eetion. PAGENO="0105" 99 These bills give us a chance to set just such a working example. Metropolitan Washington, encompassing two States and the Dis- trict-is one large, interrelated community. The protection that these bills would afford would extend beyond the District line. Merchants in the outlying areas would be influenced by comparison with goings-on in the District. They know that a consumer dissatisfied with goods or services in, say, Arlington, can hop in his car and be shopping in downtown `Washington in a matter of minutes. So, we have a chance here to benefit not just the 800,000 residents of the District but all two and a half million consumers in the metropolitan area. You can tell that I am in favor of these bills. And the Consumer Advisory Council has already given them its enthusiastic support. But let me just elaborate a little on why I think these are good bills, and why I favor the bills introduced by Senator Tydings over S. 316. Both have the worthy aim of helping the consumers in Washington. In several instances, the two proposals are identical. But I believe that your bills, Senator Tydings, are more comprehensive, and that they serve the consumer interest more ftiliy. S. 316 does not provide for the establishment of a District of Co- luinbia Department of Consumer Protection. I think consumers need this facility. I understand Commissioner Walter Washington has testified that he favors an Office of Consumer Protection set up under his personal and constant supervision. I would defer to his thinking on this matter. One of the basic consumer rights that the President has enunciated often is the right to be heard in the highest councils of government. My office exists partly to hear consumers' complaints, to put them into perspective, and to act as their voice with the President. But my office operates on the Federal level. We are not equipped to handle problems peculiar to a specific community. Several States do, however, have consumer protection agencies which are geared to help the people of that State. In an area like Washington, where every special interest imaginable is represented by a lobby, I think the consumer ought to have his voice heard, too. The department would have powers of subpena and enforcement. I think it could be a really effective advocate f or the consumer. Second, S. 316 makes no provision for limiting finance charges or other fees. And, at the moment, there are no limits in the District on the amount of interest that can be charged in retail installment sales. There are limits only on direct money transactions. It comes down to the old formula: A man who has money can get money. If a man doesn't have the wealth or the credit rating to get a regular bank loan, at the regulated 8-percent charge, he has to buy on installment. And he can be gouged by outrageously high rates, often hidden by euphemisms like "insurance charges" or "administrative costs." Sometimes those rates are 200 or 300 percent higher than rates paid by wealthier consumers. The Tydings bill would establish ceilings on finance charges. I am PAGENO="0106" 100 in agreement with this. At present, to borrow a phrase, in the District the poor pay more. I don't think they should. However, S. 2590 adopts the maximum finance charges imposed m New York and California: 20 percent per annum on the first $500 and 16 percent per annum above that amount. While I think these rates could be somewhat lower, I know there are those who hold that they provide a reasonable return. But, I will defer to the judgment of the Secretary of the Treasury. Let me run down the other benefits which would accrue to the consumers from the Tydings bill. I will take them point by point rather than bifi by bifi. I think the provisions for full disclosure of credit charges are absolutely essential. I have testified in the House in favor of strong truth-in-lending legislation on a national level. A bill designed specifically for the District would be of landmark importance. The argument for full disclosure is, to my mind, irrefutable: The lender knows exactly how much he is charging; there is no reason why he should not tell the men who wifi be paying him. One of the maj or benefits of this bifi would be elimination of the holder-in-due-course doctrine. I think this should be eliminated from our marketplace. If a man buys an item that turns out to be defective, he should not be forced to pay for that item, no matter what legal curlicues he may have been trirked into signing his name to. As things stand today, a consumer practically has to be a CPA to deal properly with installment credit. The average consumer does not realize that, after he has agreed to a purchase, he has no practical recourse against the man he bought the goods from. How many of our poor, do you think, know that the way to get redress is to keep paying the finance company while suing the original seller? How many would know how to sue if they knew they could? How many would have the money to sue? So, as usual, it is the poor and the uneducated who get taken. I think the elimination of this doctrine will improve the whole tone of the marketplace. It will give the consumer recourse against the finance company as well as the merchant. It will make finance companies choose the se]lers with whom they do business with more care. It will discourage them from dealing with fly-by-night retailers. In the long run, it should help eliminate un- scrupulous retailers from the marketplace. If they can't find finance companies to deal with, their installment sales will be cut way back. And a company that has been seffing defective goods with impunity will suddenly find itself having to make good on its contracts. This provision is not without precedent; the holder-in-due-course doctrine was abolished in Massachusetts in 1961. The consumer came out ahead, and the consumer credit business did not suffer at all. It continued to flourish in Massachusetts as elsewhere. I think, incidentally, that S. 316 is deficient in this area, too. It suggests, as a remedy, that the consumer put his mark to still another piece of paper, purporting to show that the goods conform to the contract. This is really no protection. For one thing, you would have to be a lawyer to understand the document. For another, defects or frauds are seldom discovered when the contract is signed. PAGENO="0107" 101 I also agree balloon payments ought to be outlawed. If a man orga- nizes his budget so that he can pay, for the sake of argument, $10 a month for his television set, then discovers that his last payment is $100, he is probably forced into default. The seller might as well have hit him on the head and taken his money. The bill would also prevent a man being put into a position where he unwittingly waives all the warranties on a product that he is buy- ing. He should not be asked to sign a small-print document that says, in effect, "I don't care if this product works or not." The provisions in Senator Tydings' bills governing repossess~on are also good. As things stand now, if a man dutifully pays all the installments except one, the merchant repossesses the goods and can still hit him with a deficiency judgment if resale of the goods does not satisfy the remaining debt. The seller should have to choose between getting the money or the goods. Lastly, 5. 2592 would give a consumer his "day in court" by pro- viding that foreclosures could not be automatic, but must only follow after court proceedings. Recent articles in the Washington Post and the recent Federal Trade Commission report to the Senate Commerce Committee indicate that many low-income consumers are being ~ed fraudulently to enter into mortgage transactions on their homes. Consumers have awakened to find they have lost their homes. These deals are usually contracted fraudulently. The victims are, of course, the poor, again, sometimes the illiterate, who do not know they are signing away their homes. Foreclosure is automatic, even if the debtor was refusing to pay because of defective goods. In closing, I understand there is opposition to these bills on the grounds that they would hamper the free action of the marketplace. I think that argument is ridiculous. Forcing a man to be honest is not forcing him out of business. Or, if he can't afford to run an honest business, then he ought not to be in business. These bills benefit the consumer, and this is my prime interest, but they also help the reputable businessman. They protect him from the unfair competition of mutual trust between merchant and consumer. It is only under that canopy of trust that a decent market- place can operate. So, I am very glad to lend my full support, and the support of my office, to Senator Tydings' bills. They are fair. They protect consumer and businessman alike from unreasonable risk. I think they will make Washington a better place to live. Thank you. Senator TYDINGS. Thank you very much, Miss Furness, for that very fine and concise statement. I wonder if your work on behalf of the consumers across the country has made you aware of any individual efforts of the Federal Govern- ment and States in regard to consumer protection; whether or not there are any special State departments or agencies set up to protect the consumers; and, if so, what effect they have had in those States which you have had occasion to study? Miss FURNESS. Well, there are varying kinds of protection, of course, in the various States, but it has been my observation that where they exist they have all been very beneficial. I am only sorry that more do not exist. PAGENO="0108" 102 Senator TYDINGS. You indicated an awareness of the use of the holder-in-due-course doctrine by some unscrupulous operators in an effort to perpetrate some of these practices. Is that fairly commonly found throughout the country, in this area of consumer protection? Miss FURNESS. Yes, I believe it is; definitely. The only law is in Massachusetts-this is the only State. Senator, in so many of these instances, such as in the instance of the holder-in-due-course doctrine, the consumers do not know what is happening to them when they make a purchase. They do n~t even understand that this entire process exists, let alone what is going to happen to them. And until there is trouble, they do not realize the kind of trouble that they are in. This is an occurrence on the part of many consumers, even those who are sophisticated consumers, not only the poor and the illiterate. Senator TYDINGS. In the State of \`fassachusetts, where they have a law that prohibits the holder-in-due-course doctrine to be used as a defense against fraud or defective goods, it is similar to that pro- posed in these bills, has the experience been that this has hurt com- merce or industry, or injured the ability of reputable banks and finance companies and merchants to conduct business? Miss FURNESS. I do not believe that it has in any way. After all, this law has been in existence for 6 years there. If it were going to be detrimental to the whole consumer credit business, I am sure that -we would be well aware of it by now. Senator TYDINGS. As a practical matter, without exception, banks and finance companies, when they purchase paper, do so with the requirement of recourse, or at the very minimum they require a reserve to be set aside by the seller, the installment seller, to protect the finance company and the bank, so that, actually, what we are really doing here is merely affording the consumer the same pro- tection which the bank and the finance company already has, as a result of their contractual rights they acquire when they enter into an agreement with the installment seller. Miss FURNESS. You have said it so well. The banks and the sellers know how to protect themselves. The consumers are not that knowledgeable. Senator TYDINGS. Let me ask you, Miss Furness: In your national activity, have you detected an increased awareness by consumers of their rights in recent years, an increased demand for effective con- sumer protection, and equal rights, under the law, relative to the seller? Miss FTJRNESS. That very definitely is true, hut I think that in this area of consumer credit that is probably the area in which the con- sumer is the least educated, the least sophisticated, and is the most unwilling to admit that he or she is in trouble. Many of the people who get into trouble are so embarrassed, by the apparent ignorance on theii part, or they think in some fashion they have been stupid in not understanding that many of the systems are set up so that they cannot understand them, and they do not want to admit that they are in this kind of trouble. So t.here has not been a big hue and cry about this, because nobody wants to admit that they are in financial trouble or that they did not understand the papers that they were signing. It takes something like the Washington Post series of stories which sc PAGENO="0109" 103 well illustrated what could happen in the home-improvement field to bring this to the forefront, and when a few people start saying: "Look, what has happened to me; I am in trouble", others say, "That happened to me, too. And I did not want to say so." So I think that is just the beginning. We are just hearing the very start of the con- sumers saying that they did not like many of the credit practices that are, unfortunately, practiced across the country. Senator TYDINGS. Actually, it is true in many instances that the consumer is paying three and four times the interest rates that he thinks that he is paying, and he really does not realize it until some- thing happens and he finds himself in default, and all of a sudden being sued? Miss FTIRNESS. That is right. Senator TYDINGS. We know that you have a very busy schedule, Miss Furness. I would like to spend more time with you, on this subject; but, unfortunately, the Congress is almost going around the clock, and my colleagues are not able to be here. However, we appreci- ate very much your courtesy and cooperation in being with us this morning. Miss FIJRNESS. It has been my pleasure, Mr. Chairman. Thank you very much. Senator TYDINGS. We are delighted to welcome to this committee Mr. Bronson C. La Follette, attorney general of the State of Wiscon- sin. Attorney General La Follette is also Chairman of the Consumer Advisory Council. I am particularly happy to welcome the attorney general here since my grandfather and his both went to the convention in 1912 in Baltimore together. My father served as well with his father in the U.S. Senate. The name of "La Follette" is recognized and honored not only in the State of Wisconsin but throughout the United States. We are delighted to have such a champion of the consumer testify before this subcommittee today. Mr. LA FOLLETTE. Thank you, Mr. Chairman. Senator TYDINGS. One more thing, Mr. La Follette-one more thing: the reporter for our subcommittee this morning, Mr. Martin Smith, a very eminent member of his profession, was also the reporter of the Progressive Convention where your grandfather was nominated. That really brings us altogether in a great family. Mr. LA FOLLETTE. I do not know whether I should continue under the circumstances. Perhaps, we would rather adjourn and talk about it. Senator TYDINGS. About old times. STATEMENT OF BRONSON C. LA FOLLETTE, ATTORNEY GENERAL OF WISCONSIN AND CHAIRMAN OF THE PRESIDENT'S CONSUMER ADVISORY COUNCIL Mr. LA FOLLETTE. I appear here today not as an expert on the specific problems of consumers of the District of Columbia for I have not studied them. But these bills deal with common problems faced by all consumers of this Nation and, if adopted, would set the pace for the rest of the country. The District of Columbia, our Nation's Capital, ought to be the leader in consumer protection. But, until now, the records being set PAGENO="0110" 104 in the District of Columbia have been for crime, inadequate housing, garnishments, and welfare payments. All of these problems lumped together create a contagious disease that spreads and destroys the foundation of our American way of life. And there is hard evidence to show that a major cause of the senseless violent disorders which en- gulfed our cities recently was economic oppression of the poor by a few unscrupulous and greedy merchants. Senator Tydings' bills will not solve all consumer problems. There is much work to be done. As President Kennedy said, "A trip of a thousand miles begins with a single step." But, with the exception of a few minor points, Senator Tydings' proposals strike at the core of these problems. For those unfamiliar with the wide scope of these consumer prob- lems, the major provisions of these bifis might seem drastic and un- warranted, and to the legitimate businessman these proposals may appear as unnecessary and unduly restrictive. I can only say that in my judgment the incidence of consumer fraud is extensive enough to warrant this legislation. The honest merchant has nothing to fear from the enactment of these bills and in fact he will be protected from unfair competition which takes millions of dollars away from legitimate enterprise. As Federal Trade Commission Chairman Paul Rand Dixon said recently in discussing home improvement frauds, "`The honest majority' of 194,000 home-improvement contractors needed their reputations protected from fly-by-night operators with minimal assets and gross annual sales in the millions." The National Better Business Bureau has estimated that the fraudulent and deceptive practices in the home-improvement field alone caused consumer losses of between $500 million and $1 billion yearly. Hopefully, testimony developed by this committee with particular reference to the District of Columbia will be developed which will clearly identify the nature and scope of the problem in the District and will justify the enactment of these measures. Parenthetically, I refer this committee to the report of the Consumer Advisory Council dated June 12, 1966, page 41, for further information regarding the national scope of the problem of fraud in the home- improvement industry. There are many specific parts of the bifis which are worthy of comment but time will not permit discussion of all of them. Viewed as a whole, these bifis effectively deal with the major areas of today's consumer problems-regulation and disclosure of finance charges on consumer credit contracts, protection against fraud in door-to-door sales contracts, and providing remedies to the victim and the estab- lishment of an administrative agency with rulemaking powers. In my judgment the major cause of the problems which the consumer has with fraudulent practices in retail installment sales contracts especially, and especially door-to-door contracts, is the present holder- in-due-course doctrine of the law which permits a third-party assignee to escape the defense of fraud when trying to enforce the provisions of his contract. Miss Furness commented on this in her testimony. This cute device is an open invitation to the salesman to get the name of the buyer on the contract by any means possible so that the paper can be discounted to a third-party finance company and everyone escapes liability except the victim, who is left holding the bag. He PAGENO="0111" 105 must pay the third party if he is a bona fide holder-in-due-course regardless of fraud or nonperformance. He then must try to recover from the original seller which involves the expense and time of bring- ing court action against someone who has either fled the scene or is financially irresponsible. Thus, most victims find it easier to settle than to fight even though criminal fraud laws may have been violated. This cozy little device actually encourages retail sellers to foist credit upon poor people who are financially unable to afford it because they get their cash immediately and are out of the picture. The finance company then comes in to utilize all existing creditors' remedies which are very powerful indeed. As a result; many finance companies do not check the reputation of the company from which the paper is bought and really do not even care as long as they can look to the original purchaser for payment. Abolition of the holder-in-due-course doctrine would force finance companies into making sure that the company which has made the sale is legitimate and does not use high-pressure and fraudulent tac- tics. Furthermore, finance companies would have to make sure the merchandise is of the quality represented. I think this would drasti- cally cut down the easy-credit policies of many of these companies. For an actual and typical case which we investigated in Wisconsin just recently, you can see the relationship between the consumer, the seller, and the finance company. Recently, a door-to-door salesman sold a 29-year-old housewife from Dodgeville, Wis., a central vacuum cleaning unit for her home. The salesman, after 3 hours of incessantly high-pressure tactics, assured her that she could have a $300 machine for only $17.50. All she had to do was refer the names of six of her friends at $50 a name to pay for the contract. Each additional referral would be $50 in her pocket. This unfortunate person submitted 45 names, has just finished J)aying $990.72-which included $799 for the cost of the machine plus finance charges-to a finance company. The original company which discounted the note has left the State and the central vacuum cleaner machine needs repairs. Under the four bills now before this commit- tee this experience probably couldn't happen in the District of Columbia. By eliminating the holder-in-due-course doctrine, by set- ting up a 3-day cooling-off period, and by establishing safeguards on the home-improvement and door-to-door retail installment contract, the main avenues of the gypster and the con artists are closed. I would suggest, however, since referral selling is one of the principal techniques used by most of the companies practicing fraud today, it should be specifically outlawed or very strictly regulated as in Illinois. Two States have already declared referral selling illegal under the lottery laws and we are attempting to have this matter declared an illegal lottery in Wisconsin, but have difficulty in getting the matter before the State's highest court. With respect to the Department of Consumer Protection under S. 2589, I have these comments: Nowhere in the bill is there a provision setting forth how the Commissioner or the Council are to be chosen, on what basis they are to be chosen, for what period of time, and whether their actions are in any way reviewable by the electorate. Unless there are provisions setting forth the machinery for creating the position of Commissioner PAGENO="0112" 106 and the Council elsewhere, I would consider this to be a major weak- ness of the bil.. Our experience in Wisconsin with the department of agriculture is a case in point in that the department has excellent laws to work with but has not done the job because it is insulated from the public and dominated by business interests. I would fear the same type of development in the District of ColunThia unless safeguards are built into the law. Section 2.101 of S. 2589 gives the Council the power to make regulations to "safeguard consumers from unfair and unconscionable advertising, sales, credit, and collection practices in connection with retail installment transactions.' Section 2.102 provides that no regulation shall be adopted until after a public hearing has been held thereon. The power to promulgate ru es and regulations is necessary, but it should not merely be limited to retail installment contracts because of the obvious loopholes. What about false advertising generally? Or what about c.redit card and revolving credit transactions? Further- more, there should he a method by which c tizens can petition the Council for the adoption of rules or the holding of public, hearings on certain problems. Section VIII of S. 2589 establishes important administrative procedures in the Department of Consumer Protection. The most iniportant of these in addition to investigation, education, and voluntary cooperation is the power to obtain injunctive relief in the civil actions against fraud. I think this is a most. significant part of this proposal. This will permit voluntary settlement of most consumer fraud cases without having to resort to lengthy litigation, providing the consumer with restitution, and eliminating the fraud- ulent practice. Seventeen States have adopted similar laws and they have worked very effectively. In Illinois, for example, between 1961 and 1964, the Illinois attorney general's office processed over 15,000 consumer fraud complaints, collected over $1 million for the victims of fraud, and had to go to court to obtain an injunction in only 100 cases. He was using the powers which are very similar to the powers contained in this bill esta.blishing the Department of Consumer Protection. The low-income consumer is hardly powerful enough to fight the deceit and misrepresentation of the unscrupulous merchant in today's economy who uses the law and abuses the law to carry out his scheme. The enactment of these hills for the District of Columbia will pro- vide significant protection for the consumers of this area and the legitimate businessmen who are competing for the consumer dollar. Franklin D. Roosevelt said 30 years ago: The test of our progress is not whether we add more to the abundance of those who have much; it is whether we do enough for those who have too little. It is with this "test of progress" that. all of us must continue with our efforts for the protection of the poor, the uninformed and the uneducated against the deceitful and unscrupulous practices in the marketplace which are sapping their self-respect, their confidence in our American way of life and their hard-earned but. frequently pitifully inadequate resources. The other day, one business executive reacted rather unfavorably to the proposed Department of Consumer Protection for the District PAGENO="0113" 107 of Columbia. Tie felt that such a Department would be "nothing more than a wailing wall, and that the District does not need one." If a "wailing wall" means giving a voice to the consumers of this area, if it means giving a forum to those who have been deceived and defrauded, if it means protecting the poor, if it means permitting buyers to be informed and educated about their purchasing decisions, then I disagree with this executive's view that the District of Co- lumbia does not need one. rpl~e Nation's Capital not. only needs one, it is long overdue. Senator TYDINGS. Thank you, Mr. Attorney General. It was an extraordinary fine statement. You have been fighting this battle in- Wisconsin for the consumer for many years. What kind of opposition have you faced? What kind of arguments against, your efforts to protect the public have you faced? Mr. LA FOLLETTE. Well, it is rather unusual to hea.r the kind of arguments that are made in my State, which has a reputation of being progressive and a forward State, and in many respects this is justly deserved, but every time that we come forward with a proposal that the truth would be very beneficial and effective, as it is in other States, for example, the ones which I referred to in my prepared testimony, we find it very difilcult to move forward, and I am afraid that the area of consumer protection has been considered in our State to be too involved with partisan politics, unfortunately. This is certainly not an area which should be concerned with partisanship, because the prob- lems of the consumer are not the particular problems of either major political party. But the major argument that we get against setting up a simple law which would provide the district attorney or the attorney general the power to go to the circuit court and get an in- junction against fraud, after a full trial and all protections for the businessman, fully protected from any unauthorized type of action- we get the argument that this is too much governmental interference with private enterprise and that this would give too much power into the hands of the attorney general or the district attorney. Of course, this overlooks the fact that under the existing law the district attorney already has significantly more power in this area, because what happens when a person is really violating the existing criminal fraud laws by perpetrating a scheme to defraud the consumer is that the district attorney has the discretion to commence a criminal action with potentially very severe criminal sanctions being imposed, but the trouble is that because of the fact that a criminal case is so very difficult to prove and time consuming, and the harsh penalties of criminal law do not really protect the consumer at all, hut are directed against the perpetrator of the fraud, these remedies are very seldom, if ever, used in the typical consumer fraud area. That is why this is an area which is so rampant with unscrupulous merchants. And if you use the proposals merely to get at individuals who are presently vio- lating criminal laws that are not being prosecuted, then it is another very useful mild tool, indeed, placed in the hands of the district at- torney who is responsive to the needs of the people in his community, because, at least, in our State he is an elected public official who has to stand for election every 2 years, whereas, for example, in the depart- ment of agriculture which presently has the major responsibility for investigating and enforcing consumer protection laws in our State, S8-64S-GS-----8 PAGENO="0114" 108 the head of the department is insulated, really, from the wifi of the people. Senator TYDINGS. Is that a gubernatorial appointment? Mr. LA FOLLETTE. We have a unique setup in Wisconsin with a weak executive system. The head of the department of agriculture is appointed by an eight-man board consisting of five citizens, and they, in turn, are appointed by the Governor for 6-year staggered terms, so that he is not even responsive to the will of the chief execu- tive; he is responsive to this part-time board of private citizens that is supposed to set the policy for the department of agriculture. He is not responsive to the needs of the consumers of our State. They have had this power for over 40 years, but have been reluctant to use it outside of sending out warning letters once in a while, so that the fight is still continuing. I think that eventually, we will be successful, but it will take a little more public pressure from the average citizen before the legislature will respond. But we are gaining ground all of the time. I think that in your question to Miss Furness, you wondered what the average person is thinking about these matters, and I can say that this is a problem that touches persons from all walks of life. I think efforts on the part of Government to correct the evils which have e~dsted for a long time in this area have the general support of the people as a whole. Unfortunately, it is the same old story, that the opponents are very well organized; they have well-financed pressure groups with lobbyists who contribute to the political campaigns and they are, unfortunately, in the position where they can exert more pressure at the legislative level than does the voice of the people. It is a continuous battle. Senator TYDINGS. We are very grateful to you, Mr. La Follette, for your effort and the time that you have devoted to the preparation of your testimony, and to be with us, I want to express on behalf of myself and the entire committee our thanks to you. Mr. LA FOLLETTE. I wish to congratulate you for your work in this area. I wish you every bit of success in getting this legislation passed, because I think to have these issues debated in the Halls of Congress will provide, even if the battle is temporarily lost, a national forum for focusing on these issues and will be of great benefit to the people of this country. Senator TYDINGS. Thank you very much. Our next witness is Mr. C. Robert McBrier, chairman of the Legis- lative Committee, Retail Bureau, Metropolitan Washington Board of Trade, who is accompanied by Mr. Harvey H. Holland, Jr. STATEMENT OP C. ROBERT MeBRIER, CHAIRMAN OF THE LEGIS- LATIVE COMMITTEE, RETAIL BUREAU, METROPOLITAN WASHINGTON BOARD OF TRADE; ACCOMPANIED BY HARVEY H. HOLLAND, JR., OF WILKES & ARTIS, WASHINGTON, D.C. Mr. MCBRIER. Mr. Chairman, I am C. Robert McBrier, chairman of the Legislative Committee, Retail Bureau, Metropolitan. Wash- ington Board of Trade. Accompanying me this morning is Mr. Harvey H. Holland, Jr., counsel for the board of trade and a member of the firm of Wilkes & Artis, a Washington firm. PAGENO="0115" 109 Senator TYDINGS. We are delighted to welcome Mr. Holland. Mr. HOLLAND. Thank you, sir. Senator TYDINGS. He is from a very distinguished law firm. Mr. MCBRIER. And also accompanying me are several merchants from the Washington area. Our testimony is as follows. I appreciate this opportunity to present the views 1 of the Metro- politan Washington Board of Trade regarding S. 316, 5. 2589, and 5. 2590. The board of trade shares with proponents of these bills an earnest desire to protect National Capital consumers against unfair, fraudu- lent, or deceptive practices in the retail marketplace. We join with Mayor Walter Washington and others who have expressed the need for comprehensive and effective consumer pro- tection programs in our community. We agree with Mayor Washing- ton regarding the need for unified community action in this important area of public concern. It is the intention of the board of trade to support and work with the new city administration in its efforts to implement improved and expanded consumer protection and information programs in our National Capital community. And we further concur with the chairman of this subcommittee, Senator Tydings, who said, upon introducing these bills, that their enactment is necessary-and I quote-"both to protect consumers and to safeguard the legitimate interests of reputable businessmen- who are the vast majority of merchants in this area." The Metropolitan Washington Board of Trade is no newcomer to the field of consumer interest protection. Our organization has long advocated and worked for unified action by all segments of our community in eliminating pernicious business practices that are injurious to consumer rights. Toward this end, the board of trade, through its iepresentatives on the drafting committee authorized by the former Board of Commis- sioners, participated in the formulation of 5. 316, which was intro- duced by Senator Morse. The board of trade believes that enactment of S. 316 will eliminate abuses in our community's retail marketplace, providing extensive protection to National Capital consumers without unduly restricting the normal business practices of ethical retail merchants. The board of trade also endorses the broad objectives of S. 2589 and S. 2590, although with reservations regarding specific aspects of these proposals. However, let me stress that such reservations stem from the belief that S. 2589 and S. 2590 can be made even more effective in carrying out the chairman's objective of protecting consumers and safeguarding the legitimate interests of reputable businessmen. Our organization fully supports enactment of a law which will require a full and clear disclosure to purchasers of the essential terms and conditions of sales, including an adequate description of the merchandise, the price to be paid, the amount of all charges relating to the extension of credit, and a clear statement of consumer rights and obligations under the purchase agreement. Upon introducing 5. 2589, the subcommittee chairman expressed his intention to enact legislation for the District of Columbia requiring 1 Supplemental statement subsequently received may be found on p. 298. PAGENO="0116" 110 credit disclosure, to quote Senator Tydings, "similar in effect and purpose to the truth-in-lending legislation which has recently Passed the Senate." Subsequent to the introduction of S. 2589, the House Banking and Currency Committee on I\oveml)er 28 reported a bifi substantially similar in disclosure requirements to the Senate-approved version. It is virtually certain that the House will act on this measure within a few months, during the second session of the 90th Congress. Thus, retailers in the District of Columbia and in every State could become subject to the regulatory features of the Federal credit disclosure law. It is, therefore, a matter of concern that significant differences exist between the credit disclosure provisions of this proposed Federal law, as contained in 5. 5 and H.R.. 11601 and those contained in our proposed local law, S. 2589. The Federal bill would not require a statement of finance charges in terms of annual rate, either in the case of certain open-end credit plans or in the case of installment transactions where the finance charge does not exceed 810. S. 2589 would conflict with the Federal hifi by imposing the annual rate requirement under those circumstances. The Federal bifi would apply, of course, to all business in the Metropolitan Washington area-not only in the District of Columbia but in Maryland and Virginia as well. The legal efficacy and in~pact of S. 2589 on transactions entered into outside the District of Columbia is uncertain. The board of trade does not believe that substantive differences between the Federal disclosure law and a District of Columbia credit disclosure law wifi serve the interests of consumer information and protection in our metropolitan area. Quite the contrary, significant differences between a Federal and District of Columbia credit disclosure law would serve to confuse the consumer, unnecessarily burden the businessman, and upset the com- petitive balance that is desirable for the economy of the Metropolitan ~\Tashington marketing area. Indeed, such a conflict, because it would inevitably result in arbi- trary and artificial differences in credit transactions conducted in our area, would defeat one of the principal consumer protection aims of the Federal bill. Let me here refer to the Senate report on S. 5 which concludes that a uniform system of disclosures as is provided by that bill "permits the average person to compare the cost of credit from * * * alterna- tive sources of credit.." Moreover, states the Senate report on S. 5, enactment of Federal credit disclosure legisia tion "would pro tect the honest businessman from * * * unethical competition by requirlng all creditors to dis- close the cost of credit in uniform manner." The key to improved and strengthened consumer mnformatmon and protection in retail credit transaction is uniformity. A consumer in the Metropolitan Washington area, whether purchasing merchandise in the District, Maryland, or Virginia, is entitled to credit mnformatmon based on a uniform system of disclosure. Yet enactment of S. 2589 as presently written would create a situation in which a metropolitan area consumer in the District PAGENO="0117" 111 would transact purchases under a credit disclosure law substantially different from the Federal law applicable in Maryland and Virginia. It is for this reason that the board of trade does not believe such undue proliferation of credit disclosure laws can possibly serve the best interests of the consumers in our metropolitan area. We therefore urge that the Federal provisions with respect to credit disclosure, as contained in S. 5 approved by the Senate and 11.11. 11601 approved by the House Banking Committee, should be identically incorporated into legislation regulating retail credit in the District of Columbia. The pros and cons of proposed Federal provisions covering credit disclosure have been exhaustively debated before committees of both the Senate and the House. The board of trade believes that these Senate-House deliberations have culminated in credit disclosure provisions which will well serve the Nation's consumers. We believe that the Federal credit disclosure provisions will also serve to protect the interests of consumers in our Nation's Capital, and we, therefore, urge that the District of Columbia bill conform to the Federal legislation in this area. I would like now to refer to section 4.102 of S. 2589 which deals with the doctrine of "holder-in-due-course." While recognizing the need for greater protection for the consumer in this area, the board of trade is continuing to study this provision in an effort to determine the effect it may have on the retailers who must depend upon bank or other financing in which the assignee must occupy the position of a holder-in-due-course and the effect on normal commercial and financial transactions. In its supplemental statement the board of trade would expect to state its view on this provision or to suggest an alternate approach. The board of trade further supports strong penalties and effective remedies for violations provided that language is included which would adequately protect the honest businessman from being unfairly penalized because of an inadvertent or clerical error or unintentional mistake which he is given opportunity to correct after being brought to his attention. The board of trade supports provisions which would prohibit large so-called "balloon payments" at the end of a series of smaller install- ment payments. We support provisions for fair and equitable treat- ment on cancellations, and provisions relating to prepayment rights of consumers. The board of trade also supports those provisions strengthening laws to protect consumers against false and misleading advertising. The board of trade supports those provisions affording substantial protection to the buyer under repossession and redemption procedures, with the exception of section 6.105 of S. 2589 which requires that the seller elect to either repossess without any subsequent deficiency judgment, or to pursue his efforts to collect the unpaid balance without repossessing the goods. It is the position of the board of trade that if the seller fully follows the highly protective repossession procedures, including notices to the buyer, such seller should have preserved to him the right to require the buyer to fulfill his obligation by requiring the buyer to pay any balance or deficiency owed. We believe that the legislation should guard against abuses in connection with deficiency judgments. However, we are not prepared PAGENO="0118" 112 at this time to support their total elimination which, in effect, would operate to discharge the purchaser from repaying a part of his justly incurred obligation. Recommended maximum finance charges: With reference to provisions of S. 2590 setting maximum finance charges and other charges on retail installment credit sales, the board of trade would be in accord with the setting of such ceilings at the following levels: Recommendation for open-end credit plans: 1)~ percent on the outstanding balance from month to month irrespective of the amount of the balance or the basis on which the particular merchant computes the monthly balance-that is, opening, adjusted, closing or the many variations thereon. Allowance of a monthly minimum charge up to a ceiling of $1. We have been authorized to make available to you the detailed "Study of Consumer Credit Costs in Retail Stores in Maryland," sponsored by the Maryland Council of Retail Merchants, Inc., and carried out by the independent public accounting firm of Touche, Ross, Bailey & Smart. This study~ covered large, medium, and small stores on a representative pattern and, although the information was not drawn directly from Washington, D.C., stores, a good number of the stores involved in the study operate places of business both in Maryland and the District of Columbia. The costs of handling such credit transactions have increased since this study was completed in 1963. This study will show that even at the finance charge rates then employed, the large stores were not fully covering all their credit costs and the small stores were falling far short of covering such costs. Accordingly, it is the feeling of the board of trade that any maximum ceiling on finance charges should be a ceiling under which all legitimate businesses can follow their established procedures, which should be fully disclosed to the buyer. If legislation is to attempt to adjust rates based on the type of balance utilized, as undertaken in S. 2590, then such rates should be adjusted up from the 134 percent rather than down from that rate. The 134-percent monthly rate on open-end credit plans is the rate ceiling established in the great majority of jurisdictions having statutes on this point, including Maryland-up to $500-New York, Massachusetts, and California. No other statute has established different ceilings based upon various methods of stating the monthly balance upon which the finance charge is applied. Recommendation for retail installment contracts: $12 per $100 per annum on unpaid balances of $1,000 or less; $10 per $100 per annum on so much of the unpaid balance as exceeds $1,000. Minimum charge ceiling on such retail installment contracts of $10, if the service charge so computed is less than $10, but if the due date of the last installment is 8 months or less after the starting or effective date, then such minimum to be $8. As the subcommittee wifi note, the proposed change on the rate ceilings as applied to retail installment contracts is twofold: (1) The expression of such rates in terms of dollars per $100 rather than in terms of percent per annum (20 percent and 16 percent); *Study referred to may he found In the files of the subcommittee. PAGENO="0119" 113 and (2) the increase in such ceilings to $12 and $10 (in lieu of the $10 and $8 per $100 i~te which would be required under the 20-percent and 16-percent provision in S. 2590). In connection with the setting of such maximum charges on the basis of an annual percent, the position of the board of trade on this point is as previously stated with regard to disclosure in terms of annual rate. With reference to the dollar per $100 maximum rates of $12 and $10, these are the rates which were established for and are now in effect in Maryland, which rates were established after several years of study and information was made available to show what the merchants needed to come close to covering their costs of handling credit accounts. I again refer you to the Maryland study for supporting data on this point. In addition we refer you to the National Retail Merchants study entitled "Study of Consumer Credit Costs in Department Stores-1963," for further pertinent information in support of the findings made in the Maryland study. * The minimum charge ceiling of $10 and $8 on retail installment contracts is also the same as the rate set for Maryland (art. 83, sec. 153D.(b) (3) of the Annotated Code of l\~faryland). The practice of stating such rates in terms of dollars per $100 has good precedent here in the District of Columbia by virtue of the Auto- mobile Finance Act enacted by Congress in 1960. This act specifically establishes such maximum finance charges on that basis and in a range of $8 per $100 to $16 per $100 per year, depending upon the age of the automobile which is the subject of the transaction (title 40, ch. 9 of the District of Columbia Code). In conclusion, let me once again thank your subcommittee for this opportunity to state the position of the Metropolitan `Washington Board of Trade on this extensive consumer protection legislation your subcommittee is considering. From the introduction of these bills in the latter part of October to the present, we have continued to receive numerous inquiries and suggestions concerning various technical and procedural aspects of the proposed legislation. Time has not permitted proper assimilation and evaluation of all the points raised. For this reason, we would appreciate the opportunity to submit such supplemental statements and materials dealing with specific language and provisions as will aid your sub- committee in its deliberations. Senator TYDINGS. Thank you for your very fine and concise state- ment. I should like to ask you some questions. First of all, in relationship to your comments about the disclosure provisions, you say that the principal purposes of the Truth-in-Lending Act are to bring about uniformity, and that if our bill requires any more complete disclosure than the Federal bill. This might upset the uniformity of the act. How is that going to injure the person who is buying, if he has more information in the District of Columbia than he might have if he were buying in the State of Illinois or California? Mr. MCBRIER. I think I referred to the testimony which we identi- fied as testimony on 5. 5, that one of the objectives was to enable the consumer on a national basis to make comparisons. A consumer might ~Study referred to may be found in the files of the subcommittee. PAGENO="0120" 114 well shop in Maryland or in Virginia or in the District of Columbia and this would tend to enlist confusion if we had the national bill apply. Senator TYDINGS. Getting down to nuts and bolts, the basic difference in our proposal is that it would require disclosure on the basis of the amount of interest paid per year. This was the original proposal of the national truth-in-lending bill. 20 percent is the annual interest rate whereas the Federal bill now only says $12 per year per $100. I can remember very well when I was on the board of directors of a bank that we always had to think twice on installment loans. The yield was 12 percent, when actually it is 24 percent. So, what you are doing then is really telling the purchaser a little bit more. The average purchaser does not realize that $12 per year per $100 is 24 percent interest rate. and if he had to make two purchases and he was told on one purchase that he had to pay 20 percent interest per year and on the other only $12 per $100 per year, he is going to buy the $12 per S100; is that not right? Mr. MCBRIER. If the national bill provided for it being stated in terms of an annual rate, we would be in favor of that. Senator TYDINGS. We have to get the national bill passed in the Senate. I do not see how providing more information is going to hurt anyone. Mr. MCBRIER. If the national bill provided that the rate might he stated as $12 per $100 per year but that the District of Columbia bill might provide it be stated as 24, might this not be confusing? Senator TYDINGS. I gathered from the context of your argument that competing merchants would only set their interest cost the way their national bill had it. There would be nothing to prohibit the merchant from saying that the cost of his merchandise interest, which was the cost to the consumer, would be 24 percent. He could do that right now. He does not need any permission to make a disclosure of interest. I do not see how that is going to disadvantage the merchant. The only thing that it will provide is clearer insight as to the cost of the money to the consumer. Mr. McBHIER. Again, we are not taking exceptions to this. We are calling attention to the advantage to the consumer of their being uniformity between the District bill and the national bill, in that all of us would have to comply with the national bill, but if there were a District bill which would be different, this could be confusing, in attempting to comply with both. Senator TYDINGS. WTe know that merchants, as a whole, will follow the particular technique in advertising interest which is most effective. The merchant does not have to he told by the Government to do so. They will do it themselves. Mr. MCBR~ER. The le~itimate businessman in the District today is identifying, as a matter of practice, what the service charge ii It is expressed as a percent of the balance, or in some cases it is ex- pressed as in the Maryland area today as a number of dollars per hundred, which is the provision that Maryland has. Senator TYDINGS. Let me ask you this: You indicated that you are not prepared to take a position vis-a-vis the commercial doctrine PAGENO="0121" 115 of the holder-in-due-course defense against fraud and faulty mer- chandise. S. 316 makes the proposal that in order to avoid fraud and faulty merchandise a certificate of approval be secured on each installment contract; it makes certain that there is no fraud and no faulty mer- chandise. Do you feel that that is an effective way to protect the consumer against fraud or faulty merchandise? Mr. MCBRIER. We thought, at the time that we cooperated in the development of this, that it would be adequate. We have quali- fied our testimony to say that this may be fine, but we would like to study this to a greater extent.. We are concerned that a number of* the small merchants, in particular, are financing their credit, and we want to find out what the impact would be on them as well as on the consumer. SenatorTYDINGs. We have had substantial testimony here already of high-pressure, door-to-door salesman selling something to the average person which he does not realize he is buying; that is, what he is buying, and that he is signing a mortgage on his own home. And he will sign that, just like the installment contract, or anything else, when under pressure. And hence he loses the normal protection that would be afforded to an intelligent, educated buyer. Mr. MCBRIER. We think that this is very influencing to us, too. We are just asking permission to take more time on the question. Senator TYDINGS. I think the final area where you expressed con- cern is that of the top interest rate. As I gathered, you feel that our top level, which would be $10 per $100 per annum, or 20 percent, should be raised to $12 per $100 per annum or 24 percent; and, as to the unpaid balance, the unpaid balance over $1,000 could be at the rate of 15 to 20 percent, or from $8 to $10 per $100. Mr. MCBRIER. We would propose this in full recognition that this is a maximum ceiling. We have many retailers today charging less than even what you propose. We also have a condition, however, where many stores are not recovering their costs. Senator TYDINGS You said you had some surveys on this? Mr. McBRIER. We do have some surveys. Senator TYDINGS. I wonder if we could have them, because they would be helpful. Mr. MCBRJER. We are prepared to make them available. The surveys cover the cost of credit as it is related to installment contracts as well as revolving credit. Senator TYDINGS. I wonder if you could give us the names con- tained in that survey, so that, if we are going to change the interest rate, we would like to have testimony on the record to show that a given concern could not compete at that rate without losing money. Mr. MCBRIER. We can make available specific names of the stores that participated. Senator TYDINGS. That would be most helpful. Let me say, Mr. McBrier, that I appreciate your testimony, and also appreciate Mr. Holland being here. Your testimony has been helpful, and we appreciate your fine statement. Mr. MCBRIER. The stores represented by the board of trade are very anxious to cooperate with your committee. PAGENO="0122" 116 Senator TYDINGS. I appreciate the attitude that you are taking, because, candidly, I am doubtful if we can get any form of legislation passed without the support of the board of trade. Mr. MCBRTER. Thank you. Senator TYDINGS. Our next witness is Mr. Stephen M. Nassau, who is accompanied by Mr. Mark Ugoretz, of the Greater Washington chapter of the Americans for Democratic Action. We are delighted to welcome you gentlemen before us. In the interests of time, I am going to incorporate your entire statement in the record as though read, and ask that you comment and make the main points that you wish to make in relationship to the pending legislation. STATEMENT OF STEPHEN M. NASSAU, OF LANDIS, COHEN & SINGMAN, WASHINGTON, D.C., REPRESENTING THE CONSUMER PROTECTION COMMITTEE OF THE GREATER WASHINGTON CHAPTER OF AMERICANS FOR DEMOCRATIC ACTION; ACCOM- PANIED BY MARK UGORETZ, MEMBER Mr. NASSAU. Mr. Chairman, I will then go to the end of my state- ment where we make a recommendation. I will do that in lieu of reading the statement in full. One of these is involved in the field of labor law. We would like to see stronger remedies than provided in the bill. We feel that it would be even more helpful in this area of the law. Most likely, merchants will be deterred more by the possibility of having to post such notices than by the danger that fines might be imposed against them. And a notice-posting provision would serve to warn even the most unwary purchaser that the merchant had formerly preyed upon the public. In this way it would serve a consumer-education function. Senator TYDIXGS. Do you have any language to submit? Mr. NASSAU. We can do that, and we will do that. Senator TYDINGS. We would like to have it. It is a novel idea. Mr. NASSAU. We feel that it would be a very substantial deterrent, as I have already stated. Senator TYDINGS. It would be all right, insofar as the store was concerned, but we have found to date that the danger is not from the installment sales contract entered into with the store where the buyer goes to the store, but where the consumer is preyed upon by the door- to-door salesman who contacts the little housewife and does a real sales job. In one instance, we had an example of a $300 television set for which a person paid $1,200. Mr. UGORETZ. The problem with that type of salesman is that he does not have a home base in the district in which he works. He comes in from another jurisdiction, makes his profit, and leaves. I think that the part of the bill that would attack that type of salesman is the ability of the law-enforcement officer in charge of the enforcement to go into court and get an injunction which he can get faster than he can under the criminal statute. Mr. NASSAU. I would suggest that a posted notice be put in the same contract of this door-to-door salesman, after being found in violation of the law. I am not sure that you can do this, but if you can, I would like to see something like this to take care of that situation. PAGENO="0123" 11.7 Also, I would like to say that we support the approach of S. 316 as the proper method of legislating in this area, and by the "approach" I mean that S. 316 is an enabling statute, delegating to the District of Columbia government the power and the authority to pass the retail rules and regulations. The other bills, also, delegate authority to the Council, but most of the important details are taken care of in the bill itself. Senator TYDINGS. You would rather leave it open in the hope that the Council would protect the consumer rather than have us protect the consumer? Mr. NASSAU. We are sure that you will protect the consumer, and we are all for the strongest legislation possible, but we are also in favor of home rule for the District of Columbia, and we think that this would be a significant precedent. Senator TYD1NGS. You want to let the consumer wait a little while? Mr. NASSA~U. I think that you will be balancing the objectives and evils in that case, and I think that home rule is a higher objective, to some extent, but I do not think that the timelag would be that critical. If Congress is to act, as I said, we urge a passage of the strongest bill possible. We endorse the inclusion of the revolving credit plans in the bills. We would like to see a situation taken care of which is touched upon in the bills but is not completely remedied, and this is that many stores in the area charge as their finance charge a percentage of the balance at the beginning of the month regardless of the amount of I)ayment or credits during the month that the customer has in his favor. In other words, the customer who purchases $100 worth of merchandise at the beginning of a month is billed $100 at the beginning of the next month. If he pays $100, he would have no service charge, but if he pays $90, the next month's bill, for the following month, will have a finance charge based on the $100, not on the $10 carried over. In this circumstance, the interest charge would be 15 percent per month or 180 percent per year, in the illustration that I mention. We feel that many customers are unaware of this method of computation. As the result, when they buy goods, they pay them off substantially in the following month, feeling that they will not incur a heavy finance charge, only to discover that interest is charged on the entire amount. We would like to see that type of calculation prohibited or at the very least a requirement that there be a clear disclosure that upon failure to pay the entire opening balance the finance charge will be computed on that balance regardless of the size of the balance carried over to the next month. In the field of home-repair contracts, we would also like to see the law require any mortgage deed of trust instrument to state clearly, at the place for the buyer's signature, that they are conveying a security interest in their home and what the consequences could be of such action. As you said a little while ago, a lot of people do not know what they are signing when they are signing these papers. If we could make this as clear as possible at the place that they have to sign, I think it would be very helpful. We would also like to see first-mortgage contracts covered under the disclosure portions of the bill. The buyer of the house often is PAGENO="0124" 118 unaware of the cost and the savings that he might have by paying over a shorter period of time, making a larger downpayment, or paying at a lower rate of interest. Senator TYDINGS. I do not follow you. Mr. NASSAU. When a person buys a house today, he may know that he is paying 6-percent interest over 20 or 30 years but he may not know that a $20,000 house, a.t the end of that time, will cost him $40,000, or that if he pays it off in a lesser period of time it may actually cost him $35,000, or if he pays it off at a lower rate of interest and makes a larger downpayment, he could save a substantial amount of interest money. I do not think that the typical buyer is aware of the amount of interest that will accrue over 20, or 25, or 30 years. Senator TYDING5. That is a little different setup. You are only paying one rate of interest on the remaining amount. What you are saying is that you should have a table so that they would be told how much it is for 20-, 30-, 40-, 5-, or 10-year loans. I do not see anything there that is fraud. Mr. NASSAU. I am not saying that there is any fraud here; not at all. Senator TYDINGS. I do not see what you are getting at. I do not see the analogy. Mr. NASSAU. I would just like to see the bill extended in this area, so that- Senator TYDINGS. Extended to what? Mr. NASSAU. To cover the total amount paid over the entire term of the mortgage-the principal cost. of the house, the interest over those years, and the total given- Senator TYDINGS. You mean what the total of all of those payments would be if it was a 20- or 30- or 5- or 10-year loan? Mr. NASSAU. Correct. Mr. UGORETZ. It would call for the same disclosure element that the retail installment contract would call for. Senator TYDINGS. It is not quite the same. You are limited in a mortgage, depending on the jurisdiction, to a flat 6-percent interest on the unextended balance. That is all that can be charged, but you know what you are paying. The problem with the retail installment system is that people pay sometimes as high as 100- to 200-percent interest and have no idea what it is costing them while they know, in the case of a mortgage, exactly what the money is costing. Mr. NASSAU. It would not involve any fraud. I do not believe there is any fraud in this area. Senator TYDINGS. Then, what is the problem? Mr. NASSAU. The problem is that the purpose of these bills, I think, is to inform the customer of what he is buying as fully as possible. Senator TYDINGS. The purpose of these bills is to protect the cus- tomer from fraud and deceptive practices, especially the poor, to see that he is not preyed upon, quite frankly, by people who deliberately attempt to deceive them. If you have a specific problem, we will try and cover it. I am still not clear as to your problem. I see the problem where somebody is fraudulently induced to sign a mortgage on their home and does not realize what they are doing-that their home will be taken away from them. We have had that question come up here. PAGENO="0125" 119 Mr. NASSAU. I am getting away from the fraud area. I am just asking for a full disclosure, as much as possible, in all types of install- inent contracts. I think this will be very helpful, and I believe that the House truth-in-lending bill covers first the mortgage situation. Going on, we endorse the setting of maximum finance charge rates, but we question whether the rates set forth are reasonable, or whether they might not be too high. WTe feel that 20 percent might still be an onerous burden on the poor citizen. We would like for the Congress to delegate to the District of Co- lumbia Council the right to hold hearings on this problem, to investi- gate what the most reasonable charge would be, from the point of view of both the consumer and the merchant, and then set the specific charge. Even the setting of the maximum level will not be enough in all cases to protect the consumer. A store which does a large percentage of credit selling, as many do, can merely increase the cash price of its merchandise to hide the real credit charge. The subcommittee should study this problem with an eye toward solutions such as providing that extreme markups or prices far out of line with the price of similar goods elsewhere in the community would constitute prima facie evi- dence that the finance charge is greater than stated and is, in fact. hidden in the cash price. We are pleased with the attack by the bills on the Ora Lee Williams situation where a merchant was allowed to repossess all of the items which the customer had purchased on credit, even though she had paid well over the amount due on most of the goods. The bills deal with the after-acquired situation. We question whether or not the same inequity could not result from the purchase of several items at the same time under one contract. We urge the subcommittee to amend the bill to prevent the repossession of all the items purchased under one contract where the principal already paid is sufficient to fully pay off any of the acquired items. Accordingly, we recommend that the bill be amended as we have set forth in our prepared state- ment, adding the recommended language to the bill. S. 2589 authorizes the Council to make appropriate regulations dealing with unfair and unconscionable advertising in relation to retail installment sales contracts. We heartily urge that the wording be clarified or expanded to allow regulations to safeguard consumers from all unfair and unconscionable advertising, whether in regard to retail installment sales or not. We would like to see a provision in the law prohibiting an employer from firing an employee because his wages were being garnisheed. The employee, who not only gets himself into debt but as the consequence of this debt loses his only means of removing the debt-his j ob. We also regret that the subcommittee is not at this time considering S. 2591, the bill which would provide for a cooling-off period, after home solicitation sales. We would like to recommend that when this bill is considered that the purchaser of goods in the store should also be given 2 or 3 days in which to decide about the purchase. Senator TYDINGS. There is a national bill on that. The hearings have gone forward in the Commerce Committee. Mr. NASSAU. When the committee does consider this, or when the Congress does consider this, we would like to see it extended to the store-sales situation. Very often, people do not take the time to PAGENO="0126" 120 read a contract in the stores. They go to the stores to purchase mer- chandise, not credit. They wait until they get home. They read their contract then. But then it would be too late to cancel it. Senator TYDINGS. You do not see any difference between the pur- chaser in the home, in the sale by the high-pressure salesman, and the purchaser who goes into a store and shops around and makes a purchase? Mr. NASSAU. I think that there is, certainly, a distinction, but I think that the person who goes to the store goes to buy a washing machine or a sewing machine, he does not go to buy credit. Senator TYDINGS. He knows what he wants to buy. Mr. NASSAU. He knows that. Senator TYDINGS. The housewife at home does not want to buy anything; she is minding her own business, and somebody comes in and pressures her into buying something. You do not see any difference? Mr. NASSAU. I certainly see the difference, but I think that there is still an abuse that can take place in the store installment sale contracts where the terms might be onerous, where the person may not know what he has signed until he has had a chance to read it. I think we should take care of that situation. Mr. TJGORETZ. You have similarity between the two situations. In both cases, the contract generally is written up in technical legal form. In the store, as in the home, the salesman may and often does misrepresent what the contract says. The 24-hour or 48-hour cooling- off period would give the consumer, the customer, an opportunity to read over the contract and to find out exactly what he is getting and whether or not the salesman actually represented the truth. Senator TYDINGS. And one customer took the merchandise home with her. Would you give every customer the right to take the mer- chandise home for 48 hours and then to decide that they do not want it and to return it? Mr. UGORETZ. What I am thinking of in this situation is the heavier appliances and the more expensive items. I can see your point, and I would limit it to a maximum or a minimum amount. But, as I say, you have that same problem of misrepresentation which is what you want to eliminate. Mr. NASSAU. The ADA endorses the establishment of a District of Columbia Department of Consumer Protection. We recommend that the Department be required to publish annual reports, in which would be listed the complaints and actions taken against merchants in the community. Such listing could, in itself, act as a deterrent to fraudu- lent practices. In addition, we urge the creation of a consumer advisory council to be made up of representatives of citizens and organizations in the community to act as a vehicle for citizen concerns being brought to the Government apparatus. Heading up such a council would, we hope, be an official who would listen to, and seek the most effective solution to, consumer complaints. We also recommend the establishment of a consumers' branch in the District of Columbia Court of General Sessions with summary proceedings so that consumers would have quick and effective meth- ods of redressing their grievances. PAGENO="0127" 121 Finally, consideration- should be given to a strengthening. of the remedies for violations of the bills, especially S. 2589. We urge that serious consideration be given to a provision revoking the license to do business or the corporate charter of a merchant who continuously and flagrantly violates the provisions of the bills. Thank you. (The prepared statement submitted by Mr. Nassau reads in full as follows:) STATEMENT OF STEPHEN M. NASSAu Mr. Chairman and members of the subcommittee, my name is Stephen M. Nassau. I am associated with the law firm of Landis, Cohen & Singman; and I am Chairman of the Consumer Protection Committee of the Gi eater Washington Chapter of Americans For Democratic Action, on whose behalf I appear today. Accompanying me is Mr. Mark Ugoretz, who also served on the Committee. Our law has developed with a heavy bias in favor of the merchant-creditor. The purchaser-debtor has traditionally been at the short end of the rule of caveat emptor-the buyer beware! While this may have been an acceptable standard in the days when purchasing was done on a personel, cash-payment basis, it cannot survive in this day of extensive installment buying. Too many abuses have been perpetrated upon the installment buyer, and he has had too few opportunities of protecting himself. Where the competitive system should have led to a lower level of credit costs, it has instead inspired the creation of a myriad of devices to increase and hide those costs. The purchaser often finds that the commercial paper which he unknowingly signed is considered sacrosanct in the eyes of the law regardless of the deception or fraud that produced it. The time has come to recognize that the consumer, a category into which every one of us fits, must be protected by legislation. The bills before this Committee today will help all consumers-rich and poor alike-to intelligently purchase credit and to protect themselves from unscrupulous practices. But, of course, their main effect will be felt in the ghetto areas of our city where merchants for years have preyed upon the destitution of the poor. I am sure that the President's Commission on Civil Disorders, when it issues its report, will cite these practices as one of the prime factors in the recent riots in many of our cities. The poor, those who can least afford exorbitant and unconscionable finance charges, are the most apt to be paying them. The proposed legislation will be one step-hut sadly only one step-in enabling the ghetto resident to break out of the vicious circle that entraps him in a perpetual state of poverty. In addition, the proposed legislation will serve to protect those merchants who do observe honest and legitimate business practices. Such businessmen today must compete with the deceptive methods employed by their unscrupulous brethren, often to their severe disadvantage. The legislation will remove the load they have had to carry because they are honest. Washington ADA strongly favors and supports the purposes of all the bills that are before you today. However, it endorses the approach of 5. 316 as the proper method of legislation in this area. S. 316 is basically an enabling statute, delegating to the District of Columbia Government the power and authority to pass detailed rules and regulations in the realm of consumer protection. While the other bills also delegate authority to the City Council, most of the important and significant changes are included in the bills themselves. This is a crucial period in the history of the District of Columbia. The new gov- ernment, although far from constituting a government established by the people, can provide effective leadership which will be responsibe to the will and desires of the people of the District. Congress should not hamper the development of self- government by passing sweeping legislation that would leave only minor details to the Council. You should establish a significant precedent now by giving the District of Columbia Government the right to specify the laws under which retail sales will take place. We therefore urge the adoption of the approach of 5. 316 to the extent that it enables the D.C. Council to act. On the other hand, if Congress decides to act in this field, we urge the passage of the stro'ngest bill possible. Accordingly, we urge the adoption of most of the spe- cific provisions of 5. 2589 through S. 2592. Full disclosure of finance charges is an absolute necessity to the intelligent selection of the best credit arrangements. Even the most sophisticated among us can find it difficult to assess the relative PAGENO="0128" 122 merits of charges expressed in terms of amounts added to or discounted from the cash price, per cent a month, per cent a year, dollar per hundred, etc. But disclosure and information are clearly not enough-it is only a first step. It must be followed by intensive programs of consumer education and by encouraging more reputable dealers t~o set up businesses in the ghetto areas. If the ghetto resident lacks the means of getting to the downtown stores or the knowledge that he can get better buys at these stores, and if he is fearful of entering what seems like to him a forbidden area, the stores should he prepared to come to him as they have gone to suburbia. Initially, tax credits or subsidies could be utilized to encourage such a movement to the ghetto. Washington ADA supports the inclusion of revolving credit plans within the purview of the bills. The argument is often made that the charges on such accounts cannot be expressed as an annual rate, because the customer is given varying periods of interest-free time depending on the date of purchase and the date of payment. But what is important to the purchaser is the consequence of not paying his bill by the due date. He wants to know how much it will cost him in finance charges from that date forward. If it is too much, he will pay his bill; if it is ac- ceptable he will incur the charge. Thus, an annual finance charge computed as of the date on which the charge begins will be most informative. And this is the rate that can he simply and accurately ascertained merely by multiplying the monthly charge by 12. `We urge, however, that special attention be given to those revolving charge plans which compute the charge on some amount other than the amount carried over to the next month. A number of stores in this area charge a percentage of the balance at the beginning of the month regardless of the amount of payment or credits during the month, unless the balance is paid in full. Thus a customer may purchase $100 worth of merchandise in January and be billed $100 at the beginning of February. If he pays the full $100, no service charge will he added. But should he pay $90 in February, his March bill will show a finance charge of $1.50, 1~/2% of $100, not the $10 carried over. In effect the customer in this illustration is paying 15 percent per month or 180 percent per yekr interest on his carry-over balance. Many customers have been caught unaware by this method of computation, buying items which they paid off substantially in order to avoid heavy service charges, only to discover that they were charged interest on the total amount, regardless of their payment. While S. 2590 provides an incentive for st.ores to discontinue this method of calculation by permitting a lower finance charge than would otherwise be allowed, we urge that such practices be abolished completely. At the very least, clear disclosure should be required, informing the customer that upon failure to' pay the entire opening balance, the finance charge will he computed on that balance, regardless of the size of the balance carried over to the next month. Washington ADA is very happy to see home repair contracts included in the scope of the bills. The recent series of articles in the TlTashington Post demonstrated the need for strict regulation of this industry. Apparently, many persons sign mortgages on their homes as security for the amount owed for this work without being aware of what they are signing. We suggest that the law require any mort- gage or deed of trust instrument to state clearly, at the place for the buyer's signature, that. they are conveying a security interest in their home and what the consequences could be of such action. We also urge that full disclosure be required in first mortgage contracts. Too often the buyer of a house is unaware of the cost of interest and of the saving that might be had by paying over a shoiter period of time, by paying at a lower rate or by making a larger down payment. Disclosure would aid in more intelligent pui'chasing of mortage money by revealing the total cost of the interest. In addi- tion, the District Council should be authorized to investigate the utilization of "points" as a means of evading maximum interest laws. As noted above, disclosure is only a first step in protection of the consumer. It cannot help him much to know that he must choose between evils. The solution is to remove the evils. Therefore, `Washington ADA heartily supports S. 2590's setting of maximum finance charge rates. However, we question whether the rates set forth are reasonable. While 20 percent is considerably better than the 30 or 40 percent sometimes charged, it is still an onerous burden on the poorer citizen, while the more affluent can finance their purchases at considerably less. 5. 2590 delegates to the City Council the right to set the rates for credit insurance. The Council should be given the same power with respect to finance charges, after investigating what rate would be most reasonable front the point of view of both consumer and merchant. PAGENO="0129" 123 But even the setting of maximum charges will not be enough in all cases to protect the consumer. A store which does a large percentage of credit selling, as many ghetto stores do, can merely increase the cash price of its goods to hide the real credit charges. The subcommittee should study this problem with an eye toward solutions such as providing that extreme mark-ups or prices far out of line with the price of similar goods elsewhere in the community would constitute prima facie evidence that the finance charge is greater than stated and is in fact hidden in the cash price. The Subcommittee might also consider whether whole- sale prices should be required to be revealed and posted. Such disclosure would permit the customer himself to determine whether the cash price is excessively inflated and encourage him to do some comparative shopping. Washington ADA also urges the tightening of controls over debt consolidation services. I his industry has fostered much deception and fraud upon the public. The charges for such services should he strictly limited to the present usury laws governing loans in the District of Columbia. Washington ADA is quite pleased about the bills' attack on the infamous Oia Lee TVi1Iiams situation where a merchant was allowed to repossess all the items which the customer had purchased on credit, even though she had paid well over the amount due on most of the goods. The hills deal with the after- acquired property situation. But we question whether or not the same ineguity could not result from the purchase of several items at the same time under one contract. We urge the Subcommittee to amend the bill to prevent the repossession of all the itemns purchased under one contract where the principal already paid is sufficient to fully pay off any of the ac~uirecl items. Accordingly, we recommend that Sec. 4.104 of S. 2589 he amended by inserting, after the second sentence of that section, the following: ``Any retail installment contract for the sale of more than one article of consumer goods shall be severable into as many contracts as there are articles. Each article shall serve as security only for the obligations arising from the portion of the contract covering that article and shall not secure any other obligation of the buyer. The payment on such articles shall be allocated to the articles [in tIme order in which they are listed in the contract or, in the oider of decreasing price]." The following definition should also be added to the Bill: "Article: Any item of consumer goods or set of consumer goods which is normally sold in the ordinary course of business as one unit." Washington ADA endorses the provisions of S. 2589, which abolish the holder- in-due-course doctrine in retail sales transactions. Too often the doctrine has been used to force a buyer to pay for goods or services which turned out to be worthless, shoddy or even non-existent. Often the finance company or purchaser of the note is a party to, or at least knowledgeable of, the fraud; but it is almost impossible for the typical purchaser to prove this in court. Not only will the abolition of negotiable instruments put an end to this practice, but it will make many of the other provisions of the bills self-policing, by requiring the finance company to assure that the merchant followed correct practices before purchasing its con- tracts. Along this line we recommend that 5. 2589 and 5. 2590 be amended to allow recovery of charges not only from any person who acquires a contract with knowledge of noncompliance with the act, but from any such person who should reasonably have had such knowledge. S. 2589 authorizes the Council to make appropriate regulations dealing with unfair and unconscionable advertising and sales. The wording of the bill however does not make it clear whether this authority is restricted to retail installment sales only or whether it applies to all sales, whether installment or not. We heartily urge that the wording be clarified to allow regulations to safeguard consumers from all unfair and unconscionable advertising and sales. Washington ADA also would like to see a law or regulation passed which would prohibit an employer from firing an employee because his wages were being gar- nisheed. How impossible the lot of the destitute becomes when he not only gets himself into debt, but as a consequence of that debt loses his only means of removing it-his job. Washington ADA must oppose that part of S. 2589 which requires a person to testify despite his claimn of a 1 if th Amendment privilege, upon the granting to him of immminity from prosecution. We have grave doubts about the constitutionality of such a provision and oppose it as being an infringement upon an individual's Fifth Amendment rights, despite the grant of immunity. SS-64S--GS------9 PAGENO="0130" 124 We regret that the Subcommittee is not at this time considering S. 2591, which would provide for a `cooling-off period" during which a purchaser would have the right to cancel a retail installment sales contract. Such a provision is absolutely necessary, especially in thd case of home solicitation sales, if the disclosure pur- poses of the act are to be effective. I or what good is complete disclosure if the purchaser is never given a chance to read the contract? W e think that the pur- chaser of goods in a store should also have 2 or 3 days in which to decide to cancei an installment contract, for few people will take the time to read the contract in thd pressured atmosphere of the store. ihe distinction that the store purchaser seeks out the sale whereas the home buyer does not is meaningless in this area, for the customer seeks out the merchandise, not the credit terms. He should have some time to evaluate those terms. \; e hope that when the Committee acts on these bills, this problem will be covered. Washington ADA endorses the establishment of a District of Columbia Depart- ment of Consumer Protection as being essential to the accomplishment of the purposes of the bills. ~the Eepartmeiit should be required to publish annual reports, in which would be listed the c~mpiaints and actions taken against mer- chants in the community. Such listing could, in itself, act as a deterrent to fraudu- lent practices. In addition we urge the creation of a consumer advisory council, to he made up of representatives of citizens organizations, to act as a vehicle for citizen concerns being brought to the government apparatus. Heading such coun- cil would, we hope, be an otricial who would listen to, and seek the most effective solution to, consumer complaints. We also recommend the establishment of a consumers' branch of the Court of General Sessions with summary proceedings so that consumers would have quick and effective methods of redressing their grievances. Finally, consideration should be given to a strengthening of the remedies for violations of the bills, especially 5. 2589. We urge that serious consideration be given to a provision revo:zing the license to do business or the corporate charter of a merchant who continuously and ~agrantlv violates the provisions of the hiils. We further suggest an effective remedy which should be added to the bills. Sellers who have been found to he flagrant and repeated violators of the Act should he required to post notices in their places of business informing the public that they have been found in violation of the law and stating that they will not continue the unlawful practices. Such a remedy has proved quite effective in the field of labor law. We feel that it would be even more useful in this area of the law. Most likely merchants will be deterred more by the possibility of having to post such notices than by the danger that fines might be imposed against them. And a notice-posting provision would serve to warn even the most unwary purchaser that the merchant had formerly preyed upon the public. In this way it would serve a consumer education function. With the leave of the Subcommittee, we will present for the written record a more detailed presentation of some of the above proposals at a later date. In summary, we urge the adoption of a bill that will protect the consumer to the fullest extent possible. Thank you for this opportunity of presenting our views. Senator TYDINGS. Thank you very much, gentlemen. We appre- ciate your being with us. It is obvious, the amount of time you have put in on the statement. Our next witness is Mr. Henry H. Bryiawski, executive secretary of the Maryland-Delaware-District of Columbia Jewelers' Association. We will be pleased to hear from you now. STATEMENT OF HENRY H. BRYLAWSKI, EXECUTIVE SECRETARY, MARYLAND-DELAWARE-DISTRICT OF COLUMBIA JEWELERS' ASSOCIATION, WASHINGTON, D.C. Mr. BRYLAWSKI. Mr. Chairman, I have a letter which I have prepared which I would like to submit for the record, and then I would, in addition, like to make comments. I will do that rather than read it. PAGENO="0131" 125 Senator TYDINGS. Fine, your statement will be made a part of the record at this point. (The letter referred to, dated Dec. 13, 1967, follows:) MARYLAND-DELAWARE-DISTRICT OF COLUMBIA JEWELERS' ASSOCIATION, Washington, D.C., Drceniber 13, 1967. Senator JOSEPH D. TYDINGS, Chairman, Subcommittee on Business and Commerce, ~`ommittee on the District of Columbia, U.S. Senate, Washington, D.C. DEAR SENATOR TYDINGS: The undersigned has been invited to appear before you on December 13, 1967, to testify regarding the proposed Consumer Credit Bills on which you are currently holding hearings. This letter is written to state the position of this Association with respect to this legislation. The Maryland- Delaware-District of Columbia Jewelers' Association is a trade association of retail jewelers doing business in what we call the Tn State area. Membership comprises most of the principal jewelers in the area. Its objectives are similar to the local trade associations. We do not oppose Consumer Protection legislation as such and we endorse the efforts of your committee to formulate a bill in this direction. We favor enactment of S. 316 rather than the other Bills on this subject which have been introduced for the following reasons: 1. S. 316 was hammered out in the Office of the Corporation Counsel of the District of Columbia after meetings which extended over a period of two years and which were attended by all facets of the organized citizenry of the District of Columbia including businesses, legal, trade and civic groups. The Bill as finally drafted represented an agreement among all participating parties of legislation which would be acceptable and workable in the District of Columbia. For this reason we feel it is entitled to more than ordinary weight as compared to any other proposed legislation covering the same subject. 2. S. 316 could be termed an enabling type legislation rather than regulatory in itself. In it the District of Columbia Commissioner (or City Council) is authorized to issue regulations on the many aspects of retail credit sales. We believe this method is preferable to the mandatory provisions in other bills. It is consistent with the trend toward self-rule in the District of Columbia. It would give the City Council an opportunity to in effect legislate in a field which it is eminently qualified to act. Furthermore, this method would facilitate amendment. Ob- viously a regulation enacted by the City Council would be much easier to amend than an Act of Congress. 3. While as stated we believe that consumer legislation is warranted we do feel that in some respects S. 2589 and S. 2590 are perhaps excessively protective of the consumer. This type of legislation should in nowise be detrimental to the business interest of the area and, if enacted, should be something with which they can com- fortably live. The aspects in which we feel S. 2589 and S. 2590 exceed the needs of the community are as follows: (A) The holder in due course concept of law is essentially abolished by S. 2589. We feel it is extremely dangerous to tamper with one of the established principles of business law. S. 316 meets the need for cOnsumer protection by requiring a cer- tification from the consumers that the goods and services have been received and are satisfactory. We feel this is sufficient protection. Abolishing the holder in due course concept could cause the opportunity of business men to finance their in- stallment contracts to be virtually destroyed. (B) The provision of S. 2589 regulating repossessions are onerous. The Bill would prohibit the right to a deficiency judgment after repossession. This is an unfair restriction. It might very well be that after repossessing an item sold on install- meat sales the merchant might find it completely valueless to him, a fact of which lie would not be aware beforehand. It is notable that in the automobile installment sale field where this type of activity is the most prevalent, deficiency judgments after repossession are permitted. (C) With respect to S. 2590, we catagorically object to legislation which would limit the amount of service and finance charges in connection with retail install- ment sales. This is a field in which we believe the buyer and seller should be able to contract with one another without regulation. In one sense such legislation is meaningless since in any event the basic price of a product could be adjusted to cover the merchant's loss of prospective finance charges. Basically, S. 2590 is price control legislation which, we feel, is never warranted except in case of na- tional emergency. PAGENO="0132" 126 4. ~ do not object to the creation of a Department of Consumer Protection in the District of Columbia and if legislation is required on this subject, then the provisions of Title VIII of S. 2589 could be added to S. 316. Finally, we would call the Committee's attention to the so-called Truth in Lending Legislation. Enactment of such a law would obviate many of the pro- ~visions of the Bills now being considered. Respectfully, HENRY H. BRYLAWSKI, Execntive Secretary. Mr. BRYLXWSKI. This letter states our position, Mr. Chairman, but, commenting on it generally, I want to emphasize that we favor a consumer type of protective legislation. I want to emphasize that, because I have a couple of caveats to the bifi which I want to discuss. That does not mean that we are opposed to this type of legislation. Senator TYDING5. I understand that. Mr. BRYLAWSKI. First of all, this has been covered before by others. We do favor S. 316. 1 happen to have been personally engaged as one of the persons who sat down in the office of the Corporation Counsel ~ind participated in the drafting of it. The thing that impressed me at the time-and I think it still impresses me-is that this bill repre- sented a sort of compromise of the viewpoints of all of the groups: the consumer groups, the civic groups, and the business groups, including the board of trade, the better business bureau, and others. So I think that in that respect it is entitled to a good deal of weight, because it is a bill which we feel-and when I say "we," I am speaking in terms of the merchants- Senator TYDINGS. You feel that it is a good compromise? Mr. BRYLAWSKI. We felt that it was a good compromise. It has been mentioned before, and I do feel that this is an enabling type of legislation, and in that respect I agree with the ADA. Since we have had a reorganization of the District Commissioners' Office and now have a City Council, it seems to me it would be a very appropriate thing for the City Council to act on. Such is what the City Council should be created for. Enabling-type legislation for the District of Columbia would pass the Congress more easily than bills which have controversial pro- visions in them. Our experience has been that if you enable the Commissioners to do certain acts they will do it, but if you prescribe the actions of the District of Columbia you run into such opposition that the Congress does not care to pass the bifi. Most of these have to be consent legislation, as you know, or else they are going to die. Senator TYDINGS. They have to be what? Mr. BRYLAw5KI. Consent legislation, something that is not going to be debated very formally or very extensively in the Halls of Congress. Senator TYmxGs. We can get the bill through the Senate. You may be right as to in the House. But so far we have gotten our bills through the Senate. Mr. BRYLAWSKI. I am thinking historically about any bill con- *cerning the District of Colmnbia. I have lived in the District of Columbia all my life. I have seen it. If you have a controversial bill, someone comes up, maybe on the House side, and takes if off the Consent Calendar, and it is dead for that period. PAGENO="0133" 127 If we have permissive-type legislation, such as 5. 316, I do not think that they will do it. I think it will have a better chance of going through. Senator TYDINGS. I expect you are right Mr. BRYLAWSKI. Now, on the holder-in-due-course concept, I really think there is too much emphasis being placed on this. First of all, unless I am mistaken, as a merchant I assign my contracts to some lending institution. He takes that contract subject to the defenses that the other contracting party has. Senator TYDINGS. What is that? Mr. BRYLAWSKI. If I sign a contract- Senator TYDINGS. You mean, if you sell your contract? Mr. BRYLAWSKI. Yes. Senator TYDINGS. Right. Mr. BRYLAWSKI. Now, I think, and I am subject to correction, that if I sell that contract, the buyer of that contract- Senator TYDINGS. To a bank, or a savings and loan association? Mr. BRYLAWSKI. To anybody. They will have to take it subject to the defenses. Senator TYDINGS. That is the whole point. If he took it subject to the defenses, we would not be concerned. The whole thing is that the minute you sell that paper,under the commercial code, it protects the purchaser of that paper, even if you sold goods fraudulently and de- fectively where the goods were no good. Mr. BRYLAWSKI. Are you not thinking of a note rather than a contract? You are speaking of a negotiable instrument. Senator TYDINGS. When the installment boys go to work, they sign everything-everything that is put in front of the customer, including the contract of sale-including almost anything. Are you talking about the ordinary retail installment sales contract? Mr. BRYLAWSKI. I am saying to you, and I may be wrong, and I wish that some other lawyer present would tell me that I am wrong, if I am, but if you sign a contract, as such, the assignee takes it subject to the defenses. Senator TYDINGS. You mean an installment sales contract? Mr. BRYLAWSKI. Yes, sir. I am distinguishing that from- Senator TYDINGS. Not unless you yourself, the seller, as is frequently the case here, agrees that the bank or the financial institution that purchases it does it with recourse against you. Most banks require that. But that does not do the poor consumer any good. That protects the bank and the banking instittition where they can go against you, but it does not help the poor consumer who has the piece of merchan- dise which is faulty and no good, and who was defrauded at the time of the initial purchase of the goods. It is fine for the banking institutions but no good for the consumer. Mr. BRYLAWSKI. Let me ask you this, Mr. Chairman: Suppose that I buy for cash and suppose I give a check which is another promise to pay, and then I find that the merchandise is defective. Who do I go against? Senator TYDINGS. You go against the seller. Mr. BRYLAWSKI. Why should anyone else have any better? Senator TYDINGS. If you have enough money to pay cash, you are not going to be gypped. The people who get gypped are the poor, the PAGENO="0134" 128 uneducated, the people who do not know where to go for a lawyer, and do not know what a lawyer is like-have trouble reading. They are the ones that get taken. Let us face it. We are talking about the 20 or 30 percent, the great majority-unfortunately, some of these operators are so smooth that they can get even the most intelligent housewives. There are young people in this country who cannot afrord to buy protection-they just cannot afford to buy for cash. If ou have money to buy for cash, you will have a lawyer and you will know what a~ lawyer is for. You will know that you can go against the seller. Mr. BRYLAWSKI. I just want to point out this- Senator TYDINGS. But the rub is that if you buy on installment sales contracts, and the quality of the merchandise is no good-let us say that you pay cash like most of us do, only you do not pay the cash at the time you buy the goods, you sign your name and say to whoever you are buying it. from, "Send me the bill." If they sold me a machine that was no good, when that bill comes in, I write a note: "This ma- chine is no good; you get it fixed or get me another machine, then I will pay you." That is the way it works. Mr. BRYLAWSKI. If you have the cash. Senator TYDINGS. If you have the cash. He knows I have the cash. He knows that I will send him a check at the end of the week, but the poor housewife, the poor young couple that does not have the cash, they buy the machine or the merchandise. They sign an installment contract. Their credit is not as good as some who have been around longer. Then, when the machine is bad and they call up the dealer and say: "I am not going to pay you until you get the machine fixed," they are told, "We are sorry about that; you owe the bank." And your defense of fraud, or that bad machine is no good against the bank. You have to pay the hank. And in some instances, as we have seen time and time again here, the housewife ends up paying the bank, having the machine repossessed and with nothing but a great debt, including legal fees. That is the thing we are concerned about. We are not concerned about the consumer who does not have that situation; we are concerned about the consumer who does not have that protection-the more affluent members of our society may have that protection. Mr. BRYLAWSKI. I am going to pass that point. I happen to dis- agree with you slightly on the rights of the parties. I do not think it is too important, for this reason, from the standpoint of our industry, the jewelers. Most of them hold their own paper, anyway. It is fairly academic. Senator TYDINGS. It is really academic with most. Mr. BRYLAWSKI. I think most people. Senator TYDINGS. We are talking about 2 or 3 percent, the fly-by- night operators who give the business community a bad name. Mr. BRYLAWSKI. If you eliminate the holder-in-due-course concept, the merchant who wants to sell his paper will have a hard time selling it~. Senator TYDINGS. You know that he will not. You deal with banks. Anybody who deals with a hank does not have that problem. He does not deal with a hank unless he has a tremendous cash balance or a. reserve. Let us face it. It is a common mercantile practice. You will not hurt the legitimate businessman. PAGENO="0135" 129 Mr. BRYLAWSKI. My next point has to do with repossession; that is, that portion which says that if you repossess you may not claim any unpaid balance. You have a choice of claiming the unpaid or the merchandise, but not both. That is a little bit onerous. First of all, the great piece of abuse of that type recovery is in the automobile business. I suppose you know that. You are not cover- ing them in the bill, in this bill, are you? I do not believe you are covering that; there is a separate law on that. I happen to know from personal experience that it is extremely onerous. Let us take a merchant that I represent who sells a man a watch. I am now thinking of the merchant who sells a man re- coverable merchandise. Maybe he would be delighted to take the merchandise back, if he gets the balance. When he gets the mer- chandise back, he finds it unsalable. Maybe the watch is completely broken, and he is left with a piece of merchandise which is no good to him. Senator TYDINGS. As a practical matter, suppose that this par- ticular section were enacted into law right today, what would be the immediate effect of this legislation on the sales of any installment man or any retail outlet? Mr. BRYLAWSKI. If they had to do business under this? Senator TYDINGS. What would they have to do? They would have to immediately examine their credit applications a good bit more carefully. Mr. BRYLAWSKI. Right. Senator TYDINGS. They would have to eliminate the marginal sales where they thought they would be able to repossess. They would have to check out the credit applications and deal more carefully. Probably, their sales would be a little bit lower than their sales generally speaking have been; but they would be dealing with people who can better afford to pay for the merchandise. Mr. BRYLAwSKI. That is true, but you would also then be eliminat- ing a certain segment of the public that wants to buy who would not be able to buy-anyway, not on credit. They do not have the cash. And you have eliminated their credit sales. Senator TYDINGS. Is that a bad thing if a person cannot really afford to purchase something? Is that a bad thing, to discourage him from purchasing something that he cannot afford? Mr. BRYLAWSKI. You are not discouraging; you are preventing him. And this is a free society. Senator TYDINGS. Sure. This would discourage him. It would make the merchants a lot more careful. Mr. BRYLAwSKI. Yes. Senator TYDINGS. He would know that he had to either rely on repossession of his merchandise or to go against the balance, one or the other. ~\~lr. BRYLAwSKI. Why should he not have both? If the merchandise is destroyed by the buyer or damaged in such a way that he cannot use, why should he not be able to go for the unpaid balance? Senator TYDINGS. Basically, the seller is not selling on the basis of an extension of credit, on the strength of his credit record or his PAGENO="0136" 130 ability to pay. Primarily, he is selling on the security of the merchan- dise that he is giving him. Mr. BRYLAwsKI. Not really; not really. I am speaking- Senator TYDINGS. Not really; then, the seller would be willing to take this, either option? Mr. BRYLAWSKI. He sold on both. He knew he had the merchandise to recover-at least, he hoped that he would. Incidentally, this is particularly applicable to the jewelry business. It is pretty hard to repossess. You cannot walk in and take it off the fellow lil~e an icebox. He sold it on both bases. Why should he not have both, if the mer- chandise is not in good shape. Maybe he might put a provision in here that the merchandise, if it is defective, through no fault of the seller, that he could go against them. I can get around your provision. We take an example of an icebox. I can go in the house and they wifi show it to me, and I wifi decide whether I want to repossess it or not. If I find it defective, then I will go against the man's credit. I do not think that you should take away any legal right we have. Senator TYDIYGS. That is true. It might be both ways. Mr. BRYLXWSKI. It is not both ways. Senator TYDINGS. It is both ways. Let us be candid. The law, as set up, is designed to protect the seller, the businessman. C'aceat emptor-let the buyer beware. If the buyer is defrauded, that is too bad. The holder-in-due-course doctrine is set up to protect the seller, the businessman. All we are trying go do is put the consumer in the same position that the seller is. We are not even going that far. All we are trying to do is protect the consumer from a small minority. Mr. BRYLAWSKI. Right. Then protect the automobile buyer from deficiencies, protect the house buyer. If I borrow money on my home, I mortgage my home and they sell it because I did not pay my mort- gage, are they going to go against me for the balance? Senator TYDINGS. Let me say this: When we find the degree of fraud and deceptive practices prevalent in mortgage operations, you can bet your life that we will be into it. Up to now the tragedy has been occurring in these installment sales and home improvements. There are separate laws relating to automobile financing in the District and nationally. The time may come when possibly you will have some good facts and will want to produce some testimony and witnesses on this subject. We will go into it. I invite you to sit here and listen to some of the witnesses, because we have had some witnesses tell us some stories about these things where one bought a television set for a couple of hundred dollars and they signed an installment contract and wind up paying $400 or $500, and they pay $200 or $300 on the television set and lose it and the money they have already paid in and have a judgment for another $400 or $500 slapped against them. Mr. BRYLAWSKI. I am not here to defend that. Senator TYDINGS. All of the advantages are one way. ?~`Ir. BRYLAWSKI. I am not here to defend overreaching, Mr. Chair- man, in any sense of the word. In fact, I said this in the beginning, and 1 want to reiterate, that we support this type of legislation. On that caveat, I am going to pass over it very quickly. It has to do with finance charges. I know how you feel about it. PAGENO="0137" 131 I have heard testimony about it this morning. We object to the regula- tion of finance charges; that is, to a limitation on finance charges. We object to price controls. We object to regulations which interfere with our method of doing business. Senator TYDINGS. Mortgages are now limited to 6 percent interest rates-that is, in the State of i\/Iaryland-and most mortgages in most States are limited to 8 percent. You f~el, however, that finance charges should not be limited to 20 percent per annum. Mr. BRYLAWSKI. I feel that finance charges should be based on what that particular merchant feels his cost of doing business is. I certainly have no objection to disclosing it. I do not care what type of print it is in, either. I would like to see the buyer know what he is paying for the merchandise. Senator TYDINGS. Why should the jewelry industry want to be protected, or the home-improvement, or furnishings industry? Why should they be allowed to charge any interest that they want to charge, whereas the mortgage on the home is the most important single item an individual can ever buy. There the money is far more desperately needed and the rate is limited. There you limit the amount of the mortgage return, the amount of interest you can charge. You limit it to 6 percent in Maryland, the State of Maryland. What is the big difference? Mr. BRYLAWSKI. One falls more squarely under the usury concept. When you are lending money, you are subject to the usury law. This is not a loan of money as such. It is a credit transaction where mer- chandise is not paid for, for a longer period, so that the payments on the merchandise is not recovered quickly. Also, there is a lot of cost in keeping accounts, and other expenses in connection with it. I am not going to belabor this point. We object to it. We feel we should not be regulated in that respect. If we are regulated, I am sure we will be able to coexist with it. Lastly, we further have no objection to the creation of a Department of Consumer Protection which is not in S. 316, but which is in your bill. It should be inserted in S. 316, if the committee feels that is an impor- tant thing. We have no objection to it. I feel it might do some good in the District of Columbia. Also, of course, I want to call to your attention that the truth-in- lending legislation would cover a good many aspects of your bill and, perhaps, they have been put into it. I have not observed that closely. Let me say, finally, because I do not want to take up too much time, that we do have certain reservations, although we favor the bill. Senator TYDINGS. Thank you very much, Mr. Brylawski, for being with us. We appreciate your testimony. As stated previously, your letter has been incorporated into the record in full. Mr. BRYLAWSKI. Thank you. Senator TYDINGS. Our next witness is Mr. James Williams, accom- panied by Miss Pauline Myers of the United Planning Organization, and other witnesses. We will be pleased to hear from you now, Mr. Williams. PAGENO="0138" 132 STATEMENT OF JAMES WILLIAMS, COORDINATOR, CREDIT UNION-CONSUMER ACTION PROGRAM ON CONSUMER LEGIS- LATION, UNITED PLANNING ORGANIZATION; ACCOMPANIED BY MISS PAULINE MYERS, UNITED PLANNING ORGANIZATION Mr. WILLIAMs. Mr. Chairman, my name is James Williams, 3404 23d Street SE., Washington, D.C. 1 coordinate the consumer action and credit union programs of the United Planning Organization. In the 10 neighboring centers sponsored by the United Planning Organization there are 10 consumer action programs and nine credit unions. We welcome the opportunity to present testimony at any time in support of legislation which will protect consumers in general, and poor consumers in particular, in the District of Columbia against unfair practices and economic exploitation. On December 5, Mrs. Theresa Clark, assistant consumer action coordinator for the United Planning Organization, presented testi- mony before this committee, along with witnesses who related per- sonal experiences, which underscore the critical need for this particular legislation. Today, the following persons have asked for permission to present their experiences which further supports the need for S. 2589: (1) Mrs. Jessie West, mattress purchase; (2) Mrs. Mary Taylor, stereo; (3) Leo Coward, door-to-door sales; and (4) Mrs. Aibertha McCord, book purchase. They will be followed by Mr. M. Paul Smith, president of the District of Columbia Citywide Consumer Council, and myself, coordinator, Consumer Action-Credit Union, United Planning Organization. Mrs. West.. STATEMENT OF MRS. JESSIE WEST Mrs. WEST. My name is Jessie West, and I have been a resident of the District of Columbia. for more than 20 years. On June 24, 1966, in the early morning hours, a salesman knocked at my door representing and asked if I would let him demon- strate some custom-built mattresses. I told him that I was financially unable to afford any custom-built mattress. He then stated that he had a special offer on a good mattress for $19.95. I told kim that I found it hard to believe that he had a good mattress for $19.95. He begged for a chance to show his mattress, and I agreed. He had two samples with him. The sample he showed that cost $19.95 was of very poor quality. After I complained, he said that he knew I would not like that one; he then showed his other sample. The mattress was of a much better quality and was guaranteed for life. It was called an orthopedic mattress. Some of the features of this mattress were: (1) built-in reducer, one would only have to take ex- ercise on it, (2) aid in the circulation of the blood, (3) correct back ailments in your sleep, (4) keeps your hands and feet from going to sleep, (5) helps persons who suffer from heart diseases, and (6) helps to correct conditions caused by strokes. PAGENO="0139" 133 He said that the mattress would be made up according to my weight and according to the number of persons that would be sleeping on it. I told him that I had recently been involved in an automobile accident, suffering from pains of the back, neck, legs, and knees. He stated that I could see that his mattress was the very thing that I needed. He said that this mattress with all these features would cost me only $98, plus tax. I decided that I would try to take the mattress because I was in constant pain and I did want relief, and the cost was not very high. He told me that a special box spring would have to accompany the mattress in order to get the full benefit out of the mattress. He also stated that both pieces were guaranteed for life and would cost only $199. After agreeing to purchase both pieces, I was then asked for a $12 deposit which would enable him to put my order in with the com- pany. I gave him a check for $12, payment on the $199. He told me that the regular payments would start 1 month later. We sort of hashed about the payments per month, in which I let him know I could pay no more than $10 a month. He said he would work something out to fit my budget. That I would be receiving the mattress and box spring within a couple of weeks. This was when the trouble began. The mattress did not meet the features he said I would be getting from it. I complained to the company that the mattress was very hard and was very much dissatisfied. Their reply to me was that I would have to sleep on it a while in order to get used to it. After a couple of days, I could stand it no longer, my back was aching, not to mention being stiff and sore. Again I called the company and asked them to come and get it. They said they would send a man, a mattress ad- juster, to look at it. He came, took my measurements, and asked a lot of questions, then told me that the mattress I had did not measure to my specific measurement. It took another 2 weeks before the second mattress set was delivered, in which time the first set was picked up. Later I received a letter from a finance company that my contract with the custom-built mattress company had been turned over to them. I did not know, and was not told by the company, that this was going to be done. The finance company stated that my payments would be $11 per month for 24 months, plus delivery charges of $7 and $6 for taxes. The total cost after I figured it out would be $277, which is a whole lot different from the $199 I was told by the company (custom-built mattress) in the beginning. I am looking in the mail every day, wondering whether I will be receiving new payments or being refinanced again. Mr. WILLIAMS. Thank you, Mrs. West We will next hear from Mr. Leo Coward. STATEMENT OF LEO COWARD Mr. C0wAPu. Honorable Senator, I sold cookingware for the Century Metalcraft Co., a corporation, 2265 Westwood Boulevard, Los Angeles, Calif., for 2 years. During this time there were five contracts that were not approved by the company. PAGENO="0140" 134 The customers received a letter from the company stating that they would have to pay 8 to 9 months on the cookingware before it would be shipped to them. This was not agreeable with the customers, so they asked for a refund of their money. The general mana~er of the company's branch office here refused to write for these refunds. On August 31, 1967, I left the company because of their attitude toward the consumers. I held a $250 cookingware set, and I told the general manager that I was not going to turn the set in unless he would write for these customers' deposits. So he refused to do this. On December 1, he filed a complaint against me with the U.S. attorney's office on a charge of larceny. This hearing was held on December 1. The result of this hearing was that the general manager would have to write to the company to refund my customers' deposits, and I would then turn the set in, and that has been done. Mr. WILLIAMS. Thank you, Mr. Coward. Next, we will hear from Mrs. Albertha McCord. STATEMENT OF MRS. ALBERTHA MeCORD Mrs. MCCORD. Mv name is Albertha McCord. I live in far North- east Washington. My income is from public assistance. I live in National Capital housing. One day a lady knocked on my door. When I went to the door, she spoke and said that she was from the library and had four free books for me. I thought the lady was from the District of Columbia Public Library, so I invited her in. She asked how many children I had. I told her five. She asked me to give her the names of the four youngest ones. She said that I would receive four free books. She said that someone else would come by to see me in a few days. I thought the person was coming by to bring the free books. She asked me to sign a piece of paper for the free books. I did not! read it and she did not give me a copy of it. She did not say anything about money. About a week later a man came and said he was from the Librar~. He said that I had signed a contract to buy some books. He talked about the kinds of books I would get. He opened a large sheet of paper and showed me pictures of them. He said that I would get about 60 books and they would cost $268.75. He said my monthly payments would be $7.50 for 35 months. He asked me for a $7.50 deposit, but I had only $4, so I gave it to him. He asked me to sign a piece of paper and I did. It was a contract. I do not know what was on the piece of paper that the woman had me sign. I thought I was signing for the four free books. The man said it was a*n agreement to buy $268.75 worth of books. If I had known that I would have never signed the paper. I do not need any more books for the children now because I already have a set of children's books. After going to classes in my neighborhood consumer action pro- grain, I became aware of how I had been tricked into buying the hooks. I wrote to the company telling them just what I have told you here today and asked them to stop sending me bills for the books. PAGENO="0141" 135 After many weeks I received a letter stating that I had signed a contract and that I would have to continue paying for the books. Thank you. Mr. WILLIAMS. Thank you, Mrs. McCord. Mr. M. Paul Smith, president of the District of Columbia Citywide Consumer Council. STATEMENT OF M. PAUL SMITH, PRESIDENT, DISTRICT OF COLUMBIA CITYWIDE CONSUMER COUNCIL Mr. SMITH. Mr. Chairman and members of the subcommittee, I am a resident of the far Northeast section of `Washington. I am pres- ident of District of Columbia Citywide Consumer Council. As the result of having lived in Washington for 40 years and as president of the District of Columbia Citywide Consumer Council, I am happy to be given an opportunity to speak out loud and clear in support of the retail installment bills being discussed here today. Members of the District of Columbia Citywide Consumer Council, having studied consumer representation of State agreements of California, Massachusetts and other States are keenly aware of the need for such representations of consumers here in the District of Columbia. Therefore we would like to see a bill creating the estab- lishment of a District of Columbia Department of Consumer Protec- tion. It is our hope that this Department would become not just another agency of redtape but a meaningful one which would dis- courage the abuse of consumers and deter the practices of unscrupulous businessmen. The members of the council are particularly pleased to see that the bill provides for the setting up of the District of Columbia Government Consumers Information Services which would conduct educational programs, disseminate information relating to retail installment trans- actions. We would hope that the educational program on retail installment selling information would be prepared in such a form that it could be understood and used by all segments of our society, not just for the educated. We would also hope that this information would be disseminated and that the programs would be conducted in the low-income areas as well as in the upper income neighborhoods. The members of the council represent quite a bit of experience in this field, and they offer their services in the development of such information and programs. In addition, the council concurs in the sections of the bill which states (1) complete certificates are invalid if untrue; (2) every 6 months, the seller must provide the buyer with a statement desig- nating (a) the amount paid; (b) the amount, if any, which has become due that remains unpaid; (c) the number of installment payments and amounts of each not due but still to be paid; (3) the consumer goods which are the subject of the retail installment contracts shall serve only as security for the obligation arising out of the sale of such merchandise. The District of Columbia is long overdue for consumer protection laws, and on behalf of the members of the District of Columbia City- PAGENO="0142" 136 wide Consumer Council, I urge you to push for passage of these bills, not 6 years from now but immediately. Thank you. Mr. WTILLIA~1s. Thank you, Mr. Smith. Historically, the generally accepted practice in the marketplace has been "Let the buyer beware." As you have heard, the experiences uncovered by the consumer action staffs of the United Planning Organization's neighborhood development centers and the District of Columbia Citywide Consumer Council, which, incidentally, was or- ganized as recently as June 1967, indicate that this concept represents totally insufficient protection for poor consumers in the District of Columbia. These experiences, as well as hundreds of others in our files, demonstrate conclusively that when the poor ventures into the marketplace to purchase furniture, appliances, clothing, et cetera, the extent and the frequency which they are victimized is staggering to the imagination. This occurs primarily because available cash is low; therefore, the cost will involve credit. Therein lies the great danger, "retail installment sales contracts." In reputable stores, the retail installment sales contract is not to be viewed with utter alarm; however, since credit for the poor is available only in limited establishments, many are forced to patronize the "dollar down, unscrupulous, unconscionable, compensatory mark- up merchant." When this initial disadvantage is compounded by installment contracts which include add-on provisions, hidden charges for credit reports, credit life insurance, late payment fees, penalties, service charges, and blank spaces, the growing demand from consumers that the theory of "Let the buyer beware" be superseded by "Let the seller make full disclosure" is more readily understood. A quick review of the experiences related today will show the tie- in with the proposed consumer legislation: In the case of Mrs. Albertha McCord who was tricked into agreeing to buy $268.75 worth of books she did not need and certainly could not afford, the measure in the bifi providing for a 3-day cooling-off period from home solicitation with cancellation privileges including a mandatory refund of deposit within 10 days prior to delivery would have provided ample protection. This is to say that, had the bill S. 2591 been operative, our staff would have advised Mrs. McCord accordingly. Mr. Coward's experiences as a former door-to-door salesman relates to fraudulent sales and advertising practices which are included in the legislative purpose of S. 2589. The experience of ~`Iary Taylor tests several provisions of the proposed legislation: (a) signing of blank contracts; (b) buyer was entitled to a readable copy of the fully executed contract; (c) no disclosure, since she never received a copy of the contract; and (d) receipt was given for the total cash paid. Mrs. Jessie West's presentation is bait and sweetened selling, pure and simple. It is also a good example of fraudulent advertising, hold- in-due-course finance company and third party. Finally, the establishment of a Department of Consumer Protection in the District of Columbia, which would have the continuing responsi- bility for enforcing consumer laws, conducting studies, investigations PAGENO="0143" 137 and research in connection with retail installment transactions, would provide meaningful and lasting protection to poor consumers. Mr. Chairman, because this legislation is so critically needed in the District of Columbia and because poor consumers would be the chief beneficiaries, the package of consumer legislation has been endorsed by all local consumer councils in 10 neighborhood centers, the District of Columbia Citywide Consumer Council through its president, Mr. M. Paul Smith, and the central consumer action staff of the United Planning Organization. We thank you for the opportunity to appear here today. Senator TYDINGS. Thank you very much, Mr. Williams. I appre- ciate your testimony. Mr. WILLIAMS. Thank you. Mr. Chairman, we should like to have the statement of Mary Taylor made a part of this hearing record. Senator TYDINGS. Without objection, it will be made a part of the hearing record at this point. (The statement referred to follows:) STATEMENT OF MARY TAYLOR My name is Mary Taylor and I live in Barry Farms which is a public housing project in the Anacostia-Southeast part of Washington. There are at this time 432 units in Barry Farms. Last year, a furniture and appliance store sent into this area door-to-door salesmen. They sold mainly washing machines, televisions, and stereos. Washing machines were a good item for our area because the nearest laundromat to our homes is five blocks depending on where you live in the proj- ects. They came in and showed me a stereo for $349.00. I had been wanting a stereo but my financial position did not allow me to go downtown to purchase one. They made it sound so easy for me to get one. The salesman said that I would be paying for it as I listen to it. The stereo had a meter on the hack that you put a quarter into it. There was no monthly payment because I was putting quarters into it every day. All of the people who bought the items from this company signed a piece of paper that they were told allowed the company to check on their credit. I was told that I would pay $349.00 for a stereo. When the company delivered the set to me, I had to pay $20.00 for a delivery charge. I have had the stereo for over a year and I have never received a contract. They told me that I could keep the stereo for two months to see if I liked it. At this time they would send me a coupon book for my payments. The point of the coupon book was that I could pay them at my convenience. I received the coupon book and the payments were for 24 months at $19.96. This came to $489.44, does not include the $20.00 that I paid when they delivered the stereo. I was told that the $20.00 was for the war- ranty on the stereo. The stereo does not have a name brand on it. It just has stereo- phonic on it. I have seen a similar stereo at one of the stores downtown for $199.00. I have been charged $509.00 for a stereo that I could have bought for about $200.00 some place else. Some of the people in our neighborhood have sent back their sets. One man sent it hack because he had to call them twice in a period of about two months about repairs. Another lady made no payments because the machine was not what she thought it was. She called them about picking it up in August. They finally arrived in October to take it away. During that time, she made no payments. She now has a suit pending with the Legal Service in our area. The point is that I do not have a contract and a lot of other people don't either. The people that have a contract realize that they are not legal. Their signatures are not on the contract. The oniy person that has a signed contract cannot remember signing it. I had two months to make my first payment. Before that time was up a man came to my house for my first payment. It is interesting that they send a very large man to collect for payments. I refused to give the man my payment because it was not due and I have told that I could mail it into the company. I have another friend who is dealing with this company who bought a metermatio washing machine from the company. The reason why many of my neighbors buy a T.V., washing machine, or stereo by metermatic because it will help to pay the PAGENO="0144" 138 monthly payments. You have to drop a quarter in a laundromat why not at your own home. For example, your monthly payments for a washing machine might be $14.00 a month. If when the man comes to collect and find that you have under the monthly payment, you have to make up the difference out of your own pocket. Well, my friend had $42.00 in there for one month. When the man gave her a re- ceipt it showed for only one month's payment instead of giving her credit for the next month. He tore out only one coupon. The point is that so many people in our community have had this one company take advantage of them. In other words, a stereo that cost $199.00 downtown was sold to me for $509.00. The salesman told me that it would cost me $349.00. Over $159.00 of my money will go for credit charges. I have no contract to show what kind of warranty I have with the company. There is a need to stop these companies from coming into our communities to rob us for the little money that we do have. Senator TYDINGS. The next witness is Mr. Godfrey Munter of the District of Columbia Bar Association. We are delighted to welcome you here, Mr. Munter. STATEMENT OF GODFREY L. MUNTER, REAL PROPERTY SECTION, DISTRICT OF COLUMBIA BAR ASSOCIATION Mr. MUNTER. Mr. Chairman, my name is Godfrey L. Munter. I am chairma.n of the District of Columbia Bar Association Committee on Real Property Law. I am a past president of the District of Colum- bia Bar Association. I am also a. member of the National Council of State Law Commissioners. I believe that you, Senator Tydings, have received a. letter from the chairman of the Committee on the Uniform Consumer Credit Code which our committee has promulgated. I am not a member of that committee and do not speak for it, but. the District, of Columbia Bar Association is vitally interested in S. 2592, as the chairman knows. Senator TYDING5. That is the holder-in-due-course section. Mr. MUNTER. No, sir; that has to do with requiring all foreclosures to go to court. Senator TYDING5. Yes. I understand. Mr. MIUNTER. As the Senator knows, being a member of the Amer- ican Ba.r Association-a distinguished member, I should say-that the bar associations generally do not authorize anyone to make statements on behalf of the association reflecting its position on any particular matter. In the District of Columbia, unfortunately, our board of directors does not meet until next Friday, and, consequently, I am not au- thorized to speak for it. We have made a report to the board of gov- ernors, but it. is of no effect until it is either approved or disapproved by the board. Senator TYDINGS. What would you think if it were amended and the court proceedings were required on all foreclosures of second and lesser trusts as against a first mortgage. We hare had some testimony here already on this, and I can see the problem of additional court costs, and foreclosure costs that hit people you do not want to hit? What about it? Mr. MUNTER. If the Senator is asking me for my personal opinion- Senator TYDING5. I am. Mr. MUXTER. As disrelated from the bar association, I would say that that would he a very happy amendment to tile pending PAGENO="0145" 139 legislation. I am sure that witnesses have brought to the committee information which might show that this bill is perhaps too compre- hensive in this realm. Senator TYDINGS. We have had a number of instances of testimony from people without the benefit of good education, without a lawyer, who have been tricked and defrauded into buying all kinds of mer- chandise, and then have been tricked into signing a second mortgage on their homes and are in danger of losing their homes-and some have lost their homes in some instances, because of such deceptive practices. That is what we are trying to protect. Mr. MTJNTER. I think that every member of the bar association is very keenly aware of the problem. The District of Columbia Bar Association has provided free legal services, both directly by its mem- bers and also through the Neighborhood Legal Services Association, to help and assist people who have been victimized, in bringing their complaints to the attention of the court ~vhicb, of course, the present code tells exactly what to do and the way to proceed. What I would ask, Mr. Chairman, is this: Either, if you see fit to have another hearing after next Friday- Senator TYDINGS. We will be having more hearings. Mr. MUNTER. Or else keep the record open so that I can submit the position of the bar association. Senator TYDINGS. We will do both. Mr. MUNTER. That will satisfy me, and I promise to come before you again with a full report of the District of Columbia Bar Associa- tion. I think the committee will be benefited by having some statis- tics and facts. It might also benefit from the experienced view of many people in the profession. Senator TYDINGS. I wish that you would consider submitting lan- guage on amending 5. 2592 as to second and lesser trusts. I wish that you would consider submitting such language. Mr. MUNTER. I shall be happy to do this. Thank you very much. Senator TYDINGS. Thank you, Mr. Munter. Next, we will hear from Mr. Frank Marsalek, of the Lawyers Title Insurance Co. STATEMENT OF FRANK MARSALEK, LAWYERS TITLE INSURANCE CO. Mr. MARSALEK. Mr. Chairman, my name is Frank W. Marsalek. I am a practicing attorney. I have been employed by the Lawyers Title Insurance Co. for the past 25 years; I am a past branch manager of the Washington branch. I would like to address this committee on this subject. I welcome the opportunity and I am highly honored to be allowed to testify before you. Senator TYDINGS. We are delighted to have you. Mr. MARSALEK. I am pleased that in some small way my testimony may be of some help to your committee in your deliberations on this important, far-reaching legislation. it is highly commendable that you and. your committee have undertaken to champion the cause of those underprivileged and SS-64S-6S-1O PAGENO="0146" 140 downtrodden people who become unwary victims of unscrupulous trade practices. I am fully in accord with any consumer protective bills which are bills drafted to benefit the general public and not directed specifically to special-interest groups or very slight minority groups. I would, therefore, like to direct my remarks and speak in op- position specifically to S. 2592. It is my poor judgment that this bill would not accomplish the protection to the greatest number of mortgagors, especially those who are systematically paying through the nose the exorbitant discount rates being exacted. In Maryland, for instance, we have had similar codifying proceedings involving foreclosure proceedings since time immemorial. Th e form of proceedings prescribed under the existing laws do not in any way differ in results from foreclosure proceedings now in effect in the District of Columbia, with one exception, and that is to double or triple the cost of such proceedings. Senator TYDINGS. In other words, what you are saying is that the proposal we have in S. 2592 would double or triple the cost of fore- closure proceedings as now carried on in Maryland in regular fore- closure? Mr. MARSALEK. That is right. Senator TYDIXG5. How about the exception ified to the foreclosure proceeding in Maryland where you have a court hearing? Mr. MARSALEK. Then your costs of court proceedings would be still further enlarged. Senator TYDINGS. In Maryland? Mr. MARSALEK. Yes; sir. I have a breakdown of some of the costs. It is wrong to assume that the homeowner whose property is being sold under foreclosure proceedings presently in the District of Colum- bia has no protection. Any homeowner who feels he is being aggrieved may seek legal advice. This may be afforded through the sponsored legal aides if such party is indigent. There is sufficient and ample pro- tection now available for such purportedly aggrieved homeowners through court proceedings. That is, in equity by injunction relief. The U.S. Court of Appeals for the District of Columbia circuit has consistently held that a trustee, under a security instrument, represents not only the noteholder but also the homeowner. He is charged as a trustee with the highest degree of care and fidelity and he is personally responsible for the acts in violation of such delegated trust. Senator TYDIXGS. He may be charged with that under a law, but, as a practical matter, he represents the lender. You know that, and I know that. Mr. MARSALEK. My own experience, Mr. Chairman, is this: I am a trustee under, at least, 10,000 security instruments in the District of Columbia, averaging 1,000 a year. Senator rfYDI~GS When a foreclosure takes place, your first thought is to make certain that the mortgage is bid high enough to protect the lender. You are not going to look into it to see whether or not the mortgagee has been defrauded or anything like that. What we are concerned with is such as an instance cited by a witness who told about a purchase being made. Actually, this was a home-improve- ment loan. The Health Department or somebody gave her a list of some five improvements that had to be made on the home. The owner PAGENO="0147" 141 signed a contract with a home-improvemeilt contractor for $300 for the repairs. Then the owner signed a couple of agreements with the contractor. They did not repair it. They got the owner to sign another paper ~\Thjch the owner thought was an insurance paper. Actually, it turned out to be a second-trust mortgage on the home, and the first thing the owner knew was that the home was being foreclosed. That is what we are concerned with. Fortunately, they got to a lawyer in time so that they did not lose their home. There have been a number of those who have lost their homes. rllhis is what we want your help in. We do not want to injure the reputable, normal-mortgage lender. We are concerned that there be protection afforded these people so that they cannot have their homes, in effect, almost stolen out from under them. ~ is what we need your assistance on. Mr. MARSALEK. Mr. Chairman, I would like to comment that I am a trustee under about 10,000 pieces of paper in the District of Columbia, and 99 percent are secondary and third financing. So I am speaking right in the area where you are primarily interested. From my own experience I have noted that there are about 15,000 trusts placed of record year'y in the District of Columbia. There are somewhere around 300 active foreclosure deeds. Now, in 1966, according to the best estimates, there were 2,000 foreclosures to be made. That was estimated from the 15,000 figure; 1,200 actually were advertised, 400 were sold, and out of all of these only 275 proceeded to a deed. These are astounding figures. Senator TYDINGS. How many proceedings were instituted? Mr. MARSALEK. There were 1,200 advertised, 400 sold, and 275 resulted in a deed. Now, out of these instruments that are placed of record, the 15,000 that I speak about, somewhere around 40 or 50 percent are secondary financing. Out of that there are about 200 actually resulting in f ore- closure proceedings that proceed to a deed, which is about 4 percent of the whole. Looking at the cost. You will find that the costs of foreclosure in Maryland and in the District of Columbia are somewhat the same. You have the advertising fee which runs about $125; the auctioneer is about $25; the trustee fee is 5 percent, but here you have a number of additional items. You have $30 court fees. You have to file a bond, the cost of which is $10 a thotisand. So, if you are foreclosing under a note of $6,000, there is $60 for the bond. And then you have the attorney's fee, under the rate schedule, of $250 to $300. Senator TYDINGS. In addition to the 5-percent commission to the trustee? Mr. MARSALEK. In addition to the 5-percent commission to the trustee. Now, the damage, in my estimation, is not at the time of fore- closure. It is the thousands of people who are paying these high dis- count rates and have paid them. The damage could be precluded if there was legislation which provided for an affidavit of full considera- tion to he filed which would act as a deterrent or which would be a condition precedent to the validity of the instrument, which is the security instrument. PAGENO="0148" 142 Senator TYDINGS. Now you are getting into the second-mortgage business and the usury business, which I understand is another problen~. Let us stick with the problem of protecting the consumers from having their property sold out from under them without the real pro- tection. I grant that if you are talking about a citizen who goes to a lawyer, he protects himself. They can go into equity court and handle it there. We are concerned with people who have never been to a lawyer before. Mr. MARSALEK. Let us, for example, take a foreclosure proceeding, Mr. Chairman, in the State of Maryland. I am a trustee under many, many deeds of trust in Prince Georges and Montgomery Counties. Senator TYDIXGS. Tell us the difference now between foreclosure proceedings and its relationship to the poor in Maryland and in the District of Columbia. Mr. MARSALEK. In Maryland, advertising is made in the same manner that it is made in the District of Columbia. At the time of the foreclosure, the attorney preparing the foreclosure proceedings files the case, which merely means that he- Senator TYDINGS. Actually, the court appoints, in Maryland, a special auditor, a master, or somebody to audit the proceedings. Mr. MARSALEK. Yes, but that is no more than auditing a settle- ment, say, after a trustee has made a settlement. Senator TYDINGS. It depends on the court. It is under the court's jurisdiction. Right? Mr. MARSALEK. Yes. Senator TYDINGS. And anytime the consumer or the mortgagee, feels aggrieved, he can file- Mr. MARSALEK. An exception. Senator TYDINGS. What happens in the District of Columbia? Can you do that in the District of Columbia? Mr. MARSALEK. Yes; he can file injunctive proceedings. Senator TYDINGS. In the District of Columbia each mortgage is not under the personal control and supervision of the court like it is in Maryland, is it? Mr. MARSALEK. Not to the same extent. Senator TYDINGS. Is that not the problem we are faced with here? Mr. MARSALEK. You have no jurisdiction by the courts in Mary- land any more than you would have in the District of Columbia.. Senator TYDINGS. To the extent that in Maryland, the minute that you go in for foreclosure, you are automatically under the court's supervision. The auditor of the account is an officer of the court; the auditing of the account is done by an officer of the court. Mr. MARSALEK. I would like to relate to you some of the experiences I have had. Senator TVDINGS. Is that rinht? Mr. MARSALEK. No; I would sa.y that that is not completely cor- rect, because- Senator TYDINGS. What is incorrect? Mr. MARSALEK. It does not coiue about until such time as there is a ratification. Senator TYDINGS. During the time that the account is being re- PAGENO="0149" 143 viewed, the attorney for the foreclosure goes in, and sits down with an officer of the court to go over that account point by point. Mr. MARSALEK. Yes. Senator TYDINGS. Just as if he is filing a will. Mr. MARSALEK. Nothing is taken for face value. If you borrowed $2,000 and you give a $4,000 note, we are still foreclosing. Senator TYDINGS. In Maryland, under the law there, you are under the immediate jurisdiction of the court and the court's officer during the whole proceeding; right? Mr. MARSALEK. Only to that pro forma degree, because, actually, this is really a pro forma proceeding. Senator TYDINGS. It may be pro forma, but it is sufficiently a proceeding of the court so that the individual, if he is aggrieved, can intervene and go into that proceeding without filing a special injunction-without going into equity, without any special lawyer, the individual in Maryland has a right to go right to the court and file an exception. He can go right to the judge and say, "Judge, my home is being taken from me-I never signed a second mortgage. This is all involving a television set." He cannot do that in the District, can he? In the District he has to go and find himself a lawyer and get the lawyer to file a bill of particulars and to seek an injunction in equity court; is that not right? Mr. MARSALEK. He can do that. Senator TYDINGS. There is that difference. Mr. MARSALEK. I have been enjoined a number of times. However, in Maryland, for instance, it is quite possible to foreclose with primary advertising in the newspaper, and the homeowner has no notice of such advertisement. He never gets the paper. And you can have your foreclosure proceedings. YOu can report your sales in front of the court. Then, if no exceptions were flied, because the homeowner has no per- sona~l service on this-absolutely no personal service, it is done by advertisement. Senator TYDINGS. Why is it that 5. 2592 is going to affect you so? Mr. MARSALEK. It will not affect the trustees nor the sales. It will merely double or triple the cost of foreclosure. Senator TYDINGS. That is why I am asking. Why? Mr. MARSALEK. Because it means additional fees. Senator TYDINGS. What additional fees? Mr. MARSALEK. Court fees of $30-I mean bond fees which will run $50 or $100 more. And then you will have attorney fees of $200 to $250. Senator TYDINGS. You have those in Maryland? Mr. MARSALEK. Right. That is what you have in Maryland. Senator TYDINGS. So what you are saying is that if we provide an extra protection to the consumer here, the cost of the foreclosure in the District will increase to as much as it is in Maryland? Mr. MARSALEK. Yes, it will. Foreclosure proceedings under second paper in the District of Columbia today, the fees and charges are about $125 for the advertising, $25 for the auctioneer, $25 for the trustee. And that is it. That is $150. But if you are going to add $250 to $350 attorney fees, and you are going to add court costs or another $30, PAGENO="0150" 144 and then you are going to add another cost for a. bond, you are tripling or quadrupling the amount of fees for these types of cases. The harm is not done at the time of the foreclosure. The harm is done when the people sign the paper. Senator TYDINGS. That opens up an interesting new era. Mr. MARSALEK. Because there are so many of these trusts which are not foreclosed. In other words there are many, many people who borrow $1,000 or $2,000 and paid $3,000 or $4,000 or $5,000 for the privilege of so doing. And these are the people that we are not reach- ing. So, I would say that the greater number of people are not being reached by your bill, although I think it is a fine bill. I think it is not reaching the people that you are attempting to reach in connection with this legislation. It would seem to me that if we could have some kind of legislation which would make it a condition precedent for the validity of the instrument-that is, the security instrument, that there would have to be some affidavit of consideration in support thereof, and then this would preclude such deeds of trust from being recorded- and this would meet the greater number, because any person who is aggrieved could then ifie appropriate legal action, and if he is indigent he can, most certainly, go to the legal aid. Senator TYDINGS. We would be interested in seeing any suggested legislation that you might have on this. Mr. MARSALEK. I will be happy to submit it. Senator TYDINGS. You have brought in some interesting points. Mr. MARSALEK. As you well know, the District of Columbia is a lien-theory jurisdiction. Senator TYDINGS. Is what? Mr. MARSALEK. A lien-theory jurisdiction, and in Maryland we have the mortgage-theory jurisdiction. The Maryland law holds that "once a mortgage, always a mortgage" and that any note secured by mortgage is a nonnegotiable instrument. Now, this is where you run into another area on these secondary financings, because you have a note that is made for an amount double, which is a discount rate, and discounts presently on the market are at 4 percent a year, and secondary paper runs about $10 a thousand. So that, if you have a $5,000 note, your payments would be $50 a~ month, which would then mean that this note would be repaid in 11 years, but the actual money that is disbursed by the party is one-half. Senator TYDINGS. Let me see if I understand it. Am I correct in interpreting your comments to mean that in Maryland a trust or a mortgage on the land, a mortgage note or a trust note, which is secured by personal property- Mr. MARSALEK. A note secured in Maryland is by statute a nonnegotiable instrument, but in the District of Columbia where we use the deed of trust we use a note which is a negotiable instru- ment. Here, in the District of Columbia, the trust follows the note. By merely transferring the note it could be done by endorsement.. And the purchaser of that note then becomes a holder in due course. Now, if the negotiability of a note in secondary financing may be affected in some way, then this would also aid in your ultimate purpose, because then the person could raise an objection to the amount. This is the unconscionable thing where a person borrows $2,000 and signs a $4,000 note and pays interest at 6 percent on the PAGENO="0151" 145 $4,000. Now, as a trustee I try to be very careful, and if a holder of a note presents a note to me for foreclosure, I first try to determine whether there had been a default. If there has been no payment made for 6 months, I consider this to be a delinquency. It is not a default. The holder of the note must declare the note. I can only trust where there is a default. Therefore, I notify the current party, the owner of the property and also the maker of the note, because the maker of the note is also responsible on any obligations primarily because once a maker always a maker. And we are talking about a negotiable instrument. Therefore, I, personally, send a letter to these people notifying them that, unless there is a delinquency which has been cured, the holder of the note is exercising his option of acceleration and declares the deeds default, and he has instructed and directed me to commence foreclosure proceedings after a certain date. If I hear nothing, then I merely contact the auctioneer and prepare it for advertising and send a notice of that report, that auctioneer's report or a notice of the sale, to the individual, and then I proceed with the sale in front of the property. But, in Maryland, you have it in front of the courthouse. You do not go anywhere but in front of the courthouse. And this is ridiculous. You advertise it in the newspaper which comes out every Thursday. Some people do not even get it. And then you go in front of the courthouse and sell the property, and all of the people are foreclosed out. The only thing that is left for the court to do in Maryland is go over the accounts to see if all of the figures are very nicely put on the paper, which they are, because the auditor has prepared them, but that nevertheless does not deter from the fact that the amount of money loaned or actually disbursed is about 50 percent of the value of the note itself or of the face value. Senator TYDINGS. I will have to recess soon. Do you have a state- ment? Mr. MARSALEK. No. I can prepare a statement. Sena or TYDINGS. Why do you not prepare a statement and give us a little more detail on this? I might want to call you again. Mr. MARSALEK. I will submit a written statement to you to sup- port my testimony. I thank you for the honor and privilege of appearing. (Statement referred to follows:) STATEMENT OF FRANK W. MARSALEK, ATTORNEY-AT-LAW Mr. Chairman, I welcome the opportunity and am highly honored to be allowed to testify before your eminent committee. I am pleased if, in some way, my testimony will in the slightest degree aid you and your committee in deliberations on this important and far-reaching legislation. It is highly commendable that you and your committee have undertaken to champion the cause of those underpriviledged and downtrodden, who oftentimes become victims of unscrupulous trade practices. I am fully in accord with any proposed consumer protective bills that are directed for the benefit of the general public good in contradistinction of those for the benefit of a special interest or small minority group. PAGENO="0152" 146 I would like to direct my remarks and speak in opposition specifically to Senate Bill No. 2.592. In my poor judgment the bill would not accomplish the desired protection for the greatest number of home owners; especially those who are victimized and are systematically paying through the nose the exorbitant dis- count rates being exacted by the money changers. The twenty-five years of experience in specialized real estate practice in the District of Columbia qualified me to speak with some authority on the subject matter. Personally, I have been named trustee in over ten thousand recorded deeds of trusts conveying property in the District of Columbia. These security instru- ments all being secondary financing with which your committee has a greater specific degree of interest. In today's market. place we find that the discount rate on secondary paper on a hona fide sale, discounts at 4% a year. The average second trust is usually repayable at $10.00 per thousand which normally would retire the obligation together with direct reduction of interest at the rate of 6% in eleven years. The normal discount rate would then be 44%. If there is little, or no equity, in the purchaser, the discount rate may go as high as 90%. It is wrong to assume that the home owner whose property is being presently sold under foreclosure proceedings in the District of Columbia has no protection. Any home owner who feels he is being aggrieved may seek legal advice and legal services to better protect his interests. This may even be afforded through the Bar sponsored legal aid, if such party is indigent. There is now sufficient and ample protection available to such purportedly aggrieved home owner through Court proceedings in equity by injunctive relief. The United St.ates~Court of Appeals for the District of Columbia, as well as the Court of Appeals of the State of Maryland, have consistently held that a trustee acting under a security instrument not only represents the note holder, but such trustee acts in an equally bounden fiduciary capacity of the home owner. Such trustee is charged with the highest degree of care and fidelity; and he is personally responsible for any acts he commits in violation of such delegated trusts. There is no direct relationship between the number of security instruments filed of record for any given year and the number of foreclosure deeds recorded that same year. The number of security instruments are more or less controlled indirectly by the liquidity of the money market. The number of foreclosures are controlled indirectly by the general economic conditions. Averages over a long period of time do have some significance however, and in the District of Columbia deserve some scrutiny. Year Trusts recorded Foreclosure deeds recorded 1956 1957 1958 1959 1960 1961 1962 1963 1964 1955. 1956 12,816 10,660 12,122 13,211 11,953 13,769 12,593 12,896 13,628 13,868 10,633 874 755 866 652 539 541 43~ 300 274 223 265 The above figures were furnished by the Washington Board of Realtors, Inc., who compile these statistics on a day-to-day basis. In Maryland for instance, we have legislation augmented by prescribed Court rules that provide in effect that all foreclosure sales to he valid must he ratified by the Court. This has been from time immemorial. The pro I orma cx parte foreclosure proceedings in Maryland do not in any way differ in result than those foreclosure proceedings now in effect in the District of Columbia-with perhaps one exception, i.e., to double or triple the costs of such proceedings. Let us for the moment outline the procedure under the Maryland practice: 1. The note holder delivers the note to this attorney. 2. The attorney prepares an advertisement and sets the date of sale and causes advertisement to be made. PAGENO="0153" 147 3. The attorney then makes application for a bond by arranging that the trustees sign such application. 4. On the date of the sale, the attorney secures the bond, files it with the Clerk of the Court and styles his case. 5. The attorney, together with the trustees, then appear on the Court 1-louse steps with the person who cries the sale. N0TE.-At this point it should be noted that in Maryland it is not neces- sary for a licensed auctioneer to cry the sale-the attorney himself may do so, or any one he may select can cry the sale. It should also he noted that so far there has been no notice given to the owner of the property except three advertisements which appeared once a week for three successive weeks in a county newspaper to which newspaper many of the home owners may not subscribe. 6. A report of sale is then immediately made and filed with the Clerk of the Court. The whole report may have been typed prior thereto and the few appropriate blanks are merely filled in at the time. 7. Upon the filing of a report of sale the Court may pass an order nisi, a copy of such order is advertised, usually the same newspaper (see Note under 5). Then the sale is ratified. 8. Settlement may be made on the sale immediately thereafter and a deed from the trustees to the purchaser is executed, delivered, and recorded. 9. The auditor files his report and notifies by postcard or first class mail every party and every person who has filed a claim in the proceedings that the report was filed on such date, that if no exceptions are filed within fifteen days, the accounting may be ratified. NoTE-It has been found through experience that the application of this rule has a wide and varied interpretation throughout the various counties of the state. 10. Then the owner of the property may for the first time discover what has transpired when he receives the notice to quit. N0TE.-It is very important to note at this pointthat there has been no personal service or other notice, except the possible postcard, and the news- paper advertisements given the home owner. If, however, the security instrument contains a covenant to pay the debt and the note holder is seeking a judgment for a deficiency, then personal service must be made on the maker who may not be the home owner at the time, any time within three years of the ratification. How much protection does a maker of the note have when he is served with personal service in a suit filed for a deficiency sometime within three years of the foreclosure Certainly this may be a long time after the property was sold and transferred without any actual notice to him. A comparison of estimated average costs and fees chargeable in the two juris- dictions for foreclosures of secondary trusts is in order. Item Maryland District of Columbia Advertising $125. 00 $125.00 Auctioneer fees 25.00 25.00 Court fees 30.00 None Bond premium Attorney fees 60. 00 225.00 None None Average totals Trustee fees (percent) 490. 00 5 175. 00 5 Note: If the attorney happens to be a trustee, he forgoes the trustee's commission; in which event, however, the attorney's fee is increased by $100. This allows an attorney's fee of $350 instead of $250. Compiled statistics of a leading District of Columbia auctioneer records for the year 1966 disclosed that in that year there were an estimated two thousand requests made to commence foreclosure proceedings of which twelve hundred were actually advertised and only four hundred proceeded to actual sale of which amount two hundred and seventy-five resulted in deeds. It is estimated that I have been Mmcd trustee on approximately one thousand PAGENO="0154" 148 deeds of trust in the District of Columbia per year and records disclose completed foreclosure sales resulting in deeds as follows: 1956 30 1960 39 1964 12 1957 19 1961 27 1965 2 1958 15 1962 19 1966 3 1959 27 1963 23 Conservative estimates would confirm that 50% of such secondary deeds of trusts would be discounted. This would indicate, that based on the above I ore- closure experience, only 4% of the discounted trusts were foreclosed and 96% payed off. Would it not then be reasonable to assume that the desired legislation would be more meaningful and more effective to the general public good if it were directed to the 96% of the cases stated rather than the 4% to which the present proposed Senate Bill 2592 is geared insofar as those cases in which I am personally concerned. It should he obvious, that as a named trustee in over ten thousand cases; and as a member of the District of Columbia Bar, the above arguments presented are against my personal self interests. I feel compelled however, as an officer of the Court and a Christian, that my civic duties transcend those that would afford me personal self-aggrandizement at the expense of so many citizens. In order to further aid this committee, I would humbly recommend that some consideration be given to legislation designed to affect the very existence, legality, and effectiveness of the security instrument itself. This could be done in one or two ways or both: First, as a condition precedent to the validity of such security instrument there would be requirement made that an affidavit of consideration he appended. Second, that the obligation of debt secured by a deed of trust be relegated a non-negotiable instrument to which all defenses would lie. Senator TYDINGS. Thank you. We wifi recess to an indefinite date, sometime after the first of the year. (Whereupon, at 12:40 p.m., the hearing was recessed sine die, as the subcommittee arose.) PAGENO="0155" CONSUMER PROTECTION LEGISLATION FOR THE DISTRICT OF COLUMBIA TUESDAY, JANUARY 30, 1968 U.S. SENATE, SUBCOMMITTEE ON BUSINESS AND COMMERCE, OF THE COMMITTEE ON THE DISTRICT OF COLUMBIA, TVashington, D.C. The subcommittee met, pursuant to notice, at 10 :05 a.m., in room 6226, New Senate Office Building, Senator Joseph D. Tydings (chair- man of the subcommittee) presiding. Present: Senator Tydings. Also present: Chester H. Smith, staff director; Owen J. Malone, associate counsel; Howard A. Abrahams, assistant counsel; James S. Mcdiii, assistant counsel; Richard E. Judd, professional staff member; and Robert A. Burt, legislative assistant. Senator TYDINGS. The Subcommittee on Business and Commerce of the U.S. Senate Committee on the District of Columbia is called to order. This morning, Tuesday, January 30, we are continuing hearings on Senate bills S. 316, S. 2589, S. 2590, and S. 2592, all designed to protect the consumer from fraudulent and sharp practices, particularly in the area of installment sales, by certain District of Columbia merchants. This morning we are pleased and honored to have as our first witness the Honorable Paul Rand Dixon, Chairman of the Federal Trade Commission of the United States. I would also like to welcome some of my young constituents from the Silver Hill Elementary School. I have explained to them, Mr. Dixon, the importance of these hearings. I might, for the benefit of the students present, describe briefly what Mr. Dixon does. Mr. Dixon is the Chairman of what is known as the Federal Trade Commission. The Federal Trade Commission was established by a law passed during the administration of President Woodrow Wilson, I believe, in 1913 or 1914. The Commission is designed to protect the consumer and the public of the United States from sharp practice, from unfair types of com- petition, from false advertisement; in short, to protect the citizen from being taken advantage of by unfair trade and commerce practices. I am particularly delighted to have the Chairman of the Federal Trade Commission, Mr. Paul Rand Dixon, present to testify on the legislation which is now pending before this subcommittee. Mr. Dixon. (149) PAGENO="0156" 150 STATE1~TENT OP HON. PAUL RAND DIXON, CHAIRMAN, FEDERAL TRADE COMMISSION; ACCOMPANIED BY J. V. BUPFINGTON, ASSISTANT TO THE CHAIRMAN; AND SHELDON FELDMAN, BU- REAU OP DECEPTIVE PRACTICES, FEDERAL TRADE COMMISSION Mr. DIxoN. Mr. Chairman, it is a distinct pleasure to be here before you. Before I start, I would like to introduce to you my colleagues. On my right is Mr. J. V. Buffhigton. He is my assistant. And on my left is Mr. Sheldon Feldman, who is rather an expert in this field. He is assigned specifically to t.he Bureau of Deceptive Practices, and has quite a bit of background from working on the problems that. these bills are addressed to. Senator T~mxcs. We are delighted to welcome you, Mr. Feldman and Mr. Buffington, before the subcommittee. We appreciate your be- ing with us. Mr. DixoN. Now, I am pleased to respond to your invitation to ap- pear before your subcommittee today to tell you of the Commission's views on the proposed District of Columbia Retail Installment Sales Acts-S. 316 and S. 2589-and related bills-S. 2590, S. 2591, and 5. 2592. You asked for specific information on our District of Columbia consumer protection program so that you might have it for considera- tion in connection with the proposed legislation now before you. I might say to you, Senator, aside from my prepared remarks, that the Fecleral Trade Commission, since its very mc.el)tlon, has been re- sponsible for acts that take place in the Federal District. Of course, our other jurisdictional or statutory responsibilities are limited to acts t.ha.t take place in interstate commerce. When the administration a.nd the various Members of the Congress became particularly interested in the problems that were flowing from poverty areas in this country, Senator Magnuson of the Commerce Committee asked me specifically if, within the framework of our pres- ent funds, we could mount. a. pilot study, and we did so in a. very limited way. We set up a special office outside of the prese1mt Fed- eral Trade Commission. We realized that there were many people in the poverLy or fringe areas who actually could not read or write, and maybe they were not coming forward to the Government with their complaints of this, and so we attempted to make this as ea.sy as possible. We then began to work with the neighborhood offices of the OEO program and, in a limited ~ay, we began to educa.te. ourselves, so to speak. \\That I am trying to say to you on this subject is really a. wrap-imp of the report. t.ha.t we. intend to send to Senator Magnuson on this p~o~- ect. I a.m extremely sorry t.hat we did not. have it finished completely, because I could have filed it and made it available here to you. We anticipate having this very shortly, and I would commend it to you for your study. Maybe someone should have done this 6 or 7 years ago. IVe have been probing down into the. economics of some of these things and getting fact.s and figures, and I think they will be most enlightening. PAGENO="0157" 151 Now, the general survey which our Bureau of Economics launched into the economic aspects of retail practices in the District is almost complete. While it is not available for release yet, I can now tell you of some of the major highlights of the study, and I will submit the full report to you when it is completed.* The survey covered those District of Columbia furniture and appli- ance retailers having estimated sales of at least $100,000. Data were obtained on prices, markups, and costs, as well as credit extension and collection polices. Combined sales for 96 returns totaled $226 million, representing approximately 85 percen't of sales of furniture, appliances, and department store retailers. Sixty-five retailers with combined sales of $151 million indicated regular use of consumer installment sales contracts. The remainder sold for cash or on a regular or revolving charge account basis only. Of the $75 million in sales by this group, department stores accounted for $54 million. Thus, installment contracts apparently represent the most usual form of credit instrument used for sales involving appli- ances and household furnishings. Those responding to the survey indicated installment sales of more than $45 million in 1966, an amount equal to 30 percent of their sales. If stores using revolving rather than installment credit sell on extended time credit in the same proportion, a minimum of $68 million in sales of appliances, furniture and department stores in the District of Colum- I)ia would be affected by this legislation. While revolving credit is not insignificant as an element in the structure of the retail credit market, to simplify data collection and analysis and to facilitate matters, the Bureau focused primarily on in- stallment-type credit. The remaining comments, therefore, relate to appliance, furniture, and department stores which in 1966 sold all or some of their merchandise on an installment credit basis. The survey revealed considerable variability among stores with re- spect to the amount of sales made on an installment credit basis. In the case of certain discount appliance stores, no sales were on credit. At the other extreme, a number of retailers sold entirely on install- ment credit. In an effort to understand these variations, the Bureau classified data first by type of establishment, that is, department store, appliance store, or furniture store. It reported that this classification did little to explain variability. The Bureau then evaluated accumulated data from the standpoint of whether income characteristics of customers might be the crucial explanatory factor for credit sales variations. Although it had no direct information on the income characteristics of customers of all stores, it drew inferences from information on the stores' location and their advertising practices. On this basis it developed two categories: general market and low-income market stores. Stores located in low- nc*ome areas doing no citywide advertising were `classified as low- income stores. A major part of the variability in the use of installment credit among stores was eliminated by this classificatiomi. Stores clas- sified a.s low-income stores sold almost entirely on installment credit, 93 percent versus an average of 27 percent for all other retailers in the *Economic Report on Installment Credit and Retail Sales Practices of District of Columbia Retailers, published by the Federal Trade Commission, March 1968, may be found in the appendix on p. 251. PAGENO="0158" sample. These stores accounted for about 5 percent of total sales by retailers granting installment credit. However, credit provided by low-income retailers equaled 16 percent of all installment credit re- ported for 1966. Those classified as general market stores had install- ment sales for the most part ranging between 20 and 40 percent of total sales. In order to better understand the characteristics of customers of re- tailers classified as low income, analysis was made of a sample of 486 conditional sales contracts and credit applications. it indicated substantial differences between customers of the low-income retailer and all residents of the District of Columbia. Customers of the low- income market retailer differed in family organization from the gen- eral population in that a comparatively large number of the families- 23.6 percent-had female heads of household. The average family size was la.rger-4.3 persons compared to the census average of 3.5 per- sons; and almost half of the customers' families had five members or more. Most of the customers in the sample-93 percent-rented rather than owned their dwelling place. The median family income during 1966 of the sample customers was $348 per month. This is very low considering the larger than average size of the families. The Bureau of Labor Statistics recently estimated that in orderto maintain a mod- erate standard of living for four in Wrashington a monthly income of $730 is required. More than one-third of the customers had family incomes of less tha.n $300 per month. There were 31 welfare recipients in the sample, accounting for 6 percent of all customers. There were also a number of customers dependent on social security, alimony pay- ments, and income received from relatives. Information was also collected on occupations of customers. Most were engaged in low-paying jobs. The largest. proportion, 2$ percent, were Service Workers, such as waitresses and janitors. Second in impor- tance were Operatives, including such occupations as truck drivers and laundry workers. Laborers and Domestic WTorkers also represented a significant share of the sample. Together, these four major occupa- tional groups accounted for 76 percent of the customer sample. In comparison, only 36 percent of the general population in the District were classified in these low-paying occupationa.l groups. Despite the low average income of customers in the sample, they made substantial purchases, averaging $207 per contract. Items pur- chased most frequently included furniture, household utensils, and television sets. The Bureau then undertook to resolve whether any characteristics other than income of customers distinguished these two groups of retailers. In particular, examination was made of comparative prices, gross margins and markups, credit charges and relations with finance companies. One of the most striking of the Bureau's developments is that low- income st~ores have consistently a higher markup than high price stores. On the average, goods purchased for $100 at wholesale sold for $255 in the low-income stores, compared with $159 in the general market stores. Contrasts between the markup policies of low-income and general market retailers are most apparent when specific products are corn- PAGENO="0159" 153 pared. Retailers surveyed were asked to give the wholesale. and retail prices for their two best-selling models in each product line. Thus, data collected are typical of a large volume of products sold by each class of retailer. For every product specified, low-income market retailers had the highest average gross margins reported. When similar makes and models are compared, the differences are striking. For example, a portable TV set cost about $109 wholesale to both a low-income market and a general market retailer. The general market retailer sold the set retail for $129.95, the low-income market retailer charged $219.95 for it. The Bureau reports that despite their higher prices, low--income retailers do not appear to make unusually large net profits compared to general market retailers. I think that is a striking thing that you might want to inquire into. Average net earnings per dollar of sales were comparable for both groups. It views the limited data as indicating that selling expenses, bad-debt losses and other general expenses, including legal fees and collection costs, are substantially larger for low-income retailers. Examination of credit charges imposed by the two groups of re- tailers is said to reveal considerable variability, particularly among the low-income retailers. All the general market retailers writing install- ment contracts determined finance charges iw terms of au "add on" rate based on the initial balance. When calculated on an effective annual basis, rates varied between 11 and 29 percent and averaged 21 percent when contracts were assigned and 19 percent when general market re- tailers financed the contracts themselves. Financing charges by low- income retailers entering into "add-on" installment contracts calculated on an effective annual basis ranged between 11 and 33 percent per annum and averaged 25 percent on contracts assigned to finance com- panies and 23 percent on contracts they financed themselves. The survey revealed that some low-income retailers made no charge for credit. Whatever the customer paid for credit was already included in the purchase price. This practice is of particular importance in the light of the proposed regulationof finance charges. To the extent that retailers can hide finance charges in the price of the product, rate regulation, as such, would have little or no real effect. However, general market retailers geared primarily for cash and reg- ular charge sales would have difficulty engaging in such practices. Thus, any legislation which requires full disclosure of finance charges would serve to better inform most consumers of their credit costs. At the same time, however, it should be noted that the Bureau's sur- vey reflects that a limited number of retailers especially geared to serving low-income customers apparently already engaged in some measure in the practice of packing credit and financing costs in the price of the product. Quoted low finance charges may thus give the illusion of "cheap" credit when in reality the customer pays a great deal for such credit through higher product prices. As a result any ap- proach toward consumer credit regulation which focuses solely on PAGENO="0160" 154 rates will not help substantially this small but needy sector of the market. The survey's development with respect to the assignment of install- ment contracts also has relevance for the discussion today. The elimi- na.tion of the so-called holder in due course doctrine has a worthy ob- j ective-to make it simpler for the customer to obtain redress when dissatisfied with faulty or defective merchandise. The survey reflects that all but department stores assign installment paper in some meas- ure. In 1966 general market appliance and furniture retailers sur- veyed assigned more than 80 percent of their paper. Low-income re- tailers assigned about 20 percent. Thus, assignment is a widespread practice which affects in some measure all retailers of appliances and household furnishings other than department stores. One of the most notable facts uncovered by the study related to the frequency with which small groups of retailers utilize the courts to enforce their claims with respect to installment contracts. Eleven low- income retailers obtained 2,690 judgments in 1966. Their legal actions resulted in 1.568 garnishments and 306 repossessions. For this group one court judgment was obtained -for every $2,200 of sales. Depart- ment stores-reporting sales on an installment contract basis-which are comparable to low-income stores only in the sense that they hold their own paper, reported obtaining 29 judgihents.' For them to have used the courts at a rate similar to low-income retailers would have meant obtaining 41,500 judgments, as compared to a reported 29.2 These figures are not definitive because not all retailers holding their own paper undertake to enforce claims before the court in their own names. They may instead assign or sell off delinquent paper to collec- tion agents who in turn bring suit. However, they roughly indicate the comparative dependence of these retailers on court action as an integral part of their credit-collec- tirni system. You are familiar, sir, with some of the hardships resulting from such a policy. It is these hardships that S. 316 and S. 2589 are designed to alleviate. These bills, if enacted, would clearly delineate the rights of plaintiffs in such suits and sharply restrict rights of re- possession and garnishment. Since our District of Columbia program was instituted in 1965, we have issued 22 complaints challenging 22 alleged deceptive practices involving 16 different types of business concerns such as retailers of sewing machines, television sets and other appliances, burglar alarms and fire detect.ion devices, carpeting, musical instruments and instruc- tion, auto transmission repairs, and a. jeweler selling eyeglasses and numerous other items. Fourteen of these cases have resulted in issu- ance of final orders to cease and desist. The remaining eight cases are presently in various stages of litigation. As of today, recommenda- tion has been made that we issue complaints in nine additional matters. The cases to date that have resulted in orders to cease and desist have banned deceptive practices in a wide variety of forms. Many of 1 These judgments relate to installment contracts only which accounted for 20 percent of the sales of department stores in the sample. -Total suits filed in relation to all sales by these stores in 1960 were 356. 21n 1966 approximately 50,000 suits of all types involving debt claims were filed. Less than half of these involved claims on consumer merchandise purchases. PAGENO="0161" 155 them readily fell into old familiar patterns. They included fictitious pricmg, misrepresentation of guarantees, misuse of conditional sales contracts by failing to disclose finance charges, failing to give the pur- chaser a copy of the contract, and the like. Another major approach banned was a technique employed in the sale of almost every type of consumer commodity-"bait and switch." Here the game commences with a "come on" advertisement or per- haps a "you have been chosen" phone call. The prospective purchaser is usually disillusioned upon discovery that there never was any inten- tion to sell the advertised product at any such price or under any such conditions. This was merely "bait" followed by a high-pressure effort to "switch" him into purchasing the higher, oftentimes extravagantly priced, article that the entrepreneur really intended to sell him all the while. This, I would make clear-the "bait and switch" tecimique is not new-it is not restricted to any particular type of commodity-and it is not limited to the District of Columbia. It has a long history before the Commission. Our "Guides Against Bait Advertising" were issued in 1956. They were predicated on the Commission's experience reflected by its prior actions. Thus, industry generally has had notice for over 11 years of our views on its various forms. One other phase of our District of Columbia program has been our Office of Consumer Complaints. The experiences which some consumers have related to this office have been particularly heartbreaking, be- cause many in reality described a private controversy between seller and purchaser-a situation in which we are without authority to in- tervene. In most cases those aggrieved could not afford private coun- sel. We were able to assist these persons only to the extent of referring them to the Neighborhood Law Office nearest to their residence for advice. The Commission has long been on record as an advocate of con- sumer protection. The facts developed from our District of Colum- bia consumer program are among the reasons why we endorse the principles of the five bills you are considering. It is obvious from our experience that significant deception of the populace exists concerning the terms and conditions of the credit they are offered and contract for, as well as by advertisements failing to disclose the credit terms being offered. We favor particularly the "truth-in-lending" proposal represented by section 3.104 of S. 2589. The purpose of both S. 2589 and S. 316 is to provide regulation in the District of Columbia of retail installment sales of consumer goods (except motor vehicles) and services. Instead of delegating authority to the District government to make and enforce regulations respecting these transactions, S. 2589 represents a comprehensive, specific, and reasonable legislative statement on how they should be conducted. Section 3 of 5. 2589 constitutes a clear and fair regulation of retail installment contracts. We could not quarrel with S. 2589's requirement of disclosure of finance charges expressed as an annual percentage rate in open-end credit plans-in revolving credit transactions-and in installment con- tracts. Why shouldn't those seeking credit have a truly informed basis for comparing offers of competing creditors? Why shouldn't all credit retailers come under the same standard? SS-64S-G8----1i PAGENO="0162" 156 We believe in the principle, enunciated by S. 2589, of standardiza- tion of the terms and the form of retail installment contracts-includ- ing full disclosure of all costs and clear enmneration of the rights and remedies of both parties. S. 2589 is a.major step toward the realization of this principle. S The provision in both S. 316 and S. 2589 that the only collateral for *an installment contract shall be the goods covered by that contract would benefit those who might be high pressured and persuaded into pledging as security an interest in other property. Why should this be permitted? We favor the provision. The prohibitions against "add on. contracts" and "balloon notes" speak for themselves. But I would add that our recent experience clearly indicates that the traditional reasons for protecting holders of negotiable instruments should be reconsidered, as does section 4.102 of S. 2589, in the light of an overriding need to protect consumers and to destroy the shi~ld behind which too many businessmen have been hiding. I mentioned our Consumer Complaints Office and the heart rending experiences we sometimes learn of without being able to assist except to refer the aggrieved party to his Neighborhood Law Office. The con- tinued operation of this office would not conflict with the operations of a District of Columbia Department of Consumer Protection as pro- vided by section 8 of S. 2589. We favor the imposition of reasonable limitations upon finance charges and other fees, costs, and penalties called for by S. 2590. How- ever, since our economic survey disclosed that finance charges in par- ticular are sometimes hidden behind the cloak of an inflated selling price, I feel sure the committee will seek to consider the full economic report upon its submission in determining the final version of this bill. S. 2591 would provide the right to cancel retail installment contracts under certain circumstances. It specifies a 3-day "cooling off" period. This is not an unreasonable provision and, in my judgment, would be desirable. Finally, we endorse the principle of S. 2592 which would afford the debtor an appropriate court hearing before a security interest in his real property is foreclosed. A consumer should not lose his home with- out an opportunity to present his case in a court of hearing. Let me conclude, sir, by making our position clear. We do not con- sider that the passage of any of these bills would preclude the continued exercise of our jurisdiction over unfair and deceptive business prac- tices within the District. We recognize that the principles of the five legislative proposals now before you are both fair and equitable. The bills encompass fundamental consumer rights which should be spelled out for the citizens here and ultimately throughout the land. Indeed, several States, such as Massachusetts and Washington, already have much of what you are considering here today. S This is the age of the consmner, Mr. Chairman. I think it has finally arrived. We applaud your efforts. I might say this to you also, sir: I have been a strong supporter of the States passing similar legislation to the Federal Trade Commis- sion Act. I do this with the full realization and knowledge that many of the things that happen on Broad Street, America, are not in the stream of commerce. I do it with the full realization that if those things PAGENO="0163" I 5T are attacked on the local site, that much of the need of doing something about it here in Washington will be eliminated. I applaud these bills, because these bills would assign, in a sense, down into the District government something that is similar to what is being done in the States. The Federal Trade Commission today has tremendous responsi- bilities, as you are aware. We have the responsibility in the general trade field in interstate commerce to see to it that the fair businessman, the legitimate, the ethical businessman is not put upon by the rela- tively small minority group of unfair actors. This is in the field we call the antitrust and restraint field. In the other field, since 1938, when the Congress passed the Wheeler- Lee amendment to the Federal Trade Commission Act, it `was clear that Congress once and for all turned its back and buried caveat emptor. It said that hereafter, at least, any statement or ad that was disseminated in commerce could not be deceptive. Now, up to that time, the argument could be made that we were all grown people, that we should know what we are doing and we should be aware, in a sense. Well, in our system of mass distribution it simply will not work, sir. And Congress was wise, in my opinion, to turn that corner there, because in selling goods that are produced by the mass method, the public must be able to depend upon what they read or hear. We cannot afford to dissipate some $15 or $16 billion worth of advertising a year and have a cynical consumer ask what the consumer now is asking. For undertaking investigations on these questions I applaud you. I ap- plaud you for doing it here in the District of Columbia. It will make our course a bit easier. With the program we have, I recently wrote Chairman Magnuson of the Commerce Committee and pointed out to him that even to effectu- ate a strong follow through on a program in D.C., we must have ad- ditional funds. And then the question might very well be asked, Why, in the District of Columbia, when we have the responsibility flowing across the lines? You see? So I think this is fine. I hope you are successful in your legislative `endeavor. Senator TimINGs. Thank you, Mr. Dixon. How many States have legislation that is similar to that proposed for the District of Columbia? Mr. DIXON. I do not know exactly. Senator TYDINGS. It is limited to a few States? Mr. DIXON. There would be a rather small number similar. Now, as I said, recently the State of Massachusetts passed what I would call a model Federal Trade Commission Act, which is a pretty strong type of statutory enactment. Hawaii has a broad act; the State of Wa~shington has. To a lesser degree, we have States like New Jersey, Wisconsin, Texas, California. Mr. Feldman tells me 31 States have general retail installment bills now; 31 States. Senator TYDINGS. How many have a model act such as the Massa- chusetts law? PAGENO="0164" 158 Mr. DIxoN. There are oniy about three, sir. But we have made some degree of progress, working with the various State attorneys general aiid the compact of Governors, and this approach is receiving increas- ing consideration. Senator TYDINGS. Mr. Dixon, the survey which you are in the process of completing for Senator Magnuson and the Commerce Committee, is it a voluntary survey which the retailers of the District of Columbia- Mr. DIXON. No. We used facts, sir-not force. We have a section 6 of our act which says that we may call upon any corporation in com- merce in the District of Columbia and ask them to give us a little special report. This is the fact, sir. Senator TYDINGS. Your survey then should be pretty reliable when it is completed. Mr. DIXON. I would think it would be something you would want to look at, sir. Senator TYDINGS. In a quick analysis of your. testimony, it would nppear that among the stores that do business in the center city areas, the so-called low-income stores, the markup from wholesale to retailer is almost a hundred percent greater-as indicated in your statement- almost a hundred percent greater than the markup of the general department stores and the plant stores that are located outside the low- income areas. Mr. DIXON. That is the indication, sir. Senator TYDINGS. You indicated in your testimony that the actual profits of these merchants is very similar to those of merchants out- side the low-income areas and that this comes about because much is eaten up in bad-debt losses and general expenses, which include legal fees and collection costs. Mr. DIXON. Yes, sir. That is something I think must be weighed also. Senator TYDINGS. And, also, it is apparent from your testimony, that where the 11 low-income retailers obtained 2,690 judgments in 1966, I think the department stores- Mr. DIXON. Very few. Senator TYDINGS (continuing). Reporting on installment sales com- parable to the low-incomes obtained apparently 29 judgments. Many of these low-income stores a~ppear to really be using the courts as an adjunct to the operation of their business; namely, for the collection of bad debts. Mr. DIxoN. I think there is a strong indication that that conclusion is right. Senator TimxGs. Now, you point out that a number of the so- called low-income stores are already experiencing some pressure with respect to the costs of packing, crediting, and financing costs as a part of the price of the product. That could continue even if our legislation were enacted into law, could it not? Mr. DIXON. That is what I am afraid of, sir. In other words, just like-if they weigh it arbitrarily, assign it, but if it is an example like I gave of the television worth $129 a.nd it is two hundred and some- odd dollars, saV, "You just owe me so many payments at so much, and this is the price." PAGENO="0165" 159 Senator TYDINGS. I really do not see how you can regulate the eost~ of goods. If the customer knows the cost of the credit, and if the cus- tomer is protected from sharp practices, then if the customer wants to buy a television set for $250 which he can buy at $125 at a normal de- partment store or appliance store. Mr. DIXON. Senator, I am afraid we have arrived at a time in our society-and this just does not necessarily apply to poverty people- where the average American says "How much a month or how much a week?" And I think- Senator TYDINGS. They do not shop around enough. Mr. DIxoN. I think that is it, sir. Senator TYDINGS. It is obvious from the statistics which you have presented in the course of your testimony that the stores in the low- income areas which inflate their prices and throw on the high credit charges because a high percentage of their customers are not going to be able to pay for the goods and they are going to have to go to court to collect, or reposses the goods or get a judgment. Would it be to say that your survey indicates that? Mr. DIxoN. I would think that it would be warranted to conclude that experiences have been weighted in some way and that the prices and charges have been set with the knowledge that perhaps many re- possessions will have to be made-garnishments, repossessions, and what have you. Senator TYDINGS. Now, in garnishments and repossession cases, the court costs are always loaded onto the customer, are they not? Mr. DIxoN. That is correct. Senator TYDINGS. It would appear that those committees having jurisdiction over the judiciary ought to perhaps examine court costs from the standpoint of whether or not the courts are being used by the merchant against the consumer, rather than requiring the merchant's own judgment to be decisive in assessing the risk so that he does not sell goods to a person who obviously cannot afford to pay for them. Have you any thoughts on that? Mr. DIxoN. Well, I would think it would be a very worthwhile study, even a study of various thinking that garnishment should be reex- amined completely itself. Senator TYDINGS. I think it is going to be interesting. How much detail does your survey go into with regard to the statistics relating to repossessions and garnishment.s and attachments, and so forth? Mr. DIxoN. I think it is comprehensive and will be very under- standable. I think it will be very helpful to you. Senator TTDINGS. I frequently hear particularly from my own con- stituents in Baltimore, the feeling expressed by those that are in the poor and less educated sector of the economy that the courts are used always to protect the owner and seller, and never to protect the con- sumer. Indeed, sometimes they are rather unfairly used against the interest of the consumer. Mr. DIxoN. Certainly, I think it is time that this whole procedure be examined, as it is being examined today, to see if we can even up the PAGENO="0166" 160 scales and balance them out somehow. Maybe if the scales are now in favor of the seller, that should be reexamined, and in the reexamina- tion, I would urge you not to go beyond a. balancing-not go the other way, because this could happen also. I believe that it would be fair to say that the study we have made could be used. as a kind of pilot for what might be found in Baltimore or in Philadelphia or in my hometown of Nashville, Tenn. I do not think there is anything unique happening in Washington, D.C., that is not happening in other places. Senator T~nINGs. In your statement, you discuss in some detail the District of Columbia program which you instituted in 1965. Mr. DIXON'. Yes, sir. Senator TIDINGS. And then you mention that one phase of your Dis- trict of Columbia program has been the Office of Consumer Com- plaints. Mr. Dixox. Yes, sir. Senator TIDINGS. How many consumer complaints have you had since you opened your office? Mr. Dixox. I have inquired about this. We started in mid-1965 or a little later. I would say that sometimes we have had as~ many as 50 in a~ week; sometimes we would only have four or five in a week. It would vary. Many of these things, I might point out to you, were in the nature of a private controversy where nothing could be done. But many of :them did fall in the old'tracitional pattern, as I recounted here some of the things that we did. We issued complaints, settled many of them, have had to try some of them, but we obtained the cease and desist orders that I set out here. We are trying at the Commission today, with the limited resources we `have, wherever possible, instead of going, on the case-by-case methOd, to go across the board if we can, to try to clarify and guide in a sense a kind of-an equitable law enforcement is one way of saying it, and to get from the vast majority voluntary changes and compliance and then reserve our ammunition, so to speak, for the recalcitrant, the fellow that just will not. conform, the fellow that wants to take his quick-hand move. And this is a problem, sir. He benefits by the long lawsuit., by delay, by regulatory lag that we first heard President Kennedy address himself to inhis first State of the Union message. We have been trying to do something about that in our rules and pro- cedures and practices. We think we have done a great deal. And these kinds of programs will help~ eliminate some of the things that gnaw right at the vitals of the society, right down where people live. Senator Tnn~os. I gather that you are neither equipped nor do you have the authority to get involved in each individual case. Mr. DIXON. Well, we could, if Congress-I have always been amazed at the wisdom of `the Congress. The Congress does not simply want a Federal Trade Commission of 100,000 policemen. Our system will not work unless the individual accepts it and works at it `himself. We can- not run a police state. We have to persuade the individual business- man, and it isgetting easier and easier, sir-the managers of our great corporations, businessmen today seem to me to appreciate the freedom they have in an unregulated society other than to just live by catch as catch can, and then when that comes there can `be but one t:hing, PAGENO="0167" 161 and that is outright licensing and regula'tion. Freedom goes out the window with it. Senator TxDINGs. Do you feel that the 22 complaints upon which you have acted have.had an impact on the practices of these small,num- ber of merchants who have been engaged in unfair practices? Mr. DIxoN. Well, sir, I have tried to leave the impression here that many of them are the same things that we have given gmdance on the year before. It seems they did not pay much attention to the guidance. Fortunately, there are not an overwhelming number of these people, Senator. Senator TYDINGS. It appears to me that they primarily operate m the low-income areas, where the people have neither the benefit of an education or knowledge of the law upon which to protect themselves. Mr. DIXON. Well, there is not much competition, and it is a pretty dangerous area for a fellow to operate in. He has great losses and. problems here. They operate where people cannot go and get credit at the major stores. And, so~ in a sense, both the people and the mer- chants are kind of forced off into a society of their own tO do busi- ness on a catch-as-catch-can- basis. I' would think, at the drop of the hat, that there were great profits coming from this, and yet the profit picture does not indicate it is too far out of line. Yet some atrocious things are* happening; as indi- cated by the series of articles that have appeared in the Washington Post on this. People have not only been deceived, it would appear they have been defrauded by acts that people in home improvement, the home im- provement industry, have undertaken, and some great tragedies have happened here. You take a little old building, a rather poorly educated couple, sitting in an apartment somewhere in the city, and a knock comes on the door. They open. the door and the fellow says to them : "Look, I see you do not have a television. Could you afford so much a week?" "I guess we can." And then he s'ays, "Well just sign here." Now, I do not know whether there was any representation of how much, or whether it would have made any difference to them of how much it was. I think many, many articles are being sold this way, by people that overprice them and get their money real quick. Maybe after they get a few payments they have their money back, and from then on anything they get is profit. But such things as securing new purchases with goods already owned should not be permitted. Merchants should not be able to take, in addition to, an article sold on installment, the furniture, the stQve, or the refrigerator that has already been paid for. Now, these are damnable practices, sir, in anybody's society. Senator TYDINGS. Well, thank you very much, Mr. Dixon. We appreciate the time that you and your colleagues have taken out of your busy schedules to be with' us, and we appreciate your support of the proposed legislation. - . Mr DIXON Itis a pleasure to appeai before you, sir PAGENO="0168" 162 Senator TYDINGS. Thank you. Prof. William F. Willier, Boston College Law School. Professor Wilher, we are delighted to welcome you here, particu- larly in view of Mr. Dixon's testimony that Massachusetts is one of the two or three States which does have comprehensive statutes to protect the consumer from the type of practice we are concerned with. We would be delighted to have your coniments on the legislation pending before this subcommittee. STATEMENT OP WILLIAM P. WILLLER, PROPESSOR, BOSTON COLLEGE LAW SCEOOL Mr. WILLIER. Well, thank you, Senator Tydings, for inviting me. The committee has asked me to direct most of my discussion to the holder-rn-due-course, or I should say anti-holder-in-due-course pro- visions of the two bills. I would first like to commend the draftsmen of S. 2589 for what I consider to be an admirable job. I have not had time to ~o into, in depth, an analysis of the bill, but a cursory reading comparmg it with the many statutes with which I am familiar indicates that it is a superior job. And, if, during the questioning, I can offer any help to you with re- spect to any other matters, I will be happy to do so. Senator TYDINGS. Thank you. Mr. Wu~i~mn. By way of background, the law of negotiable instru- ments was pretty much promulgated some two centuries ago by mer- chants, businessmen, and bankers. I doubt if, at the time, they could have conceived that the consumer or ordinary citizen would have ever been a party to a draft or a promissory note which t.hey used strictly for business transactions. I think the result of that is that the holder- in-due-course doctrine, which is the guts of the negotiable instruments law, is in 1968- Senator TYDINGS. Will you explain this a little more? Mr. WILLIER. The holder-in-due-course? Senator TYDINGS. Yes. Mr. .WILLIER. I am sorry. Senator TYDINGS. No, no, the history. You said they did not think it would be used for a business transaction. Mr. WILLIER. Well, it grew up actually among bankers on Lombard Street. The draft, which was a first instrument, was a payment instru- ment, in order to avoid transferring cash from one party to another. Senator TYDINGS. In trade? Mr. WILLIER. Yes, in trade transactions, strictly businessmen. And then the promissory note, which was a credit instrument, was a little later in coming, and they even had to resort-because these rules were so difficult, they had to resort to courts of admiralty and other courts which were sympathetic to their points of view. The common law courts were not. The developments, it seems to me, involvmg the consumer, are rela- tively recent, probably 20th century, when these instruments really began. Senator TYDINGS. You mean the selling of paper to a bank in order to finance- PAGENO="0169" 163 Mr. WILLIER. No, not so much that, but the fact that they would use a promissory note as a credit instrument for a consu~ner transaction. Credit transactions are relatively recent in our economy. `And to use the promissory note and then transfer it to a financing agency of some kind, it is fairly recent, and yet the law did not change. In other words, the law remained fairly static for 200 years, and the courts have been faced with this problem. Certainly, a new group of people are obligors on this paper and yet the rules have not been changed. Certainly, the commercial code, which is the law of the District, has not done much to innovate in that respect. So, I think, in 1968, I support this, that there is not much basis for carrying over t'he idea of a third-party finance company who buys the paper from the dealer, the concept that they should be treated as an innocent party. I have support for that by the fact that some-I have not covered the States, `but I could name at least five: Massachusetts, `Connecticut, New York, Texas, and California, that have eliminated to some degree the holder-in-due-course doctrine. In `States where the legislatures have not acted and decided that this, `as a rule, is no longer relevant, the courts `have acted. A recent c'ase in New Jersey, I think, is far reaching in that respect. The new uniform consumer credit code proposed `by the Commis- sioners on Uniform `State Laws, a speci'al committee financed by the credit industry primarily, proposes that the holder-in-due-course doc- trine be abandoned. In a recent panel I was on in Detroit with Prof. Homer Kripky, New York University, and formerly a counsel for leading financial institutions, he finally admitted that there is not much point in carry- ing the doctrine further, that the number of cases the legitimate credit industry have had where they have found it necessary to use this are infinitesimal, and it is no longer worth it in terms of the protection of the consumer. And in today's credit economy in the New Jersey court-and Mr. Dixon before me tends to support this. The relevance of the financing introduced by the dealer paper is an integral and essential and in- evitable part of the consumer kind of transaction. He cannot divorce himself. In fact, current transactions could probably not exist except perhaps among the low-income creditor without that financial in- stitution. He provides the forms, he does many things which makes him really a part of the transaction between the dealer and the consumer. I think the problem facing the legislators, and, indeed, your com- mittee, is what to do about it; in what way can this be eliminated or affected to reverse the rule which is to the detriment of consumers, and, second, to what transactions should reversal, this reversal, apply. And in looking over the number of statutes, I have found that there are roughly three ways that the legislatures have gone about this. One is to prohibit the use of negotiable instruments. The new uni- form consumer code proposes that method. They would, on the other hand, retain the holder-in-due-course doctrine if a negotiable instru- ment were used in violation of the statute. PAGENO="0170" ~64 The other method, or one other method, is the one we use in Massa- chusetts, and we require all retail sellers to label their promissory notes consumer notes, in which ease they are nonnegotiable. This can have two effects. In our State they are nonnegotiable, and they cannot be a holder-in- due-course of nonnegotiable notes, or you can simply say- Senator TnIxGs. Now, when you say they are nonnegotiable, does thai preclude the merchant from taking them to a bank and borrowing against them? Mr. WILLIER. That is an interesting question, because there is virtual- ly no law of nonnegotiable instruments. Senator TYDINGs. I can see that-notes today, as we use them~ are an effective way of moving goods in commerce. The question is, as I see it, whether or not, by this anachronistic doctrine the consumer should be precluded from the legal rights that he would have had en- joyed agamst the original seller-he should be precluded from using these legal rights against the institution which purchased the note. I do not quite see how the elimination of the notes does anything either for commerce or the consumer. Mr. WILL~R. Well, actually, in Massachusetts, we have had this act, this part of our act, since 1961. It has not prohibited any of this kind of financing. Actually, as far as I know, we have had no test cases. Now, what the effect is of declaring the notes nonnegotiable-which, by the way, is what your bill does, that is, 2589-I do not know, because there is no law of nonnegotiable instruments. Article III of the Uniform Commercial Code applies only to negoti- able instruments. So, once you destroy the negotiability, you have left the law in the hiatus, and yet financing institutions buy this constantly in Massachusetts without any problem. Senator TYDING5. I do not follow you. Is it your position that once you destroy the holder-in-due-course protections you would automatically destroy the negotiability of the note? Mr. WIr~LuR. No, there are two ways of doing it. Senator TnING5. Well, our bill does not destroy the negotiability of the notes. Mr. WUJLIER. It prohibits the use of negotiable instruments. Senator TYDING5. It prohibits the use of the holder-in-due-course doctrine. Mr. WILLIER. Of a negotiable instrument. Senator Tn~INGs. But it does not destroy the negotiability of the note. Mr. WILLIER. Yes; it says "any note in violation is void and unen~ forceable." I am sorry, Senator, but the statute does not read that way. Senator TYDING5. Let's get down to the nuts and bolts of it then. Let's turn to the page we are talking about and refer to the language we are talking about. Mr. WILLIER. Section 4.102, page 23. Senator TYDINGs. Let's read the language:. Notwithstanding section 28.301 through 307 of the District of Columbia Coder no instrument or series of instruments payable to order or to bearer which, when negotiated, will cut off as third party any right of objection or defense PAGENO="0171" 165 which the buyer may have against the seller shall be executed as evidence of the obligation of the buyer in connection with a retail installment transaction. Any such instrument issued in violation of this section is void and may be en- forced by any subsequent holder. Well, that refers to one type of an instrument which cuts off the right of defense against the buyer. That does not refer to all instru- ments. Mr. Wui1ri~a~. I submit, under article III of the Uniform Commer- cial Code, from which this language was taken, you have really said that to use a negotiable instrument is prohibited, and if it is, in fact, used, it is void and unenforceable. That is a definition of "negotiable instrument." Senator TYDINGS. Well, this particular type of instrument does not stop. A negotiable instrument is a negotiable instrument; is it not? Mr. WILLIER. I am afraid I have to disagree. I do not want to get into the overly technical matters here, but what you have done is roughly what we have done in Massachusetts only in a little different way. We have prohibited the use of negotiable instruments. Senator T~mNGs. Well, perhaps my definition is a little too broad. When you say "negotiable instrument," you are referring to the strict definition in the commercial code which refers only to an instrument which is protective-which protects a' buyer with a holder-rn-due- course doctrine? Mr. WILLIEii. Yes. No, do not get me wrong. I am not criticizing your statute; I am just simply suggesting what the construction of it, as I see it, would be. Senator TYDINGS. I see. I was using the term "negotiable instru- ment" perhaps in the broader sense and not in the strict legal sense. I was thinking basically in terms of a promissory note. Mr. WILLIER. Well, there are three kinds: drafts, notes, and cer- tificates of deposit, and this would deal usually with the notes which use the credit instrument. Senator TYDiNG5. The question I am asking is whether this section would slow down or stop the use of notes or some other types of in- struments which require and enable the seller to sell more than he ordinarily would by selling the notes to a financial institution? Mr. WJLLIER. No; as a practical matter, I do not think so. As I say, we have done the same thing in a little different `way, and it has not, in any sense, in Massachusetts, hindered the commercial flow of busi- ness, from all we can gather. It is a little different way we approach it, but the result is the same. Now, what you revert to is the common law of assignments in terms of legal principles. In other words, article III of the Uniform Com- mercial Code becomes irrelevant and you simply have common law of assignments. Unfortunately, there is no statutory body of law dealing with this. Senator TYDINGS. It would have to be developed? Mr. WILLIER. Yes; it would have to be developed. If cases start arising, `there could be problems, I suppose.' Senator TYDING5. Right. Excuse me, but I was unclear on that, and I appreciate your illumination. I have trouNe with negotiable instru- ments. PAGENO="0172" 166 Mr. WILL~R. That is what I hear from all former students, Senator. The one they did not understand was-~ Senator TImINGs. I passed it, but it was rough. Mr. Wu~i~n (continuing). The course in negotiable instruments. Well, I think you probed very well the matter here, and there is not a great deal more I could add to this. Senator TrmwGs. Do you feel that there is a national trend in this direction, with respect to this t.ype of legislation, which may well see it adopted in a number of States. other tha.n just Massachusetts? Mr. WILLIER. Oh, without question. Connecticut, in one limited area, solicitation-type sales transactions, which your statute deals with, were just eliminated last year. It is piecemeal at the moment, but clearly the trend is that~ way. In 1968, the Commissioners will be promulgating their statute, a.nd I am certain this feature of it will be in there. Senator TYDINGS. The Commissioners of the Uniform Code? Mr. WILLIER. Yes. Senator TYDINGs. When that happens, then it will probably be before all the legislatures across the Nation. Mr. WILLIER. That is right. Your statute has the benefit of being simple. I mean, it is clean cut, and does not allow any holders-in-due- course at any time under any circumstances. I suppose that I am somewhat of a moderate in that. respect, and I think the ideal statute would not offend the concepts of negotiability but rather would aim itself at the holder-in-due-course directly and retain negotiable instruments as such, simply in due notice to that holder if he takes an instrument in a. consumer transaction. The rare, rare case where he could plead complete ignorance, and you have a note that is not properly labeled or does not indicate its-You may very well have a holder-in-due-course, but you would eliminate 99 percent of the cases with this approach. Senator TYDINGS. Well, we would appreciate any language you might have to offer based on the experiences of the Massachusetts statute.. We do not want to be unfair in this legislation. Mr. WILLIER. May I address myself to one other point? Senator TImINGs. Surely. Mr. WILLIER. I notice you raised the point with Mr. Dixon, and he raised the price-padding problem, that is, the low-income sellers will pad the price, and I think, under your definition of cash sale price, plus your administrative regulation, I think you have some effective weapons in here t.o stop this kind of price padding. We conducted an experiment in Boston and found if you deal, for example, with certain furniture sellers they have a. price. This would be their low-income price to the credit buyer. He comes in. He has no bargaining position. That is it. We know that it is probably 300 per- cent markup. So, I sent a student down with his fiancee, and lie started bargaining in terms of cash, and the price went down. down. down. Now, under your definition, if you could, with your administrative investigators, establish that a price to the cash buyer was different than to the credit buyer, you actually could enforce that and make this man reveal the difference in terms of the finance charge. And I think you have improved greatly on the definition of cash sale price. PAGENO="0173" 167 Senator TYDINGS. Thank you. One more question along the line of your last comment. In Mr. Dixon's testimony he indicated that a large percentage of the so-called low-income retailers sell mostly exclusively on the basis of credit. Now, in a situation like that, particularly where they use the door-to- door salesmen, who high pressures the poor buyer or consumer, how are you going to determine the so-called cash sales price in order to advise the consumer of the difference, particularly when you have almost exclusively an installment sales operation? Mr. WILLIER. Well, the only way I could-Of course2 for the in- dividual consumer who is hooked, I am not sure there is much you can do. And as far as his private rights, this is a very hard matter. As far as public administration, I think it is somewhat easier, and I think that even on credit terms if I were to try to get evidence, I would talk to the person in terms of a potential downpayment if he is strictly a credit seller. I do not know. They are very suspicious, we found. We were not able to get very far simply because it did not take them long to realize we were up to something, and it is very hard to get evidence from these people. Senator TrrINGS. You are up to no good when you are protecting the consumer? Mr. WILLIER. In their terms. Senator TYDINGS. One point that has come up-a criticism, and it may or may not be valid. One of the provisions we are considering would require the mer~hant to make a choice as to whether he would repossess the merchandise sold on installment sales and not seek other recourse in the event repossession was not sufficient, or allow the pur- chaser to keep the item and just seek his ordinary recourse through the courts. We have had some strong criticism that this is unfair and really discriminates against the seller, and the seller ought to be able to take either or take both. Mr. WILLIER. Well, I would say two things to that, Senator. Again, the proposed uniform consumer credit program in its last and probably final.draft takes the same position you do. Senator TYDINGS. It does? Mr. WILLIER. Yes. Senator TYDINGS. This is in the proposal to go before the Corn- inissioners next year? Mr. WILLIER. Yes. In Massachusetts, we compromised, and I sup- pose it is not only a matter of economics; it is also a matter of some- thing to do with the matter of tactics which has become reprehensible. It is not just a matter of what is fair entirely in terms of economic return. To be quite honest., you have to have some sort of built-in mechanism to let the creditor think twice. And what we have done, if he repossesses, we have denied him a judgment for the finance charge for the time period that follows the default. Now, this is a small penalty. It is a compromise penalty. But in the usual case, absent a statute to that effect, he can recover the entire fi~ nance charge, accelerate, collect his fees. In fact, the debtor owes a PAGENO="0174" 168 fantastic sum in terms of deficiency. And he can sell the collateral and get very little for it. We compromised in the middle and said, "At least, you are not going to get any ffnance charge for the period of credit for which you have taken the goods." It has only been in effect a year, and I am not certain how effective that has been, but at least the current draft-and there was a meeting in Chicago on January 19 and 20 of the special committee of the commissioners. I did not attend that. They were arguing that draft. Now, whether that proposal which was in the sixth and, hopefully, final draft was altered at that point, I cannot say. I do not have the data. Senator TTrmxis. Let me ask your judgment on a couple of other points that have been raised. There has been some question that the way we spell out our truth- in-lending provision in this legislation is different from the legislation pending before the House of Representatives which passed the Senate, the national legislation. In the national legislation, I think it is re- flected in an annual dollars per hundred; whereas, in our bill it is a direct interest rate. Of course, you know the difference. When it is a direct interest rate, it is doubled, or at least it appears to be doubled. A 12 percent annual interest rate is $6 per hundred, and it is easier to sell credit when you tell a person you are charging $6 a hundred a year rather than if you tell him you are charging 12 percent. The criticism has been raised, since our bill is not uniform, that we should really make it uniform in standard with the truth-in-lend- ing proposal which we hope will pass the Congress. Do you have any commenth On that ~? Mr. Wu~L~R. Well, .1 am not familiar with it. Frankly, I have not seen the bill that passed the Senate unanimously. I saw the original S. 5 which, as I understand it, was in keeping with what you have in this bill. Senator TYDncGS. Yes; but S. 5 was amended to get by. Mr. Wu~L~R. I have heard that. I have read newspaper articles about it,but I havenot seen the original text of what passed the Senate nor what reached the floor of the House. I would say this, that I could see no conflict between your bill and that. . . In Massachusetts, Washington, Connecticut and Maine, we require an aimual disclosure in terms of percentage. Now, as you. probably know, your bill adopts the U.S. rule or actuarial method. Now, I was hearing this with Senator Proxmire's committee. The Treasury Department has shown thatthey can use the actuarial method with the compufers for almost every conceivable credit transaction to reveal an annual rate. In Massachusetts, we adopted a different method called the con- stant ratio formula, and at the time we picked it because the creditors who opposed us outright said if we had to do it, we had the political strength, and that was the easiest to use. . Now, they are heard in our Commissioner of Banks' hearings, asking and pleading that we adopt the actuarial method, which was originally in S. 5. PAGENO="0175" 169 Now, if I might just add this: Dollars-per-hundred concept was in draft No.4 of the Uniform Consumer Credit Code for State adoption. The latest draft, unless they changed it, adopted the actuarial method across the board for all credit. transactions. Senator TYDINGS. That is our method. Mr. WILTJIER. The same one you have in your bill, and they did it, frankly, simply because they felt it was going to be upon them, and they might as well do it and get it over with. Senator TYDINGS. Well, Professor Willier, we certainly appreciate your very, very enlightening, and edifying testimony,. particularly on the law of negotiable instruments. And we appreciate very much your coming down from a great law school, and the time and effort you have put forth to appear before us today, Mr. WILLIER. Thank you, Senator. Senator TnuNes. David Rusk, Washington Urban League, and Mrs. Adenia McPherson, Armstrong . Neighborhood, Federal Credit Union. * We are. delighted to welcome you here, Mrs. McPherson, and Mr. Rusk. *` . . STATEMENT OP DAVID RUSK, ASSOCIATE DIRECTOR, WASHINGTON URBAN LEAGUE .. ., Mr. BusK. Senator Tydings, I am David Rusk, associate director of the Washington ~Urb~n League. It is a very great pleasure to testify on behalf of the proposed Retail Installment Sales Act and related legislation We hope that these hearings mark the. beginning of the, end of a long journey. The Urban League's own direct interest in retail in- stallment sales protection began in late .1964. , . , The following spring, we helped to organize the Ad Hoc Committee on Consumer Pi otection, which testified before this subcommittee Fist month We have followed very closely the birth of 5 316, inti oduced by Senator Morse, as it developed within the corporation counsel's study group. ` . . In May 1965, the board of directors adopted unanimously 10 prin- ciples as the `minimum protection which any consumer credit legisla- tion should contain. `A copy of this resolution i's appended, to this statement. (See page 174.) Our goal has always been the strongest possible consumer protection legislation for the District of Columbia. Through long familiarity, we know S. 316 to be a compromise bill-better than nothing, but sub- stantially less than our community's needs. The Urban League's 10 principles are best fulfilled by 5. 2589 and related bills sponsored by yourself, Senator. We will `support every effort to pass this stronger legislation. Our purpose today, however, is to discuss the holder-in-due-course provisions. . ` ` Community testimony last month demonstrated how much the city needs effective legislation to .protect the consumer's defenses against fraudulent warrantees and installment purchases.. PAGENO="0176" 170 We have also heard financial interests express concern that abolish- ing holder-in-due-course relationships would diminish the availability of consumer credit. Frankly, we believe that the holder-in-due-course principle is based on the concept: "I will extend you credit only if I maintain my right to gyp you." Through holder-in-due-course, the consumer assumes all the risk of dealing with unscrupulous or insolvent sellers. On the other hand, what is the posture of the finance company or commercial bank, who use the public's funds to lubricate this system? They ca.miot lose. They retain full rights as creditors with none of the obligations of the sellers. Whatever the history of holder-in-due-course, it is time for common law to give way to moral law. Who can better judge the reputable nature of a business-and un- tutored householders, harried by high-pressure salesmanship, or an experienced, sophisticated, financial institution? Who can better absorb the risk of a business default or fraud-a low- income consumer or a multimillion-dollar corporation? It is not sufficient protection to require a certification procedure, as proposed by S. 316. High-pressure tactics can as easily extort an unwary customer's signature on such certificates as on fraudulent contracts and usurious notes. We believe that the financial community itself must shoulder an active responsibility to rid our city of fraudulent credit houses and home improvement companies. It is little enough to ask one's business leaders to put their own house in order. Thus, the Washington Urban League supports fully the holder-in- due-course provisions of S. 2589. We should like to add one more comment. This legislation is concerned primarily with credit problems which most effect poor people-a so-called high-risk population. We submit that poor families are not high-credit risks by nature. They are created. High exploitation breeds high risk. Denied credit in reputable firms, the poor person must often deal with a special seller's market, ruled by a sort of jungle law. Sunk into debt by high-pressure salesmanship, saddled with shoddy goods under exploitative credit terms, the low-income consumer is often driven to deliquency or default on debts. Thus, by definition, the poor person has been converted into a high-risk credit. What makes a good credit risk? A good credit risk is a. person sufficiently free of sales pressure a.nd deceptive propaganda to incur debts only for genuinely felt needs. A good credit risk is a person who understands fully the terms of credit arrangements and believes them to be just. A good credit risk is a person who has a relationship of mutual respect and confidence with his creditor. Throughout Washington, there are a dozen examples of this type of credit system: the neighborhood Federal credit unions, as one example. PAGENO="0177" 171 I should like to introduce Mrs. Adenia McPherson, manager, Arm- strong Neighborhood Federal Credit Union. Mrs. McPherson will dis- cuss the credit union's experience with the same persons whom merchants view as high-credit risks. Senator TYDINGS. Thank you, Mr. Rusk, for an excellent statement. Your definition of a good credit risk was well stated. We will now hear from Mrs. McPherson. STATEMENT OF1~IRS. ADENIA McPHERSON, MANAGER, ARMSTRONG NEIGHBORHOOD FEDERAL CREDIT UNION Mrs. MCPHERSON. Thank you, Mr. Chairman and members of the subcommittee. Asmanager `of the Armstrong Neighborhood Federal Credit Union, 1 would `like to first give a little background information as to our operations and services. It is one of nine credit unions in the area strategically located in :low4ncome areas, sponsored by the United Planning Organization. All funds that are loaned to members are funds that are saved by members inthe area. The boundaries of this area include-well, to the east we go `to `the tracks; we go on the northside up North Capitol Street. We are able to accept members from up to North Capitol and Florida `on the north- west side; North Capitol and Rhode Island on the northeast side; on the west, to New Jersey Avenue; on `the south to Massachusetts and New York Avenues, a very, very strong pocket of poverty. Our dealings are with these individuals. They are living in that area. They are participating in other services sponsored "by the Washington Urban League and the Urban League Neighborhood Development Center. The credit union itself was started in April of 1966, but not `staffed until July of 1966. We considered this the starting point, because with volunteer services sometimes you are not able to operate `as fully or as capably as one would wish. In July of 1966, at the time we became employees of this credit union, the total savings in that community were $551.50 in this credit union. Senator TyruNos. How much? Mrs. MCPHERSON. `$551.50. At the end of December of last year, the savings had totaled $22,816.08. The member of the credit union, after they have joined by paying the initial fee which is 25 cents and having on deposit in their shares `at least $1 to $5, are able then to make loans that are approved by the credit committee. No person is- Senator TYDINGS. Who is on your loan committee? Mrs. MCPHERSON. The credit committee is elected by the member- ship once every year at the annual meeting. This is a requirement by law of the Bureau of Federal Credit Unions. No person is turned down for membership because of a lack of funds. Anyone who lives in this area and meets all of the other requirements, such as participation in other center programs, is eligible for member- ship in the credit union. 58-848-68-----12 PAGENO="0178" 172 Last December-and all of my figures will he directed to that par- ticular point, because of our end-of-the-month balances-all delin- quency ratio was high at the time. Now, we feel that this is true only because of two factors : because of Christmastime and because of a very big problem that had come about as the result of a bankruptcy case. Prior to that time, our delinquency ratio had ranged from a low of 1.9 percent in December of 1966-in spite of having loans made as early as June of 1966, it ranged from 1.9 percent in December of 1966. At the end of December 1966, it was 6.1 percent. Now, this ratio is steadily coming down, and I would like to point out that even though these loans are considered delinquent, and this is in dollar value, payments are still being made. It is not because the person has gone, has lost vital contacts with them-not necessarily. Many of our delinquents are still paying. At this time, also, we have had no loans turned over to any collection agency; nor have we sued any particular individual. We have made a total to the end of December 1967 of $72,938.83 in loans. Of that amount, only $49.35 has been charged off as a bad loan. And this figure is even smaller than that, because $49.70 represents the actual charge-off figure. The balance of 44 Senator TYDINGS. How did you get started? Mrs. MCPHERSON. Pardon? Senator TYDINGS. How did you get your credit union started? Mrs. MCPHERSON. How did we get it started? Senator TYDINGS. Yes. - Mrs. MCPHERsON. The credit union was started, as all credits unions are, by asking for charter from the Bureau of Federal Credit Unions. Senator TYDING5. Did anyone encourage you? Mrs. MCPHERSON. No; this was one of the programs that was studied by the UPO. I believe the Urban League acted for -this particular thing, prior to my employment. Senator TYDINGs. I am somewhat familiar with the Federal Credit Association operation. In many respects it resembles the old building and loan association in tha.t it is locally run. I think it is wonderful. I just wish we could get more of them around. You heard the testi- mony here this morning? Mrs. MCPHERsoN. Yes, I did. Senator TYDINGS. Even if they paid your Credit Association 10 or 12 percent interest, they could save 5 to 10 times that much by bor- rowing the money from you and then going out and buying from a department store or discount house for cash. Mrs. MCPHERSON. This is what we tried to encourage our members t.o do. Certainly, I think the reason for our delinquency not having come a problem at this time, a major problem, is because of the con- fidence the members themselves have in the credit union. There are no hidden charges. There is no effort to give or try to give them false figures. We try-in fact-, we urge them to understand exactly what the cost will be. We mention perhaps the 1 percent on the unpaid balance, but no one, we feel, is really interested in the percentage. They want to know: "What does it cost me?" If we can say this figure is 6.5 or $6.50 per hundred per year, this is what the members want to know. PAGENO="0179" 173 Now, as I `say, we do make `a very-we carry on an effort to make every member aware of the cost to build confidence in a credit union as an integral part `of that community. We also give them, when they make their first loan with us, a little form which states that you do have `an obligation, spelling out this obligation `and why you have it. This is `another `step toward building that `confidence in the credit `union. We recently concluded a membership drive which, to me, in the participation of the members trying to recruit new members, showed that they do have now confidence in this particular credit union `and all neighborhood credit unions. Senator TYDINGS. How many Federal credit associations are there within the inner-city `area? Mrs. MCPHERSON. There are nine TJPO credit unions in this area. Senator TYDINGS. Nine? Mrs. MCPHERSON. Nine; yes. Senator TYDINGS. Do they have similar records to yours? Mrs. MCPHERSON. Similar records. We are the newest one. We were `funded `and organized last. They do have similar record's. I d'o believe that confidence in the program itself, the fact that we do not go `out `and try to get members to borrow. There is no high- pressure salesmanship here. In fact, the credit committee quite often reviews the application, determines th'at `the individual does not neces- sarily need this `amount `of money, discusses it with `the individual to offset or to try to get the individual to see that it is not necessary for the individual `to go into this much `debt. Certainly, it i's- ` Senator TmING5. That is `a wonderful `service you perform, just like ~the old building and loan association. If `a m'an wants to borrow too much money for too `big a house, they `sit down with h'im `and tell him, "You `have no business doing this; we will lend you so much `at such. ~and such, but th'at is `all you ought to try `and swing"; it provides `a great public `service, an educational function. ` Mrs. MCPHERSON. Thi's is very true, `and I do think that this h'as a lot to do with the low delinquency which we are experiencing at' this time. Senator TYDING5. Do you have anything else you would like to `add? Mr. RUSK. I think perhaps the point that we want to reemphasize Senator, is that the members of the Armstrong Credit Union are the very `same kind `of people who must `shop on Seventh Street who `are subject, `according to the testimony, to up to 33 percent a year annual finance charges on the concept that they are high risks, and yet I did some quick figuring-based upon figures presented by Mrs. McPher- son, the actual bad loan ra'te has been less than two-tenths `of 1 percent through the credit union. Now, there obviously must be some sort of intangible circumstances here which exist between people `and their credit union which do not exist whatsoever between merchants `and their customers in low-income neigh'borhood's which w'ould cause `these responses. We believe that the more we can reduce the level `of exploitation, `the gre'ater will `be the confidence in the people `and the merchants with whom `they `are dealing ~and we will lessen `the degree `of risk involved. PAGENO="0180" 174 Senator TYDINGS. I appreciate very much the testimony you pre- pared, Mr. Rusk, and Mrs. McPherson, and your taking the trouble to be here. It is a very illustrative point you bring out and most help- ful to the deliberations of this subcommittee. Thank you both very much. We will stand in recess until tomorrow morning at 10 o'clock. (Whereupon, at 11 :40 a.m., a recess was taken until 10 a.m., Wednes- day, J~anuary 31, 1968.) WASHINGTON URBAN LEAGuE, WASHINGTON. D.C. The District Commissioners have asked the Corporation Counsel to draw up, with the advice of community groups. legislation which would eliminate these evils. The Washington Urban League has been participating in this effort along with the Board of Trade, The Better Business Bureau, the D.C. Bar Association `and the United Planning Organization. The League now wishes to broaden the base of comniunity support for a strong consumer protection law for the District of Columbia. Our study of retail install- ment practices leads up to believe that the following principals should be em- `bodied in the proposed legislation: 1. Standardization of terms and form of retail installment contract. in- cluding full disclosure of terms and enumeration of rights and remedies of the parties. 2. Limitation of finance charges and other fees, costs and penalties. 3. Provision that `the only collateral for a contract shall be the goods covered by the contract. 4. Regulation of allocation of payments to buyer's several contracts with one seller so that first contract will be paid off at original rate and each subsequent contract will be paid off in turn. 5. Prohibition of "add-on" contracts and "balloon notes". 6. Strict regulation of installment selling by salesmen who solicit buyers in their homes, including licensing of salesmen, clear labeling of cash price, and requirement `that cash price be same as that for same article in seller's store. 7. Right of buyer to cancel contract prior to delivery of goods or within a specified time, such as 48 hours. 8. Provision that where installment contract sold by the seller to finance company or bank, the installment buyers rights and defense will be good against the finance company or bank (e.g. branch of warranty). 9. Limitation of secured party's right to accelerate payments and/or re- possess collateral. 10. Limitation of amount of deficiency judgment after forced sale. The WTashthgton Urban League Advisory Committee On Consumer's Education requests the Urban League's endorsement of the above 10 principals. PAGENO="0181" CONSUMER PROTECTION LEGISLATION FOR THE DISTRICT OF COLUMBIA WEDNESDAY, JANUARY 31, 1968 U.S. SENATE, SUBCOMMITTEE ON BUSINESS AND COMMERCE, OF THE COMMIrrEE ON THE DISTRICT o~ COLUMBIA, Washington, D.C. The subcommittee m~t, pursuant to notice, at 10:15 a.rn., in room ~3226, New Senate Office Building, Senator Joseph D. Tydings (chair- man of the subcommittee) presiding. Also present: Chester H. Smith, staff director; Owen J. Malone, associate counsel; Howard A. Abrahams, assistant counsel; James S. Medill, assistant counsel; Richard E. Judd, professional staff member; and Robert A. Burt, legislative assistant. Senator TYDINGS. We will call the Subcommittee on Business and Commerce of the U.S. Senate Committee on the District of Columbia to order. Today's hearing is a part of a continuing series of hearings on Sen- ate bills 316, 2589, 2590, and 2592, legislation designed to protect the consumer purchaser in the District of Columbia. We have a number of witnesses today. Our first witness is Cleveland Reed. Is Mr. Reed present? Mr. REED. Yes, sir. STATEMENT OP CLEVELAND REED, R & W CONSTRUCTION CO. Senator TYDINGS. Would you please come forward, Mr. Reed, and have a seat, sir? We are happy to welcome you before this subcommit- tee. Mr. REED. Yes, sir. Senator TYDINGS. Now, Mr. Reed, are you a resident of the District of Columbia? Mr. REED. Yes, sir. Senator TYDINGS. How long have you resided here? Mr. REED. Well, I came to Washington in 1950; then I left and lived in Cleveland for a couple of years and I came back. I left here in 1963 and I caine back in 1965. Senator TYDINGS. And you have been here, working in the District of Columbia since 1965? Mr. REED. Yes, sir. Senator TImINGS. And briefly, what is your educational background? Mr. REED. Well, I came out of school in the 11th grade. I didn't finish high school and I haven't gone to college. (175) PAGENO="0182" 176 Senator Tynn~s. And was there a time when you were associated with Monarch Construction Co.? Mr. REED. Yes, sir; I used to be with them. Senator TYDINGS. And how long were you associated with Monarch: Construction Co.? Mr. REED. Well, it was in the neighborhood of 12-13 months. Senator TnING5. And for approximately what period of time was that? Mr. REED. I think in the beginning of 1963 until about the end of 1963, somewhere in that area, but it was just before I went to Ohio.~ Senator Tz~mINGs. What was the Monarch Construction Co.? What. type of business was it engaged in? Mr. Ri~D. Actually they were engaged in the home improvement business, but basically they were doing what they called the Amen- can townhouses front in the Washington area, and putting aluminum siding and 606 aluminum siding in. Senator TYDINGS. Was the Monarch Construction Co. itself actually a home improvement building firm or did it sell the job and bring in other people to actually do the work? Mr. REED. I don't quite understand what you are saying. Do you. mean did they do the work, work on the house themselves? Senator TYDINGs. Yes. Mr. REED. Or did they use subcontractors? Senator TYDINGS. Yes; did they do the work themselves or did they use subcontractors? Mr. REED. Well, I believe that 60 to 70 percent of it was sub- contracted. Senator TYDINGS. Were you a salesman? Mr. REED. Yes, sir. Senator TYDINGS. What was your basic duty for the Monarch Con-- struction Co.? Mr. REED. Well, my situation was a little bit different, like we had telephone employees and things of that nature, but I made my own because principally I was in the bank business, and I Imocked on doors and solicited my own business and wrote up contracts, and I presented them into the office. Senator TYDING5. You said there were telephone solicitations, and: your own type of solicitation. What was the telephone approach, and how did it work? Mr. REED. Well, this is where you have telephone directories, and you call everyone in the neighborhood. Senator TYDINGS. You select a particular neighborhood and you call everybody in that neighborhood? Mr. REED. Well, basically, we call-like at Monarch they called everybody, I believe, in the Washington area, in all probability. Because, like for instance myself, if I was going down the street and I saw that it needed to be fixed up, this is the street that I would work, because I felt that I would have a better chance in getting a sale by the appeara.nce of the outside of the houses. Senator TYDINGS. Did you make any sales in Georgetown? Mr. REED. Did I sell any townhouse fronts in Georgetown? Senator TYDING5. Yes. PAGENO="0183" 177 Mr. REED. No, sir. Senator TYDINGS. You never tried to sell any there in Georgetown? Mr. Rm~. No. Senator TYDINGS. Monarch never tried to sell any in Georgetown? Mr. REED. No. Senator TYDINGS. Did you ever try to sell in Kalorama Road or Cleveland Park areas? Mr. REED. No. Senator TimINGs. Then, primarily they concentrated- Mr. REED. On the Southeast and the Northeast sections. Senator TYDINGS. That's right. Mr. REED. And they did some in Northwest. Senator TYDINGS. The inner city? Mr. REED. TJh huh. Senator TYDINGS.~ For the, generally speaking, lower-income Negroes? Mr. REED. Basically, yes. Senator TYDINGS. Now, tell us, if you would, about when you first went to work for Monarch. What instructions did they give you? What sort of prospects did they suggest you approach, and how did they suggest you sell to them? Mr. REED. Well, what-they had set up what was like a training program because I never sold any home improvements before. But, it was a little bit different because all they wanted to do was to sell these townhouse fronts. So, they gave us what we call a pitch, you know, how to go about selling the program. You had photostatie copies of some clippings that they had in the newspapers where the Congress or something was supposed to have signed. Senator TYDINGS. Something to do with urban renewal? Mr. REED. Self-help urban renewal programs. Senator TYDINGS. And the sales pitch you made to the prospective purchaser was that this was a part of the self-help ubran renewal pro- grain? And this approach gave it a little authenticity? Mr. REED. Yeah, it was somewhat in that direction. Basically, like' they have the self-help urban renewal program, was what it was sup- posed to be, where this would prevent your home, you see, from being- Senator TYDINGS. From being condemned by the urban renewal?' Mr. REED. From the urban renewal. Senator TYDING5. Then you would go in-and the salesman would go and tell the person that if they wanted to protect their home from being condemned or removed by urban renewal that the thing to do' was to purchase a home front, or an improvement and participate in "self-help urban renewal"? Mr. REED. Well, I couldn't actually say this is what they were say~ ing when they went into the house, but this was the idea. Senator TYDINGS. This was the way you were instructed by the train- ing program to approach it? Mr. REED. Right. Senator~TYDINGs. When you would go in to make that type of a pitch, were you instructed to ihention the names of prominent Negro lead- ers or other people who had endorsed the self-help urban renewal program? PAGENO="0184" 178 Mr. REED. Yeah. Well, we had several meetings at the office there. We had pictures, you know, of several fellows, this gentleman with the NAACP- Senator TmINGS. Roy Wilkins? Mr. REED. I think he was his secretary or something. Senator TYDINGS. Roy Wilkins.or Clarence Mitchell? Mr. REED. No, it wasn't Roy Wilkins. This gentleman-I can't recall his name at the present time, but he was a secretary of something there. He did something there. They had a couple of bankers and things of that nature, you know, where you had a portfolio, otherwise, of who had been attending our meetings and things of this nature, to show what this program was~ doing in the Washington area, upgrading the property and things of this nature. Senator TYDINGS. Do you recall who actually taught the program at Monarch Construction Co.? Mr. REED. WTell, Mr. Clark was the general sales manager, you see. Senator TYDINGS. Who was he? Mr. REED. Clark. Senator TYDINGS. C-l-a-r-k, Clark? Mr. REED. Yes, Mr. Clark was the sales manager. Senator TIDINGS. What was his first name, do you recall? Mr. REED. I know it, but I can't even think of it right offhand. Senator TIDINGs. Would it be- Mr. REED. Mervin Clark. Senator TYDINGS. Mervin Clark. Was he black or white! Mr. REED. He was a. white man. Senator TYDINGS. Did he have a.ny other assistants who helped in the sale~s training? Mr. REED. Well, for instance, I was with Monarch, I guess, about a week or two- Senator TYDINGS. Yes. Mr. REED. And then I became a sales manager also. Where we had six sales managers and each sales manager had 15 or 20 salesmen, you see, and the sales managers were the ones that would go into the producing, you know, otherwise selling business. Senator TYmxGs. Right, and who would the sale~s managerreport to? Mr. REED. We all reported to Mervin Clark, which was the sales manager. Senator TYDINGS. He was the top sales manager? Mr. REED. Right. Senator TirnxGs. Now, the 16 or so men that worked under you and the other sales managers, what were their responsibilities? Mr. REED. Well, they would go out and canvass, also. A~ I said, we had telephone appointments because they had, I guess 25 or 30 girls working on the phone talking to people every day about upgrading the property. Senator TIDINGs. What sort of a pitch would the people workrng on the phones make when they reached somebody by telephone? What were they supposed to say? Mr. REED. Well, if I recall it correctly. it was something in this order: They would call a client and say, for instance, a Mrs. Jones; and they would say: PAGENO="0185" 179 We are calling you from the American Town House program of self-help urban renewal and we would like to send you, you know, like the engineer, out to see you, to talk to you about upgrading the values of your property. Senator TYDINGS. And if the person showed some interest they would then send one of the salesmen out to see him? Mr. REED. Yes. Well, we went out in any case if they even just wanted to discuss it, whether we sold the job or not, they would always send someone out, one of the salesmen out on an appointment, you see. Senator TIWINGS. Did they ever mention in any phone call that this was the Monarch Construction Co. which was in the home improve- merit business and that they wanted to sell them some home improve- ments or did they take the line that you indicated? Mr. REED. Well, I didn't hear them say it was Monarch. Now, I, you know, by me being in the office during the day, working on the phone, myself, with my own-you know, however I wanted to do it, then I knew that this was basically the pitch, the American Townhouse Self- help Urban Renewal Program. Senator TYDINGS. All right. Did Monarch ever use their referral refund tecimique to make sales? Mr. REED. What do you mean, where you pay a certain fee when you get a lead, or something of this nature? Senator TYDINGS. Yes. Mr. REED. Not to my knowledge. Senator TYDINGs. They never made any promises that money would be refunded if they made a referral to another customer? Mr. REED. Not that I know of; no. Senator TYDINGS. In a situation where a phone call has been made and a prospective customer had indicated that he was interested, or at least might talk with an engineer concerning this urban renewal self-help townhouse or the type of self-help that `had been described in the telephone call, how would you approach the person when you made the call? Mr. REED. Well, when I knocked on the door or rang the bell, I would say, "Mrs. Jones, I am Cleveland Reed from the American Town House Program. I have an appointment, I believe, to see you and Mr. Jones," and just walk in. Senator TYDINGS. And what would your technique be then? Mr. REED. Well, first of all I would show them-well, it's pretty difficult to say what you would do when you go in a house because every time that I go into a house I would have no set pattern in the way I said it, because I just strike up basically, a conversation, and then go into showing them some of the other homes that you have redid the townhouse front to and show them what you could do for them and give them some type of design, what you could do, because we had blueprints, I guess maybe 50 blueprints of different ways we could do the townhouse fronts. Senator TYDINGS. Now, if a customer indicated they were interested in let's say a particular type of townhouse front- Mr. REED. Uh huh. Senator TYDINGS. Could you estimate the actual cost, including what the subcontractor would charge to do the work? Mr. REED. No, I didn't know that much about the business at this particular time, you see. When we first started selling the townhouse fronts we were selling them for $1,500. PAGENO="0186" 180 Senator TIDINGS. For how much? Mr. REED. $1,500. Senator TYDINGS. Yes, and is thatwhat they cost? Mr. REED. That was for the two-story towuhouse front. Senator TIDINGs. When you say "selling", is that the price you told the customer, or is that the cost for which you would get the subcon- tractor? Mr. REED. This was the price we wrote the job for. Senator TIDINGs. And would you tell this to the customer or would you generally give them a figure of approximately 21/2 times what would it would cost the subcontractor? Mr. REED. No. Well- Senator TnuNGs. How did you determine the figure that you told the customer? Mr. REED. Right. This is what I am saying. See, for instance, in the Washmgton area I believe you have houses ranging in the area from 14 feet to 24 feet wide in this area, two stories high, and then you have a three-story high house, and you have got three stories with a base- ment, which is like four stories, but you have a price of $1,500 for a two-story front, and if it was a three-story it was $2,000, you see, for it. Senator TIDINGs. All right. Mr. REED. But then this way we didn't have to basically figure the price because it was set up so that if you sell two-story houses with five windows, you see, without any concrete porch or anything of this nature, of course, this was a $1,500 job. If you had seven windows we would have to charge for the other two windows. Senator TYDINGS. What did you tell the customer about the price? Mr. REED. I don't follow you there. Senator TIDINGs. Well, there must-if you knew that it was going to cost the subcontractor to cha.rge $1,500 to do the job- Mr. REED. Right. I am not saying that. This is what they charged. This is what-this was the selling price at this particular time. Senator TYDINGS. So that would be the selling price to the customer? Mr. REED. Right, at this particular time, when we first started out. Senator TYDINGS. Right? Mr. REED. Right. Senator TTDING5. And following along from then? Mr. REED. Well, eventually the townhouse front was $3,500 in some cases and in other cases I have known it to be $4,500, which is accord- ing to the size of the house, you see. Senator TIDINGs. Right. So that initially you would be selling or you would be talking to the customer in the area of $1,500, but actually when it came to signing the papers~ Mr. REED. No. No, no, no. No. That's-this is-maybe I am con- fusing you. In the beginning, you see, they had a set price, as I say, of $1,500. Senator TIDINGS. Who is they? Mr. REED. Monarch. Senator TIDINGS. Monarch? Mr. REED. Right. Monarch had a price for $1,500 for a townhouse front and they had a price also of $2,000 or $2,200. I don't remember that well. PAGENO="0187" 181 Senator TYDINGS. Right. Mr. REED. Then about 5 or 6 months later, then the townhouse fronts -went up. You follow me? Senator TYDINGS. Right. In other words, what you are saying, when you first started selling they were selling for $1,500 or $2,000? Mr. REED. Right. Senator TYDINGS. Toward the end you were selling them for $3,000 or $4,000? Mr. REED. Right; $3,500 or $4,500. Senator TYDINGS. Now, when you went to the customer, particularly toward the end, would you quote a price which you estimated would be the highest price the customer would pay? Mr. REED. No. You see, I never did this. `I can't say that it hasn't been done, but when the price of the job was $3,500, of course, if the people want a concrete porch, which some houses have a large porch on there, then I would sell the job for $4,500 with the townhouse front and the concrete porch. Senator TYDINGs. This is basically the same job you were first sell- ing for around $1,500 or $2,000? Mr. REED. Yes; -in the same basic area. Senator TYDINGS. Are you at all familiar with the actual prices that the subcontractor charges? - Mr. REED. No; I don't know what they would- charge for it. Senator TYDINGS. Would it be a fair statement to say that the mark- up was generally two and a half times what the subcontractor charged? Mr. REED. Well- Senator TYDINGS. Two times? Mr. REED. This is something that I couldn't actually say because, you see, we :have a book, so to speak, that they had printed up, with the price already in it, to justify the price, as you would say if I was selling the job to you. I would have it on there,: how much the windows, how much they would charge for the windows, you .know, and when they finally got down to the end it would be $3,500. Do you follow me? You know, so for your blueprints and yOur plans and things of that nature. - Senator TYDINGS. Would you estimate like that on the quoted price of $3,500 the subcontractor actually charged less than $1,000? Mr. REED. I would say the job should cost, to do it correctly, it should. cost in the neighborhood of from a thousand to $1,200. Senator TYDINGS. All right. Did Monarch ever sell water softeners? Mr. REED. Not that I know of. Senator TYDINGS. Do you know of any similar organizations that sold water softeners? Mr. REED. No. I mean, I have heard of, you know, people talking -about water softeners, but I don't know anyone that was selling them. Senator TYDINGS. What about home intercoms? - Mr. REED. No; they didn't sell those either. Senator TYDINGS. All right. What sort of legal documents would you have the customer-s sign for the townhouse frOnt? Mr. REED. Well, you see, in the beginning, you see, this-the only thing that the salesman would -have t do. was write a contract a~nd bring it to the office and they handled i.t fron~ there. They had their own men going out. PAGENO="0188" 182 Senator TYDINGS. They had what? Mr. REED. Their own men. Otherwise, someone that knew more about the business tha.n we did. Senator TYDINGs. Right. Mr. REED. For instance, if the dealer required a note and deed of trust, then this was what you-this is what they would get signed, you see. So, some dealers they financed a. note on FHA because the people's credit would warrant FHA. but if it didn't., of course, they would have to sign a note. Senator TYDINGS. Now, when the salesman went in to make the initial contract a.nd the initial pitch, would you advise the customer that they would have to sign other papers? Would you tell them that? How many papers would they have to sign initially? And what would you tell them about signing later papers? Mr. REED. Well, the only thing that they would have to sign when. I was there would be the contract and, of course, the credit application. And I don't recall on any occasion where at a.ny particular time when I was with Monarch I told them that they had to sign other papers. They would contact me from the office, you see. Senator TYDINGs. Did you always leave them a copy of the con- tract? Mr. REED. Yes. Senator TYDINGS. And what sort- Mr. REED. As far as I know, I did. At that particular time, you see-now, today, this situation is a different thing. I know that I leave them one now. Senator TYDINGS. You wha.t? Mr. REED. You said-you asked me a question whether I left the.in a contract. I am sure I did, a copy of the contract, but., you know, I couldn't swear that I did, you know, at that particular time. I mean, you know, I couldn't say, but I am sure I did. Senator TvmNGs. Who were the men that would go out and actually have the deed of trust and ot.her papers signed? Mr. REED. Well, this again would be a. difficult situation for me to answer because by them being so many of us out there, I don't know exactly. Senator Ti~mNGs. Did you ever do any of that type of work? Mr. REED. I have gotten deeds of trust signed. Senator TvnINGs. And how would you get a customer to sign a note or a deed of trust? What would you tell them? Mr. REED. I would just explain it to them. Say, for instance, the job is say $3,500 on a. note and a deed of trust, and I would just show them how much the note is going to be and strike the amount of the j~b from the amount of the note which they would have to sign for the note, and deed of trust, and this would be their interest, by show- ing them, you know. I couldn't say how much percentage it is, but I could-I could tell-I could show them how much interest that they are paying. Senator TYDINGS. You never tell them the rate of interest they are paying? Mr. REED. I don't-I didn't know the rate of interest. Senator TYDINGS. Did you tell them how much the monthly pay- ments would be? PAGENO="0189" 183 Mr. REED. Oh, yes. They would have, you know, 60 payments. Senator TYDINGS. Did you tell them that they were signing a mort- gage for their home? Mr. }~EED. I told them they were signing a note and deed of trust against the property. Senator TYDINGS. You never told them they weresigning a mortgage against their home. And if they defaulted, the house could be taken away from them? Mr. REED. Yes; I have always told people this, any time that I have gotten a note and deed of trust. I just say it just like basically it `boils down to this: If you don't pay thi's they can take your `house. Senator TYDINGS. You would tell them that? Mr. REED. And, you know, don't sign it, you know, if you don't intend to pay. Senator TYDn~os. Now, did you take a notary with you when you had `these deeds of trust signed? Mr. REED. Well, this is what I do now, but I used to take the people to the notary. But, this was inconvenient for the customers, you see, a lot of times. But now I always take the notary to the house with me. I set up appointments, you see. Senator TirnNGs. Where are you employed now, Mr. Reed? Mr. REED. I am operating a home improvement company of my own, R. & W. Construction. Senator TYDINGS. Do you do basically the same type of work that you did before; that is, you sell the job and subcontract it out? Mr. REED. Well, subcontracting, yes. Because none of `the fellow's that, you know, do the work that I sell, they are not on a salary or any- thing, if that is what you mean. Senator TYDINGS. Did Monarch ever do any actual home improve- ment work themselves? Did you ever know of any Monarch people actually doing the construction work, or `putting on the front? Mr. REED. Well- Senator TYDINGS. You indicated that you thought they subcon- tracted most of it out? Mr. REED. Yeah. Well, I know they had what we call installments. This fellow, Lovejoy, used to do the installing. He was working for Monarch and he was putting up a lot of the fronts fQr us. Senator TYDINGS. They did have one man that was actually doing the work? Mr. REED. He had one or two installers, but then after the `business started coming in so fa'st, of course, they had to subcontract some of it. Senator TImINGs. Now, let's go back to the sales pitch for the training course that they gave you at Monarch. Did they ever tell any things to say to confuse the customer w'hen they were signing, so that they wouldn't actually know what they were signing? Did `they give ~ou any sales pitch of this sort? Mr. REED. No. Well, I have never heard them say this to anyone. They have never said it to me. Now, where `a person would be saying that they were confused when they were signing the papers, you know, that would be a pretty difficult question for me to answer because I have never heard them say it, and they have never told it to me. PAGENO="0190" 184 Senator TYDINGS. Well, I do not mean that they have actually ever said it, but that it was referred to during the training course to try and~ Mr. R.i~. And confuse the people? Senator TYmNGs. Yes. Mr. REED. Not to my knowledge; no, sir. Senator TYDINGS. If an individual had some debts outstanding and there was some reluctance or hesitancy on the part of the customer to assume the obligation, did you ever discuss debt consolidation, or ever undertake to give them more money so that they could consolidate their debts? Mr. REED. No. I did do some consolidation, but I did it-I can only speak for myself on that particular part. Say, for instance, if I went into a home and a. person was-had x number of bifis and they wanted this job done, I would say to them, "This I feel would be more feasible f or you to pay this bill off than this bill," but we never actually gave them, at least not on the jobs I had, any money to pay the bills off,~, themselves. They paid them off. Senator TYDINGS. But, you increased the amount of the loan or the obligation by the amount that you, yourself, had to pay to pay off the loan? Mr. REED. Yes. You see, and also I explained this to the customer, you. see, it's going to cost more interest, you know, if this is what you mean by increasing it. But, your payments, I feel that you will be able to. meet. Otherwise, you see, I would never want to sell a. job just to make a profit for myself, and then cause a problem, or a person to lose their home. Senator TvmNGs. Did Monarch always pay off the existing debtors Ill: those situations? Mr. REED. That's pretty difficult for me to answer. I don't know.. Senator TYDINGS. You do not really know? Mr. REED. No. Senator TvnIxGs. Now, when the contracts were filled out, were any of the essential items ever left blank, such as even the total price? Mr. R~. When you say the total price, you mean including the interest, you mean? Senator TDn~os. Yes. Mr. REED. Not to my knowledge. Senator TYDINGs. Did you always compute the interest right there in the house with the customer, and put everything down, or did you. leave parts blank so that you could take it back to the office and let the- Mr. REED. Oh, yes; I see what you mean. Well, you see, when I was with Monarch there had to be some places left blank on the cont.ract because, first of all, I didn't know how the job was going to he fl- nanced, whether it would be financed through FHA or through a con- ventional loan or first trust, or wha.t, because a lot of the people, they paid off this second trust, you know, and the first, a.nd put them all together. Senator TYDINGS. So that the actual contract t.hat was left with the customer would by necessity have to be blank as to the total amount.. since you didn't know what interest you were going to charge, and. you had to have that checked out and determined at the home office?: PAGENO="0191" 185 * Mr. REED. Right; plus 1 didn't know which way they were going to finance, you see. Senator TYDINGS. The person, then, would actually sign a contract, not knowing what the total cost of the contract was going to be to them? Mr. REED. No. But then whoever was taking care of the financing would go back to the customer, you see, and then they would go over the complete job and everything with them, and they would get every- thing else, you know, taken care of. Senator TYDINGS. Did you ever have any customers when you came back to them or when the people from the home office came back to them, refuse or not want to sign the new papers? Mr. REED. Well, I wasn't there. Senator TYDINGS. Did you ever hear of any? Mr. REED. I have heard of some. Senator TYDINGS. And what would happen then? Mr. REED. Well, then the deal might be blown out of the box, so to speak. You might not have a deal, you know. Senator TYDING5. What sort of a sales pitch would they give a per- son that did not want to sign the new papers? Mr. REED. Well, like I say, I wouldn't be there when they would go to get the new paper signed, so I wouldn't know exactly what they told them. Senator TnING5. Did you ever discuss such a situation with any of your~- Mr. REED. No. They never discussed this with the salesmen; no. Not to my knowledge. Senator TYDINGS. Working on your own now, are you ever asked to do any repairs or fix any work that was formerly done by Monarch subcontractors? Mr. REED. Yes, sir. Senator TmING5. Have you ever contracted or been requested by customers to have repairs or work fixed on home improvements that had actually been done just months before by Monarch people? Mr. REED. What do you mean, doing a job where maybe Monarch had done work there before? Senator TYDINGS. Yes. Mr. REED. Yes; I have done a couple of jobs like that. Senator TYDINGS. And why did you have to do it? Why did you have to do a job again if Monarch had done it before? Mr. REED. Because they hadn't completed it. Senator TYruNos. What do you mean, they hadn't completed it? Mr. REED. They hadn't finished the work. Senator TYDINGS. Why would they not finish the work? Mr. REED. I have no idea. Senator TimINGs. Did the people still owe Monarch for the work done? Mr. REED. One case I had, I know that they owed the bill. I don't know where they owed it to. Senator TImINGS. They were still being charged for work that had not been done? Mr. REED. Yes. PAGENO="0192" 186 Senator TIDINGs. When you made a sale, back when you were work- ing for Monarch, did you ever go back to see whether or not the sub- contractor actually completed the work? Mr. REED. Yes. I would always go back and check on my customers~, to the best of my ability to and see if they were happy and if the work had been completed. If they had a complaint I would take them to the office and see if they would straighten it out. Senator TYDINGS. You always did that? Mr. R.Enu. Yes, sir. Senator TYDINGS. One every sale you made? Mr. REED. Every job because, you see, my `business mostly conies from referrals anyway, you see, so if I do a job on a particular house here, then there is a possibility that I have a chance to get another job in the block, if this work is done correctly. Senator TYDINGs. Did you ever sell a job to a white person? Mr. REED. Yes. Senator TYDING5. Whereabouts?. Mr. REED. You mean when I was working for Monarch? Senator TYDINGS. Yes. Mr. REED. Oh, no. No. Senator TIDINGS. You never did? Mr. REED. Because all we were selling was townhouse fronts. They didn't want kitchens, bathrooms, and things like this. Senator TIDINGS. Did you know of Monarch ever selling any jobs in the white neighborhoods, of these townhouse fronts? Mr. REED. Not tha.t I know of. I don't know. Senator TIDINGS. Is it not a fact that when you were in the sales training program you were assigned areas and given parts of the city, but in fact the areas were all primarily low-income Negro housing? Mr. REED. Yes. Well, this was basically the program. There was no question about this, because it was in. as I said, in the Southeast and the Northeast sections, and the lower Northwest section. Senator TIDINGS. Did you ever sell to any people that were not able to write and ha.d to sign their mark? Mr. REED. I sold, I believe, one, one job like that where the man had to put a mark down, but then I had to have a notary public there-I had him sign the contract. Senator TIDINGS. Is Monarch still in business? Mr REED. Not that I know of. I don't think so. Senator TIDINGS. Do you feel, Mr. Reed, that the Monarch Con- struction Co. took advantage of the people to whom it was selling? Mr. REED. It's a pretty-that's a pretty difficult question to answer. When you say taking advantage of a person- Senator TIDINGS. Taking advantage of the fact that they were un- educated, were less able to protect themselves, and did not know their legal rights or have a lawyer, and would not be able to compute rapidly the interest? Mr. REED. Well, you see, basically this is not altogether, I don't fell, true, so to speak. Well. I will give you an idea of the reason I say this. You run into a lot of people out here that are not educated, which is true, hut all of them, most of them have good commonsense, so to speak, you see. PAGENO="0193" 187 Senator TYDINGS. Did you think it was taking advantage of a person if you sold them a job which cost `$1,000 to $1,200 and made them pay $3,000 or $4,000 for the job? Do you `feel that is taking advantage? Mr. REED. Well, there is no `question about that. That's taking ad- vantage of them. Senator TYDINGS. Is `that not what Monarch was actually doing in many instances? Mr. REED. This is what they were doing' but, you see, it, as you would say, would probably be taking advantage of them, so to speak, I don't know. Well, I didn't know at the `time actually what a townhouse front would cost, and I don't think any of the salesmen did because we had ~a set price. Senator TYDINGS. I am not asking you about the salesmen. I am ask- ing you about `the Monarch Co. Mr. REED. Well, you see, when you said taking advantage, I thought -that you were basically speaking of- ~Senator TmING5. I am not talking about the salesmen, I am talking about the Monarch Construction -Co. Mr. REED. Right, but `just like I said before, you asked me did I -think `that Monarch was `taking advantage of people. Senator TYDINGS. Yes. Mr. REED. Right. Senator TYDINGS. Right. Mr. REED. Now, it is a pretty difficult question for me to answer unless I explain to you in my own words. Senator TYDINGS. How were you paid? Did you get a commission? How were you paid for your work? Mr. REED. Well, as I said, as a sales manager I was getting paid i-percent override on all the business per month. But- Senator TYDINGS. You say 1-percent override. Does that mean 1 percent of the total sales cost, or 1 percent-on the total contract, or the subcontract, or- Mr. REED. The contract. Senator TYDINGS. Total contract. Now, is that the contract before -they added the interest and finance costs on it? Mr. REEI. Right. Senator TYDINGS. That was the contract that was initially brought back by the salesmen?' Mr. REED. Rig~ht. Senator TYDINGS. So that even if the initial price on the contract `was $1,500 on the contract, and even though the papers were signed for the customer and he might be paying as high as $3,000 or $4,000 `when the finance costs were added to it? Mr. REED. Yes. Senator TYDINGS, Were you getting the 1 percent on the $1,500, and -not on the total cost to the customer? Mr. REED. Yes; I was getting the 1 percent on that for the sales ~nanager plus I made, you know, commissions on the jobs which I sold. Senator TYDING5. What sort of a commission did you get on the jobs that you sold yourself? Mr. REED. Well, they paid us $150 on the job and we were supposed to get some more mo~~y, you know, after the job was worked out and PAGENO="0194" 188 completed, you see, you know, if they made a profit, whether they lost money on the job, and things of that nature. In some cases I got money on the end and in some cases I didn't. Senator TirnxGs. But in any event, whenever you brought back a signed contract you would get $150? Mr. REED. WThen the deal was approved. Senator TiDINGs. When the deal was approved? And that means when the deal was completed, when the final contracts were signed, in- cluding the financial papers which had interest and principal as well as the cost of the work? In other words, you didn't get your $150 when you brought back the initial signed contract? You did not get that $150 until the manager from the home office actually went out and got the other papers signed? Mr. REED. Right. Right. Senator T~mixcs. What's the greatest number of sales you ever made in a week? Mr. R~a~i. Well, I don't recall on the townhouse fronts. I don't think any more than four. Senator TnINGs. Four. Wrhat is the most sales you think that Monarch made in a week, in the whole business? Did they ever make as many as 50 sales in a week? Mr. REED. It is very possible because we had about 50 salesmen out there. It's quite possible. Senator TxrnNGs. Would it be fair to say that an average salesman made one sale a week? Mr. REED. Yes, in all probability. You could always say that he would average out to one sale a week. Senator TriIxGs. One sale a week? Mr. REED. Because he might not sell this week, but then again he might get two the next week, you see. Senator T~INGs. Right. WTell, thank you very much, Mr. Reed. We appreciate your being here and being a witness before this subcommittee. Mr. REED. Thank you. Senator T~INGs. Thank you. John Morgan. STATEMENT OP JOHN MORGAN, ALLSTATE CREDIT CORP. Senator TIDINGS. We are delighted to welcome you here before this subcommittee, Mr. Morgan. Mr. Morgan, where are you employed? Mr. MORGAN. I am presently employed at Allstate Credit Corp., at 1111 Massachusetts Avenue. Senator TIDINGs. And in what capacity? Mr. MORGAN. I am the owner and the president of the corporation. Senator TIDINGS. And what is the business of the Allstate Credit Corp.? Mr. MORGAN. We are in the business of buying and selling home improvement receivables. Senator TImINGS. How long have you been in business? Mr. MORGAN. Buying receivables of this type? PAGENO="0195" 189 Senator TYDINGS. How long has Allstate been in business? Mr. MORGAN. Allstate has been in business about 3 years. Senator TYDINGS. Did you organize it? Mr. MORGAN. Yes; I did. Senator TIDINGs. Do you have any other partners in it? Mr. MORGAN. No; I do not. Senator TYDINGS. You are the sole owner? Mr. MORGAN. Yes. Senator TYDINGS. And how long have you been in the business of purchasing home improvement receivables? Mr. MORGAN. Well, in varying degrees, for the last 10 years, since 1957, or even before that; I guess back in 1955. Senator TYDING5. Are you a resident of the District? Mr. MORGAN. No; I live in Maryland, suburban Maryland, but I have lived in the area since 1947. Senator TIDINGS. Now, have you ever been associated with the Atlas Financial Corp.? Mr. MORGAN. Yes; I have sold that business for the past 10 years, and a*s a matter of fact, I worked for them for one short period of about 6 months, working for them directly. Senator TYDINGS. And when you say you sold them business and. you have been selling them business for the last 10 years, what do you mean? Mr. MORGAN. Papers that I purchased in the area and resold to them. Senator TYDINGS. To Atlas? Mr. MORGAN. Yes. Senator TYDINGS. And what was your first contact with the Atlas Financial Corp.? When was it and what was it? Mr. MORGAN. It was, as I recall, I think in 1957, and we were financ- ing, or I was buying home improvement papers and debt consolidation papers, and at that time I heard of Atlas and went to Philadelphia to see them and started to sell them papers then. Senator TYDINGS. Up to that time, who had you been selling your papers to? Mr. MORGAN. Oh, prior to that time I had been in the home improve- ment business myself. Senator TIDINGS. Actually a subcontractor? Mr. MORGAN. No, actually a general contractor.: Senator TIDINGS. General contractor? Mr. MORGAN. With some men on the payroll and subcontracting some work, and if I sold any home improvement papers, then I sold it to local sources, lawyers, doctors, indivlduals in the city. Senator TYDINGS. I-low long have you been in this type of business? Mr. MORGAN. Since 1948,1 would say. Senator TIDINGS. Since the war? Mr. MORGAN. Yes, sir. Senator TIDINGS. And then in 1955 or 1956 you moved into the brokerage area of actually buying the papers? Mr. MORGAN. Yes. Senator TYDINGS. Now, who was the first person that you talked with at the Atlas Financial Corp.? PAGENO="0196" 190 Mr. MORGAN. I- Senator T~mIxGs. Who did you make the deal with? Mr. MORGAN. Oh, at the time the Woijen family pretty much con- trolled the Atlas Credit Corp. There were three brothers, two of them were in the business after I was~ and I am sure I made the deal with them. There were other people working in the office, however. Senator TIDINGS. What sort of an arrangement did you make with Jack WToljen and how was your association developed? Mr. MORGAN. Well, at that time they indicated to me the yield that they would like to derive from a paper and I would try to buy it at a greater yield and resell it to them. It was as simple as that. If I bought a. pait~c~ilar piece of paper that would yield, let us say. 10 percent a year, and they only wanted 8 percent, I would make the difference. You see, they would ~Jay to me when I would deliver the paper to them, and I would provide the documentation that they wanted, which I paid for, searching the title, checking the credit, and this sort of thing. Senator TIDINGS. Now, what sort of yield did they want? Mr. MORGAN. At that time-in simple interest? Senator TIDINGs. Yes. Mr. MORGAN. At that time, from 14 to 16 percent a year. Senator TIDINGS. And what sort of yield do they expect today? Mr. MORGAN. I would say that. the yield they are looking for today is basically what you are asking for in your present bill. Senator TIDINGS. Twenty percent? Mr. MORGAN. About 20 percent for the first five, and 16 on any over that. Most of our notes average $1,500 to $2,000. I would say that now they are looking for 16- to 20-percent yield depending on the area. Senator TIDINGS. When you made your initial agreement with Mr. Wo1jen~ were you going to be given the Washington territory for Atlas? Mr. MORGAN. NO. Senator TIDINGS. Did they say that they would take care of all of your paper? Mr. MORGAN. No, sir. They would buy paper as I presented it to them a.nd as they wanted to buy it. I really had no exc'usive right with them, or had any exclusive area, nor did they agree to take it all because as a matter of fact---- Senator TIDINGS. They would not agree to take it all. How about today, is it still basically the same rate? Mr. MORGAN. It is still basically the same. I buy receivables which, I think having dealt with them for 10 years I know pretty much what they want, then I submit it to them and if they buy it, fine, and if they don't, then I sell it to another source. I don't sell all of my papers to them now. Senator TIDINGS. Do you give them the first choice? Mr. MORGAN. Yes, sir, in almost every case, unless it does not fit their pattern. For example, they don't buy any paper that exceeds 7 years, and if I find a home improvement receivable that is a 10-year payout, then they won't buy it, so I would offer it to someone else. Senator TIDINGS. In recent years, how many papers do you average? Mr. MORGAN. That is a difficult question because it is varied to such a great extent. PAGENO="0197" 191 Senator TYDINGS. What was your best year? Mr. MORGAN. I would say that the best year we probably sold them a million and a half to a million eight hundred thousand, something like this. I would say that the worst year it would be in the range of six or seven hundred thousand. This is determined, of course, by the availability of the paper and their ability to buy. Senator TYDINGS. Do you buy your paper directly from the subcon- tractor or the general contractor, or from a middle man? Mr. MORGAN. No, we buy it directly from the contractor. Senator TYDINGS. From the contractor? Mr. MORGAN. Right.. Senator TYDINGS. And did you ever buy any from Monarch ? Mr. MORGAN. Yes, we bought from Monarch for a period of, I guess, 5 or 6 months. Senator TYDINGS. Do you consider Monarch a contractor? Mr. MORGAN. Surprisingly enough, the paper that we bought from them has given us very little trouble. Maybe we~ Senator TYDINGS. Yes. Well, I am not talking about the quality of the paper. Would you consider them a contractor? Mr. MORGAN. Would I consider them a contractor? Senator TYDINGS. Yes. Mr. MORGAN. Yes, certainly. Senator TImINGs. How many similar type contractors are there op- erating in the District, like Monarch, today? Mr. MORGAN. Tell me what you mean, Senator. Do you mean like Monarch is a difficult thing- Senator TYDINGS. No, I don't mean-~-- Mr. MORGAN. You mean home improvement- Senator TYDINGS. No, I don't mean in any sinister connotation. I mean firms engaged in the type of work that Monarch was doing. Mr. MORGAN. I would say that there must be 300 or 400 in the subur- ban, total suburban area. We deal with maybe 60 to 70 of them. Senator TYDINGS. Now, in Monarch's case, as I understood it, they took about three-quarters of the work that they did, and subcontracted it out; is that a general practice? Mr. MORGAN. I would say it is at least that high, if not highe.r. I would say that the average home improvement contractor does not carry any staff except that some of them will carry on their payroll one carpenter, or a couple of painters, but it is so difficult in the renovating business, as you can see, you need electricians, plumbers, carpenters,. floormen; it would be virtually impossible. Senator TYDINGS. Of the contractors engaged in the business of sell- ing the job, financing it and then subcontracting out the actual work, and then getting the money to pay for it~ Mr. MORGAN. This is true. Senator TYDINGS. And that's a middle step. I-low many of these firms do you buy paper from? Mr. MORGAN. Of course, it varies from month to month, but overall, I checked it the other day, that we have purchased in the area from about 70 to 80 different contractors. I would say that constantly we are buying from 15 or 20, depending on how much money we have avail- able and how much business there is available. PAGENO="0198" 192 Senator TmINGs. Do you have any other major sources of funds, other than the Atlas Financial Corp.? Mr. MORGAN. You say do I have any? Senator TYDINGS. Yes, any that provide you with a similar amount. Mr. MORGAN. No. Senator TYDINGS. Do you have any that provide you with as much as 10 or 20 percent of Atlas? Mr. MORGAN. I would say that I sell 20 percent of my business to local sources in the Washington area, but not to finance companies as such. Senator TirnxGs. But not as much as 5 or 10 percent to one source? Mr. MORGAN. Possibly 5 to 1. Senator TYDINGS. What source would that be? Mr. MORGAN. Well, there are many lawyers in town, there are two or three groups. To name one there is Charley SchwarLz in the insur- ance business that has a group and buys notes from us, Irving Cass, realty companies~and going back over the years we have sold to other people who have subsequently gone out of business or no longer buy. Senator TYDINGS. What sort of yield do these groups of lawyers want on theirs? Mr. MORGAN. I would say that generally speaking they are looking for at least the same yield that Atlas is, and possibly more in many. It is difficult because you must understand that the home improve.- ment receivables created in two different fashions, one being in the form of an interest-included note which is what we deal in with out- lets where the interest is included in the face of the instrument, and the other being a discounted 6 percent simple interest note. It is diffi- cult to compute the Tield, sometimes. Senator Timixos. Describe briefly the difference between the former and the latter. Mr. MORGAN. The interest-included note is a note such as is pur- chased under FRA programs in FRA title I. It calls, as in your bill, for a cash price, minus a down payment, balance to be financed, and then a total finance charge. Let's suppose that the job is $2,000. The finance charges, let's say, are $1,000. Then the total note would be $3,000 bearing no interest except after maturity, calling for 60 pay- ments of $50 each. That. would be the one case. The other case would be if you had a note, let us say, of $2,500 bear- ing interest at 6 percent simple, payable $50 a month, that in effect is the same note because it will require 5 years to pay out and the consumer will eventually pay $3,000. That note, then, would have to be sold at a discount from its face even though it bears interest above the face.. Senator TYDINGS. During the period between 1964 and 1967 did you purchase home improvement pa~~er from the Custom House Construc- tion Co.? Mr. MORGAN. We-I'll give you these figures exactly. We were-we had 21 applications submitted to us and we purchased three. Senator TYDINGS. And Continental Contracting Co.? Mr. Monoxx. Yes, I purchased a great many from him. I don't know how many. Senator TYDINOs. Who is him? PAGENO="0199" 193 Mr. MORGAN. My brother. My brother owns Continental Contracting Co. Senator TYDINGS. Allied Enterprises, Inc.? Mr. MORGAN. Yes, we purchase from them. Senator TYDINGS. Who heads up Allied? Mr. MORGAN. Allied Enterprises is Bill Marion. Senator TYDINGS. And did you buy any United Home Enterprises~ Mr. MORGAN. Yes, United Home Enterprises, Robert Cedarloff. Senator TYDINGS. Cedarloff? Mr. MORGAN. Yes. Senator TYDINGS. Nationwide Enterprises? Mr. MORGAN. William Harring. Senator TYDINGS. And did you buy? Mr. MORGAN. Yes. Senator TYDINGS. Plaza Construction Co., Inc.? Mr. MORGAN. Yes. We bought from them. This is back in 1965 or 1964; 1965, as I remember. Senator TYDINGS. Who owns Plaza Construction Co.? Mr. MORGAN. I am not sure. The man that we dealt with was Harold Liebermann but who Plaza was other than that, I don't know. Senator TYDINGS. Monarch Construction Co.? Mr. MORGAN. Yes, uh huh. Senator TYDINGS. And who was that? Mr. MORGAN. Well, Monarch, as far as I know, was owned by- Senator TYDINGS. Nathan Cone? Mr. MORGAN. Nathan Cone, I couldn't remember his first name. Senator TYDINGS. And he has returned to Baltimore, is that right? Mr. MORGAN. Yes, I think he is in Baltimore. Senator TYmNGS. Champaign Construction Co.? Mr. MORGAN. Yes. Senator TIDINGS. Who was the- Mr. MORGAN. At that time it was a partnership, or at least there were two people involved Nicholas George and Albert Weston. Senator TYDINGS. People Contracting, Inc.? Mr. MORGAN. Right, William Byner; yes, we bought from them. Senator TYDINGS. Now, during that period, what percentage of your total paper would you say came out of those firms? Mr. MORGAN. Oh, I would say-that's a difficult question. Senator TYDINGS. More than half? Mr. MORGAN. Yes; I would say more than half. Senator TYDINGS. As much as 70 percent? Mr. MORGAN. Well, from what period? Senator TYDINGS. Let's say from 1964 to 1967. Mr. MORGAN. No; I would not say more than half during that period, because-and again we would have to determine whether we are talk- ing about dollar value or number of deals, because we bought a great many deals from Allied Enterprises, United Home, and Nationwide, but we bought these only for a period of, I think, 1 year. So, in the other 2 or 3 years in that period of time, we did not buy from them at all. Senator TYDINGS. Would it be fair to characterize those firms I have just listed as "marginal operators"? PAGENO="0200" 194 Mr. MORGAN. It depends on what you mean by "marginal," Senator.- Senator TYDINGS. When I say "marginal," I mean "not solid," not following the best business procedures, perhaps the type, of firm in. which you would not want to risk your child's savings. Mr. MORGAN. I would say that you would have to. characterize 90 percent of the home improvement industry this way. Senator TYDING5. I did not ask you about 90 percent; I asked you- about those. Mr. MORGAN. I find it difficult to answer whether they are marginal. I can tell you that in our dealings with them on an individual `basis, we have had problems with some of the paper, of course, as you know,. but I couldn't classify them as "marginal," no, other than being "mar-- ginal" in the term that the whole industry is "marginal." Senator TYDING5. Are they all operating now, those firms? Mr. MORGAN. I don't know that any of them are operating, as a mat-' ter of fact. Let's see, Monarch is not. Peoples is not; United Home is' not; Allied is not; Plaza, I am not sure whether Plaza is still operating or not. I would have no way of knowing. Monarch certainly is not. Senator TYDING5. Are you aware of any of those firms `being subject to criminal, fraud actions by Government a.gencies or courts? Mr. MORGAN. I am aware that there is a present indictment outstand-- ing against Cedarloff. Other than that- Senator TYDING5. Which one is he? Mr. MORGAN. Robert Cedarloff, United Home Enterprises. There is a present indictment aga.inst him. Senator T'X-DING5. Are you familiar with the Federal Trade Coin- mission- Mr. MORGAN. I understand that the Federal Trade Commission-- and this is only hearsay-on Allied Enterprises, entered a cease-and- desist order. On the others, I don't know of any criminal action. I do' know that Custom House is under investigation, because we submitted. the loans that we bought from them, to the grand jury. Senator TYDING5. Is Atlas more interested in mortgages than irn- secured paper? Mr. MORGAN. Until about 2 years ago, I believe, that-or 3 years ago,. we had a general policy that when we sold loans to Atlas, if they were, under $1,000, we did not have to secure in all cases. However, now, all. of the paper that we buy and sell to Atlas must be secured by a deed. of trust, and I think the reason is obvious. Senator TYmNG5. What is the reason? Mr. MORGAN. Well, if the land records of the District are checked, I think that you would find that over the 10 years tha.t we have dealt in this paper, and most of it has been secured, that if we have bought 2,000 loans, we have probably foreclosed 10 times. We primarily want' the deed of trust to be sure that t-he property is there when the time' comes to collect. Senator TYDING5. Are you, or Atlas concerned, with the character of the contractor from whom your paper is secured? Mr. MORGAN. I'll answer-I would say yes, they are, and I'll answer your question one step further, Senator, and that if I deal with 70' contractors, 50 of them are approved FHA dealers at local banks. PAGENO="0201" 195 Senator TYDINGS. Were any of those that I mentioned FHA ap- iroved? Mr. MORGAN. I think that Allied Enterprises in this respect would not qualify when they were selling intercoms or water softeners. These ivere not eligible items under FHA, but I think that Marion had been and was at the time FHA. I mean, William Marion was an FHA `dealer. Senator TYDINGS. Does Atlas take deeds of trust on sales for water *softeners and intercom systems? Mr. MORGAN. Yes; we did. I'll say this, we did in some cases, and in some we did not. Some of the water softeners were $599, as I remember, *and in some of those cases we did not take deeds of trust. Senator TYDINGS. Are you aware that United Home Enterprises has been indicted for forging homeowners' names? Mr. MORGAN. That's-I just said that Mr. Cedarloff is presently under indictment; however, it is my understanding now that that trial has been continued for another 60 days. Senator TYDINGS. Are you aware that an officer of Peoples Con- ~tracts, Inc., has been convicted of falsifying FHA loan applications? Mr. MORGAN. No; I am not. Senator TYDINGS. I think you stated that you know who Ralph Weed and H. A. Masetta were. Mr. MORGAN. Masetta. They are trustees of deeds of most of our instruments. Ralph Weed worked for me and H. A. Masetta worked for my brother. Senator TYDINGS. Now, what do you mean by "trustees" on most of :your instruments? Mr. MORGAN. They are trustees on most of the deeds of trust that we ~purchased. Senator TYDINGS. That you purchased? Mr. MORGAN. Yes. Senator TYDINGS. Now, do you indicate to the general contractors who they will have to make their trustees in order for you~ Mr. MORGAN. We do. We do even more than that. We prepare the ~papers for them, Senator. Senator TYDINGS. And what function does Mr. Weed and Mr. Masetta perform as trustees? Mr. MORGAN. What is a trustee's role, you mean, in our- Senator TYDINGS. Yes; and what are they supposed to do, and what `do they actually do? Mr. MORGAN. Well, they have two duties. They have one duty that *when a note is paid that they will promptly release it from the land records on behalf of the party that is paying, and on the other they have a duty to the note holder, in the event of default, to institute fore- closure proceedings. These are their two basic duties. Senator TYDINGS. These are the attorneys that carry through as trustees under foreclosures? Mr. MORGAN. Not attorneys; no, sir. Senator TYDINGS. What is that? Mr. MORGAN. Not attorneys; no, sir. Senator TYDINGS. Neither Of them are attorneys? Mr. MORGAN. No. They are not. They do not have to be attorneys. They merely sign an authorization fQI foreclosure when certain proof PAGENO="0202" 196 is presented to them. They are not attorneys, nor do they have to be. Senator TrrnxGs. Are they attorneys? Mr. MORGAN. No; they are not.. Senator TYDINGS. What do you mean, they sign authorizations of foreclosure when proof is submitted to you Mr. MORGAN. Well, the foreclosure procedure in the District, when a note goes in default 90 clays or more, and this is again, as I under- stand it, only a rule of thumb, because no trustee will sign a letter authorizing foreclosure unless the note is at least 90 clays past clue. They then sign a letter to a public auctioneer authorizing them to advertise the property for sale. In ever case that. we are involved in, at least, we ask the auctioneer at that point, to write a letter to the homeowner giving him 10 clays to respond and bring the account current before the advertising starts~ We then place five ads, every other day for 10 days, in the Evening Star. By the way, the law requires in the District for only three insertions, but I think it is common practice that everyone inserts five times. On the 10th clay, on the date specified for sale, the foreclosure is held in front of the premises. Senator TYDINGS. Do you ever personally contact the customer? Mr. MORGAN. Do we? Senator TYDINGS. Yes. Mr. MORGAN. At what point, sir ? Senator TIDINGs. At any point in the foreclosure proceedings. Mr. MORGAN. Oh, many times. Senator TIDINGS. You mean vou actually send somebody out to see them? Mr. MORGAN. Oh, if it were-if we couldn't get them on the tele- phone; yes, sir. Oh, and they get a letter from the auctioneer, too. Do we contact them? Senator TIDINGS. Yes. Mr. MORGAN. Yes. We, of course, if an account is this bad we are, of course, making collection efforts to collect it, rather than to fore- close. I mean, we contact them by phone, by letter, by memos, and if it requires a house call we send somebody out. Senator TIDINGS. In other words, there has never been a foreclosure with any of your trustees where the customer hasn't- Mr. MORGAN. Is unaware? Senator T~rnIxGs (continuing). Been personally advised of the fore- closure proceedings, aga lIst his property- Mr. MORGAN. Absolutely not. Senator TIDINGS. All right. In dealing with the Atlas Financial Corp., what services or what functions do you perform on their behalf? Mr. MORGAN. In the purchase of the paper? Senator TIDINGS. Yes. Mr. MORGAN. You mean-when a contractor brings a deal to me to purchase, if I decide it's what we want, I then search the land records to be sure what our position will be on the title and search the title. Senator TIDINGS. You check the title for them? Mr. MORGAN. Pardon? PAGENO="0203" 197 Senator TYDINGS. You cheek the title for them? Mr. MORGAN. Yes, we check the title. Senator TYDINGS. You do that for Atlas, or do you do it for every- body? Mr. MORGAN. We do it for everybody. Senator TYDINGS. So, that's just part of your own operation? Mr. MORGAN. Yes, sir. Senator TYDINGS. All right. Mr. MORGAN. We check the credit, of course, either by pulling a credit record or by checking the references ourselves or by doing both. We take a picture of the property :and then when the job is finished the contractor brings to us the completed d'ocuth'ents, `including the contract, the application, the note, the `deed of trust and the completion certificate. At that time we call the people on the phone and check the deal, as to whether it w'as finished, whether they understand the' terms, whether they signed the note and `deed of trust, and are aware of `it, and whether t'hey appeared before a notary public, and then we go over all of their obligations to be sure that we have the proper obligations as opposed `to what we had in the cred'it `applications. Senator TYDING5. You actually go out and talk with the person? Mr. MORGAN. This is `done on the telephone if they `have `a telephone and we can reach them, `and in many cases now in the last year we are doing it with actual `house calls. But,'we `do it in every case. Senator TYDINGS. Now, when you make a telephone call, what do you ask the person? Mr. MORGAN. `We have a-I am sorry, I don't `have one with me, but we `have a sheet going through questions, starting at `the beginning. Would you like to know theth `all? Senator TYDINGS. Yes. ` Mr. MORGAN. When did they buy their property; what did they pay for it; how much did they put down; what are their mortgages; where do they pay them; what are their monthly payments on their mortgages; how many rooms in the house; does it have a `basement; is it on a paved road or unpaved road; how many bathrooms; does it have a recreation room; where does the husband work; how long hafls he worked there, what section is he in; what is his work telephone number, and what is his salary. For a woman, the same thing, her income; where does she work, how long, and so forth. We then ask them, is the job-the first thing that we ask them, is, do you have a copy of youi~ contract, because we would like to know what your monthly payments are supposed to be, and we ask them to read from their contract what their monthly payment is. If this cor- responds to the information that we have, we know that they have a copy of our contract. We then ask them if they signed the deed of' trust, and if they appeared before a notary public. We then go over all of their debt structure, what loan companies do they owe, do they owe on an automobile, what year is it, how much do they owe on each debt, and what is the payment on each debt; how many children do they have, and what are the ages of their children. Senator TYDINGS. NOw, this is basically credit information? Mr. MORGAN. This is after the job is done. `Senator TYDINGS. What is that? PAGENO="0204" 198 Mr. MORGAN. This is after the job is done. Senator TYDINGS. Right. Now, what do you do to check the legiti- macy of the transaction itself, the paper of which you are handling? Mr. MORGAN. We ask them at this time if the job is done, if they are satisfied, and if they understand what their monthly payments are. We do this, Senator, in every case. And I think that we are the only finance company in this area that does this. Senator TYDINGS. Did you do it in the case of the paper from the Peoples- Mr. MORGAN. Yes, sir. Senator TYDINGS (continuing). Contractors, Inc.? Mr. MORGAN. Uh huh. Did we do it then? Senator TYDINGS. Yes. Mr. MORGAN. Yes, sir. And I have something very interesting with me. Nathaniel Vaughn that appeared before your committee-is this the case you are referring to, Senator? Senator TYDINGS. Excuse me; I did not hear you. Mr. MORGAN. I said, Is this the case you were referring to, Nathaniel Vaughn? To give you a*n example, maybe, of some of the problems that we have on the other side, I quote from the Evening Star of Wednesday, December 13, 1967, a report of a hearing at which Nath- aniel Vaughn appeared before your committee. Mr. Vaughn says: The debts were incurred for home improvements that were thought to cost ~3,OO0. The work was never done, although Vaughn mistakenly signed a state- ment that it had been. I bring your attention to the langua.ge, "Vaughn mistakenly signed the statement that it had been." I saw Mr. Vaughn on television and this is precisely what he said. As it happened in this case, Mr. Binhem, who is the contractor, did not have a form of completion, and I would like to show you what Mr. Vaughn signed on a statement. In his own handwriting he wrote: To Whom It May Concern: This is to certify that the work done by Peoples Contractors is very satisfac- tory. NATHANIEL VAUGHN Now, if he signed this mistakenly, lie wrote it out before he signed it. We talked to Mr. Vauglm by phone, and I didn't bring our checkout sheet, but we spoke to him on the phone, or his wife, when this job was done, to verify the fact that it was done. Now, I will be the first to admit to you that if the job is not done and the contractor somehow convinces him to sign this paper and then to lie to us on the phone, if we don't make a physical inspection, we do have a problem. Senator TYDINGS. Well, I was not speaking specifically of Mr. Vaughn, but I was just wondering in the checking out the legitimacy of the Peoples Contractors, Inc., whether you can come across their practice of their falsifying FRA loa.n applications? Mr. MORGAN. Are you talking about now an application by Peoples? Senator TYDINGS. Well, now, as I understand it, you had indicated that you checked on the legitimacy of these transactions? Mr. MORGAN. Yes. Senator TYDINGS. And my question to you is: Peoples Contractors, Inc., is one of the firms which you dealt with and is now out of busi- PAGENO="0205" 199 ness. During your check on their legitimacy, did you ever determine or understand that they were falsifying FT-IA loan applications? Mr. MORGAN. No, sir; I did not know this until you told me this moment, and I have dealt with Mr. Binhem, I think- Senator TYDINGS. Are you aware that an officer of their company has been convicted of falsifying Fl-IA applications? Mr. MORGAN. No, sir; I am not. Who was the officer? Senator TYDING5. I am asking the questions. Mr. MORGAN. I am sorry. Senator TYDINGS. Are you aware that United Home Enterprises, another of your major sources, has been indicted for forging home- owners' names on deeds of trust and selling intercoms? Mr. MORGAN. I am aware that Mr. Cedarloff is presently under indictment. Yes, I am. Senator TYDINGS. You told me basically that he was United Home Enterprises, for all practical purposes? Mr. MORGAN. Yes. He is under indictment; yes sir. Senator TYDINGS. Did you run across this practice when you checked the firms for the legitimacy of their actions? Mr. MORGAN. Are you saying when I checked- Senator TYDINGS. Now, I understand that one of the services that you perform allegedly for Atlas is to check the legitimacy of the transaction tied to `the paper which you are buying? Mr. MORGAN. Yes, sir. Senator TYDINGS. And you indicated that you did? Mr. MORGAN. Yes, sir. Senator TYDINGS. And you gave me a long line of questions which you ask, and yet you did not uncover the fact that Peoples Contractors, Inc., was falsifying FHA loan applications? Mr. MORGAN. Well, sir- Senator TYDINGS. Evidently you didn't come across anything about United Home Enterprises forging homeowners' names on deeds of trust. Let me ask you about Allied Enterprises. Mr. MORGAN. May I interject one thing, Senator, if I may? Mr. Cedarloff is under indictment for forgery. Senator TYDINGS. Right. Mr. MORGAN. He has not been convicted of forgery, or anything, yet. Senator TYDINGS. Did you come across any of the areas of charges which turned up in the grand jury investigation? Mr. MORGAN. I don't_I would have no way-of any of the charges against Mr. Cedarloff? Senator TYDINGS. Yes. And United Home Enterprises? Mr. MORGAN. In checking the individual deals? Senator TYDINGS. Yes, sir. Mr. MORGAN. No, sir; I did not. Senator TYDINGS. Did you ever check any of the individual deals to see whether or not `the people might have been the victims of fraudulent actions? Mr. MORGAN. Yes, sir; we did. Senator TYDING5. How, other than by the telephone calls that you just mentioned, do you do this? `Mr. MORGAN. Well, all right. Let me tell you one other thing `that might help, that when these people, these particular Peoples loans PAGENO="0206" 200 you are speaking of that were sold to Atlas, when they received their payment book, with the payment book is a letter which again spells out the fact that Atlas had purchased a note and deed of trust in this amount of money, which is a gross figure, and at the bottom of the letter, in bold print, it says, "If you have any questions concerning this transaction, please contact us." So wc~-~- Senator TYDING5. How many of the people whose paper you buy have completed the 12th grade of high school, Mr. Morgan? Mr. MORGAN. Oh, I think a great many of them, sir. Sena.tor TYDINGS. Do you think as many as 50 percent? Mr. MORGAN. Oh, more than that, I would say. Senator TYDINGs. I question that. Did you check out Allied Enter- prises when you were doing business with them, to see whether or not they were involved in any fraudulent misrepresentations? Mr. MORGAN. Yes, sir. I checked the deals, sir. I am talking about the individual deals. As far as the contractors themselves, I don't recall that I checked Allied before I did business with them; no. Senator TYDINGS. Do you ever check a contractor to find out whether lie had a legitimate business? Mr. MORGAN. No, sir. Generally not, because most of the contrac- tors in town I know. I mean, I have been in this business for around- Senator TYDINGS. Now, t.hose contractors which I read out to you and whom you indicated at one time provided you with at least half of your paper, they are out of business now; right? Mr. MORGAN. Yes, sir. Senator TYDINGS. And a number of them are either under indict- ment or have had their officers convicted for charges involving fraud, misrepresentations of one type or another? Mr. MORGAN. I don't lmow that, Senator. You are telling me- Senator TxmxGs. ~\Tell, I just mentioned Peoples Contractors, Inc., United Home Enterprises, Allied Enterprises. I think you are familiar with Monarch Construction Co.? Mr. MORGAN. Yes, sir; but I didn't know that anyone was under indictment except Mr. Cedarloff-I really did not. Senator TimINGs. Under indictment or charged by the Federal Trade Commission. Mr. MORGAN. This, of course~ Senator TYDING5. And as a matter of fact, you do not really look into the type of business whose paper you buy? You are concerned with whether or not you have got those papers signed and whether you have the deed of trust recorded, and insofar as the company itself is concerned, you do not care how t.hey get the people to sign that paper, doyou? Mr. MORGAN. No, sir; that's not true. We would be, I think, more than foolish if we bought paper with good money that we knew from the inception would not pay. I mean, this doesn't make- Senator TYDINGS. You have got your deed of trust. Mr. MORGAN. Yes, sir; but even that, if there is a fraud, and even considering your bill, if there is a fraud in the inducement of any of these the trust is vitiated. The trust cannot stand if there was a fraud, if these people have induced them to sign fraudulently, or forged their names, our trust is no good. If we knew this, Senator, we certainly wouldn't buy the paper. PAGENO="0207" 201 Senator TYDINGS. All right. It is hard for me to understand why half of the businesses, or half of your buying business came from firms which are now out of business and a number of whose principal officers have been charged, indicted, or cited for some type of fraudu- lent conduct. Mr. MORGAN. Well, this doesn't- Senator TYDINGS. It is hard for me to understand this, in light of the fact that you said you endeavored to check out the legitimacy of the transactions. How can you check out the legitimacy of a transac- tion when you are doing business with a bunch of bums? Mr. MORGAN. I say again, for example, Mr. Cedarloff may very well be guilty, but I am not-I certainly can't tell you he is guilty until he is convicted. Senator TYDINGS. What about those that have already been cited and found guilty? Mr. MORGAN. I don't know those, Senator. I really don't. I am not being facetious. I know no others that have been cited or found guilty. Senator TYDINGS. Now, does the Atlas Financial Corp. have any concern whatsoever about whether you are doing business with legiti- mate enterprises, or are they concerned primarily with the validity and conformity of the papers? Mr. MORGAN. Well, I think that we are all interested in the validity or legitimacy of the business of the people we are doing business with. And, of course, we are concerned with the validity of the papers, be- cause without this we have purchased nothing. Senator TYDING5. Has Atlas ever come to Washington to check out any of the people from whom you buy paper? Mr. MORGAN. To the best of my knowledge, no; they have not. Senator TYDINGS. And did they ever come down here and look into Monarch Construction Co. or United Home Enterprises? Mr. MORGAN. Again I must say to you, for example in Monarch we bought this paper for a period of about a year at that time and there were two or three major savings and loans buying the same paper, and we have had very little trouble with their paper. We don't have as much, I am sure, as some of these sources, but we have had very little trouble with their paper. Senator TYDINGS. But they have never come down and checked out- Mr. MORGAN. As far as I know; no, sir. Senator TYDING5. All right. Then they take your word for the legitimacy of the enterprises with which you are doing business? Mr. MORGAN. Yes, sir. They reach-I'll say this: They recheck a great deal of it. In other words, oftentimes after we check the legiti- macy and it is forwarded to them and they pay it, they then will call the people again on the phone. Senator TYDINGS. Are you still doing business with Allied Enter- Prises? Mr. MORGAN. No, sir. Senator TYDING5. When did your last business transaction with them take place? Mr. MORGAN. It has been- Senator TYDING5. When did you last buy paper from them? Mr. MORGAN. I can't tell you without checking my records, but I am sure it must have been 6 months or more. PAGENO="0208" 202 Senator T~mIxGs. In 1967? You have not bought any in 1968? Mr. MORGAN. Oh, none in 1968. No, sir; none in 1968, and I am not even sure that we bought. any in 1967. Well, I know that they are out of business now, but-well,~ w& stopped sometime ago, 6 or 7 months. a.t least. Senator T~mNGs. Did Atlas ever check into Allied Enterprises? Mr. MORGAN. Did they check into- Senator TImINGs. The legitimacy of thebusiness? Mr. MORGAN. Not to the best of my knowledge; no, sir. Senator TYDINGS. I mean, did- Mr. MORGAN. As I say, I believe that the principal in FHA dealer. I would assume if he were approved for FHA transactions that he would be legitimate. Senator TYDINGS. You bought, I presume, for Atlas Financial Corp., approximately 150 deeds of trust from Allied Enterprises; is that correct? Mr. MORGAN. I would-I am-I don't know, sir. Senator TYDIXGS. I am only asking for an approximate figure. Mr. MORGAN. I would say that's very possible. Senator TYDINGS. That is what you told the reporter for the Wash- ington Post. Mr. MORGAN. I would say that is right. Senator TIDINGS. You told him that, and I presume that the ma- jority of these mortgages are still outstanding, are they not? Mr. MORGAN. Yes, sir. Senator TYDINGS. And they are held by the Atlas Financial Corp? Mr. MORGAN. Yes, sir. I think almost all of them are. Senator TYDINGS. Have you informed Atlas that those mortgages, according to your interpretations of the law, might well be null and void? Mr. MORGAN. Yes, sir; they are aware of this, certainly. Senator TYDINGS. And they are aware of what the Federal Trade Commission had to say about the practices of the Allied Enterprises, mc? Mr. MORGAN. I am personally not aware Of that, Senator. I don't know whether they are or not. Senator TIDINGS. Do you know that the Federal Trade Commission cited Allied Enterprises for: Failing to disclose orally at the time of sale and in writing on any condi- tional sales contracts, promissory note or other instrument executed by the purchaser, with such conspicuousness and clarity as is likely to be read and observed by the purchaser that: (a) such conditional sales contract, promissory note or other instrument may, at the option of the seller and without notice to the purchaser be negotiated or assigned to a finance company or a third party; (b) If such negotiation or assignment is effected, the purchaser will then owe the amount due under the contract to the finance company or the third party and may have to pay this amount in full whether or not he has claims against the seller under the contract for defects in the merchandise, non-delivery, and the like. 5. Failing to reveal, disclose or otherwise inform customers, in a manner that is clearly understood by them, of all the terms and conditions of a sale and of any installment contract or promissory note or other instruiriept to be signed by any customer. PAGENO="0209" 203 You didn't advise the Allied- Mi'. MORGAN. I was-- Senator TYDINGS. You didn't- Mr. MORGAN. I was unaware of this. As a matter of fact-what i~ the date of that? Senator TYDINGS. February 6, 1967. Mr. MORGAN. I don't think that we bought any paper from them- Senator TYDINGS. Docket No. 8722. Mr. MORGAN. I am sure we have not bought any paper from them since the date of that. Senator TYDINGS. I know, but this has to do with the operation of the Allied Enterprises while you were buying their paper and while you were selling their deeds of trust to Atlas. How can you be looking out for the interest of Atlas with regard to the legitimacy of a busi- ness if you haven't even advised them of the contents of this cease- and-desist order of the Federal Trade Commission against the com- pany, 150 of whose deeds of trust they hold? Mr. MORGAN. Sir, I was unaware of the order, first of all. I knew there had been a cease-and-desist order, but I was unaware and we were not doing business at that time. Senator TYDINGS. You were unaware. And your responsibility to Atlas Financial Corp. would not require you to- Mr. MORGAN. Oh, certainly. Absolutely. There would be no question, and they knew that FTC was investigating, and that is when we stopped doing business with Allied, when we discovered this. Senator TYDINGS. Now, has Allied set up a reserve for 150, these 150 deeds of trust on the grounds that they very well could be fraudu- lently- Mr. MORGAN. No, sir. Senator TYDINGS. They have not? Mr. MORGAN. They have not, no, sir. They have not set up any reserve. Senator TYDINGs. Do you think they should? Mr. MORGAN. I assume if they were out of business-we would love to have them do it, Senator, but I don't know if It would be possible. But, as you read the order there- Senator TYDINGS. Are you sure that they have not? Mr. MORGAN. Haven't what? Senator TYDINGS. Set up a reserve. Mr. MORGAN. To the best of my knowledge they have not, sir. Senator TYDINGS. Now, when you say "to the best of your knowl- edge," are you an officer of the corporation? Mr. MORGAN. Of what, Atlas? Senator TYDINGS. Yes. Mr. MORGAN. Oh, no, sir. Senator TYDINGS. I mean, are you on the board of directors? Mr. MORGAN. No, sir. On Atlas Credit? Senator TYDINGS. Yes. Mr. MORGAN. No, sir, I am not. Senator TYDINGS. Well, how do you know what they have set up and what they have not setup? Mr. MORGAN. Only that it would have to come through me, I would think, unless they had gone and subsequently set it up, I would have no way of knowing, unless they told me. SS-648-6S---14 PAGENO="0210" 204 Senator TYDINGS. Now, why would they have to come through you? Mr. MORGAN. Well, if it was set up in the original transaction, I would be aware of it, certainly. If a reserve was taken on the sale of the original- Senator TYDINGS. But, in the case of at least some of them, you would think that this would not have been out~ta.nding. This was `handed down after some of these transactions had already been recorded. Mr. MORGAN. I am sure that this~ Senator TYDINGS. How would you know if Atlas had set a reserve? Mr. MORGAN. I would think that they would tell me. Senator TYDINGS. Why? Mr. MORGAN. Because I help them collect their accounts. I mean~ Senator TYDINGS. Do you represent their interests here in Wash- ington? Mr. MORGAN. Oh, by helping them collect the accounts I sell them, yes, sir. Senator TYDINGS. I mean, do you represent them as an agent here in Washington? Mr. MORGAN. No, sir. No. Senator TImINGs. What tie do you have with Atlas that would allow you, as you said, to Imow about it. Why would you know about it? Mr. MORGAN. Because they would tell me, Senator, I would assume. Senator TYDINGS. Well, why? Mr. MORGAN. Because if I am~ Senator TYDINGS. Are you very close to them? Mr. MORGAN. I am very close to them. Senator TYDINGS. Are you so close to them that they would not set up a reserve without your being aware of it? Mr. MORGAN. Oh, no. Well, now, that's possible. That is very pos- sible. They may very well have set a reserve on their books of which I am not aware. Senator TImINGS. Would it be fair to say that you are their man here in Washington? Mr. MORGAN. Well, when you say "their man"- Senator TImINGS. To represent them, to secure business for them? Mr. MORGAN. Yes, I certainly secure business for them. Senator TYDINGS. And to look out for their best interests? Mr. MORGAN. Right. Senator TYDINGS. And to see that they are not cheated? Mr. MORGAN. Right. Senator TYDINGS. And to see that they are not taken advantage of? Mr. MOReAN. Yes, sir. Senator TYDINGS. Thank you. Mr. MORGAN. Can I make one statement, Senator. Senator TYDINGS. You may say anything you like, Mr. Morgan. Mr. MORGAN. I would just like to say that I have-that I have read the bill, the series of bills that you have proposed, and contrary to what the committee may think, I am in favor of this type of legislation. Senator TYDINGS. Do you favor these bills? PAGENO="0211" 205 Mr. MORGAN. Yes, sir. I am in favor of each and every one of the bills because we have made an honest effort in the cases that we have purchased, to try to determine that the people understood what happened. Senator TYDINGS. Do you think that those bills would actually hurt any legitimate person in the home improvement business? Mr. MORGAN. No, sir; but I don't think they are going to be the answer to your problem. Senator TYDINGS. Do you think that the holder-in-due-course doc- trine proposal in those bills would harm any legitimate operator? Mr. MORGAN. I would be more afraid of that proposal as harming a legitimate operation than affecting us, for example, if you call us legitimate. Senator TYDINGS. Are you willing to endorse that proposal? Mr. MORGAN. I prefer, of course-I am glad you asked me this. This is the point of the bill which I prefer the type of legislation which Senator Morse introduced by putting a much greater duty on a purchaser of the paper to protect the consumer. I think that you will do much better with this than merely vitiating the holder-in-due- course theory, because fraud in and of itself vitiates a deed of trust or a note or whatever is signed. The holder has no standing anyway. But, I think if you place, as Senator Morse attempted to do with the certificate of completion, that, plus something even greater, putting a greater obligation on the purchaser of this commercial paper,~ then you will give the consumer some protection. But, by merely knocking out the holder-in-due-course concept, I don't think this is going to provide the protection. Senator TYDING5. Now, Mr. Morgan, are you or are you not in favor of the bills which I have introduced? Mr. MORGAN. Yes, sir; I am. Senator TYDING5. And including the one which vitiates the holder- in-due-course doctrine? Mr. MORGAN. I would prefer the other. I think this will do some good. Senator TYffiNG5. Would you go so far as to advise your- Mr. MORGAN. Advise wh'at, sir? Senator TYDINGS. I was going to say, would you advise your clients, the Atlas- Mr. MORGAN. They are here and I think you will find that they also are in favor of these bills, because if you set the legal rate of interest that will be allowed in this type of transaction, it will do away with all questions about overcharge and interest, and the cancellation provi- sion, I think, is an excellent provision. We are not interested in buying paper that won't pay, Senator. Senator TYDINGS. Fine. Thank you very much, Mr. Morgan, for being with us. Mr. Theodore Blumenfeld. Mr. BLUMENFELD. Yes, sir. Senator TYDINGS. We are delighted to welcome you before the sub- committee, Mr. Blumenfeld. Would you give us your address.~ where you reside, where you work? PAGENO="0212" 206 STATEMENT OP THEODORE BLUMENFELD, EXECUTIVE VICE PRESIDENT, ATLAS FIi~ANCIAL C0RP; Mr. BLUMENFELD. My residence address is in Philadelphia at 1819 West Ashdale Street. Senator TrmNGs. And you are presently employed by whom ? Mr. BLUMENFELD. By Atlas Financial Corp. I am the executive vice president. Senator T~INGs. And you work in Philadelphia? Mr. BLUMENFELD. That's correct. Senator TxrnNGs. And what is your responsibility? Mr. BLUMENFELD. As executive vice president, I am the principal administrative officer of that company, which is a finance company and a subsidiary of Sunasco, Inc., which is a company whose stock is listed on the New York Stock Exchange, which also owns a mort- gage service company which is about the fourth or fifth largest service company in the country. and a leasing company known as Atlas Leasing, a Mexican subsidiary as Atlas Liiti.no Americano. a prefabricating Or home manufacturing company, Hilco Corp. There is a title insurance company in West Jersey entitled "Guar- antee Co.," and it does business in all of the United States, Canada Provinces, Mexico, and the Bahamas, Grand Bahama Island. Senator T~INGs. Well, what is your educational background, Mr. Blurnenfeld? Mr. BLUMENFELD. I am .a graduate of Princeton University and~ Temple University School of Law. Senator TYDINGS~ And what is your vocational background? Mr. BLUMENFELD. I worked for the Equitable Life Insurance So- ciety of the United States from 1951 through 1956. Senator TYDINGS. In Philadelphia? Mr. BLUMENFELD. In Philadelphia. Senator TYDING5. In what capacity? Mr. BLUMENFELD. In a clerical capacity. I was going to evening law school at that time. Upon my graduation from law school in 1957 I became counsel for the Providential Life Insurance Co. in Phila- delphia. Senator TYDING5. Is that a local company? Mr. BLUMENFELD. Providential Mutual? Senator TYmNGS. Yes. Mr. BIJUMENFELD. It is a company that does business nationally, with assets I would expect in excess of a billion dollars. Senator TYrnNGs. Were you chief counsel? Mr. BLUMENFELD. No; I was an associate counsel in charge of the newly established group pension and health and welfare benefit divi- sion at the time. That was January of 1957 in that particular company, and they had just gone into that business. Senator TYDINGS. Now, are you a member of the bar of the State of Pennsylvania? Mr. BLUMENFELD. I am a member of the bar of the State of Pennsyl- vania. Senator TYDINGs. Any other States? Mr. BLUMENFELD. No, sir. After I became associated with the Ox- ford Finance Cos., Inc., a Philadelphia-based company, and I was PAGENO="0213" 207 with them for approximately a year and a half as house counsel, and subsequent to that I became employed by Atlas, then Atlas Credit Corp. Senator TYDINGS. When was that? Mr. BLnMENFELD. This is 1964. Mr. TYDINGS. So you have been there three and ahalf years? Mr. BLtTMENFELD. April. Two months it will be 4 years. I have been executive vice president since 1965. Senator TYDINGS. Now, as executive vice president of the Atlas Credit `Corp., what are your general responsibilities, and who are you respon- `sible to? Mr. BLtTMENFELD. Well, the executive vice president's responsibili- ties are chiefly administrative. I would say I am the chief administra- tive officer of that company, and also as a member of the board of di- rectors of that company and its executive committee, I am active in formulating business policy, responsible, of course, to the board of di- rectors of that company and the parent company. Senator TYDINGS. The parent company being Sunasco? Mr. BLUMENFELD. Sunasco. Senator TYDINGS. What is the history of the relationship between Atlas Credit Corp., the Woljen family, and Sunasco. Mr. BLUMENFELD. Could you make that question a little more spe- * cific, Senator? I could give a rather- Senator TYDINGS. Are you familiar with the facts relating to the `merger of the Atlas and the Sunasco groups? Mr. BLUMENFELD. Yes. You have a misnomer there. The Sunasco group was the name of the surviving corporation of the merger of old Atlas Credit Corp. with Sunset International Petroleum. Senator TYDINGS. I wonder if you would describe that to us. Mr. BLUMENFELD. In April of 1966 the then Atlas Credit Corp., not `to be confused with Atlas Financial Corp., and Sunset International Petroleum Corp. merged by appropriate vote of the respective share- lolders of these companies, and a new corporation, Sunasco, Inc., was formed. It is primarily, or was primarily, a holding company. At that * time Sunset International Petroleum Corp. became a subsidiary of Sunasco, Inc. There are approximately, or there were after that merger, approximately 30,000 public shareholders of the stock of that company. Senator TYDINGS. Now, the new corporation, Sunasco, was a hold- ing company? Mr. BLUMENFELD. Yes; it was not an operating company. Senator TYDINGS. Now, who were the controlling stockholders of the Sunset International Petroleum? Mr. BLUMENFELD. Large blocks of stock of Sunset International Petroleum Co. were held by the Sterling family who were managers of Sunset. That stock was listed and traded on the American Exchange prior to the merger. A Chicago-based company, which is listed and traded on the New York Exchange, by the name of Allied Products Corp. controlled a sizable block of stock. I would estimate that between Allied Products and the Sterling interests effective control, though not the majority of the control of Sunset International was had. Senator TYDING5. And what about the Atlas Ocedit Co!, who had, the ~controlling- PAGENO="0214" 208 Mr. BLU~rENFELD. Atlas Credit Corp. was also publicly owned and traded on the New York Stock Exchange, and was effectively con-~ trolled by the Woljen family, who owned I would estimate about 35 percent of the authorized issued and outstanding stock. About 65 per- cent of the stock was in the hands of the public. Senator TrmNGs. And Atlas Credit Corp. owned, I gather, Atlas Finance? Mr. BLUMENFELD. That is correct. Senator TYDING5. And after the new holding company was formed, control over Sunasco resided in the WToljen family and resides there today with effective control? Mr. BLUMENFELD. It does effectively reside there, but until quite re- cently it would be correct to say that control was in a stalemate be- tween Sterling interests and the Woijen interests. There was an even division of the board of directors with one so-called swing man who was presumably impartial or objective. This was part of the negotia- tions giving rise to the merger. The executive committee was just al)out an even division, and the officers of Sunasco came 50 percent from Atlas Credit and 50 percent from Sunset.. Senator T~-DINGs. Under the new holding company operations were the individual component parts, run pretty much by the same people that ran them prior to the merger? Mr. BLUMENFELD. Yes; I would say that that is a fair statement. Senator TYDINGS. You came to Atlas Credit in 1964? Mr. BLUMENFELD. April of 1964. Senator TYDING5. Would you describe Atlas generally? What it does, and the companies of which you are executive vice president? Mr. BLUMENFELD. Then or now, sir? Senator T1-mxGs. Then and now. Mr. BLUMENFELD. When I caine with the company, it was primarily Imown as a real estate-oriented finance company. It purchased home improvement receivables secured by liens on real estate in probably 35 or 40 jurisdictions throughout the United States, and it also purchased debt consolidation receivables as distinguished from home improve- ment receivables a.nd builders' first mortgages on home improvements. There was a. certain small percentage of specially financed business such as the water softeners, intercoms, things like that, and had an annual volume of business perhaps in the area of $10 or $12 million. It had totals outstanding in the receivables port.folio of probably $40 to $50 million. The growth of the company was quite steady from the period of 1964 through 1966, because of its ability to leverage on its net equity be- cause of good results that it had produced and this specia.lty finance business and home improvements finance business. Uiitil 1965 and 1966, the volume of new business was probably about S45 million per year. Starting in the early months of 1966, we went through a. phenomenon Irnown as the tight-money situation. A finance company leverages on its capital funds normally at the ratio of 7 or 8 times. That is its equitable funds. It sells subordinated debtors either publicly or privately, and then it borrows at the ratio of about three times that borrowing base from banks, names of which would be. fa- iniliar to all of you, and from institutional investors of insurance companies. PAGENO="0215" 209 With the advent of tight money and the ability to borrow long-term funds became pretty difficult, the rates became prohibitive, and a level- ing off of the activity of the company occurred because it is not possible to purchase real estate-secured receivables with average initial n'iaturi- ties close to 5 years, with short-term bank borrowing. It would destroy the liquidity of the company and its ability to service debts. So, for the last 2 years, I would have to characterize Atlas' activities as pretty much treading water, holding its own. I would say that the amount of receivables that it has been liquidating from its portfolio exceeds slightly the amount of new business which it has acquired. Senator TYDINGS. As part of your responsibility when you came to Atlas, did you have to find any producers for Atlas in the District of Columbia area, or was the business operation pretty well established when you came in? Mr. BL~MENFELD. Mr. Morgan was the primary source through which business was acquired in the District of Columbia area at that time. Senator TYDINGS. Is it your custom, or the Atlas custom, to have a primary source in each maj or city, or does that vary? Mr. BLnMENFELD. It varies. Atlas has never really had to do too much proselytizing to attract dealers. A finance company with a na- tional reputation, of which Atlas is only one, would attract people who are interested in selling this type of receivables primarily because banks, savings and loans, and local institutions do not normally have an area of interest much beyond the environments of their particular office. You will find that they do business in an area of 25 to 30 miles, and a home improvement dealer or contractor will normally draw from a wider area, and to the extent that he has to look to several sources for the placement of his business, lie would prefer to deai through one source because in the last analysis his interest is in reap- ing a profit from the number of jobs that he effectively places. So that over the years that. I have been there, probably a thousand different individual sources of generating this paper have come. and gone. I think~ it is a phenomenon of the business. The pattern of the acquisition business also varies as Atlas has from time to time had its own salaried employees in offices in various parts of the country to acquire business, and it has also had relationships such as the ones' which existed and does exist with Mr. Morgan, where lie is an inde.- pendent contractor who purchases paper according to a pre.ordained formula as to what Atlas is interested in buying. The net effect is roughly the same. Senator TYDING5. You heard Mr. Morgan testify here? Mr. BLUMENFELD. I did, sir. Senator TYDING5. And was his description of what Atlas wanted,, was that fairly accurate? Mr. BLUMENFELD. Yes; I believe it was an accurate statement. Senator TYDING5. What percentage of your paper from the Wash- ington, D.C., area has Mr. Morgan supplied? Mr. BLUMENFELD. Just about all the paper. There. have been dealers here in the Washington area and the Baltimore area. who purchase some paper in the Silver Spring or Washington area from time to time, but I would say substantially all of the business that Atlas now PAGENO="0216" 210 holds in the Washington, D.C., area, was purchased through the efforts of Mr. Morgan. Senator TYDINGS. Now, do you know how long Mr. Morgan ha.s done business with Atlas here in Washington? Mr. BLUMENFELD. Yes; and I know from my conservency with the company's activities that he was active for probably 3 or 4 years prior to my appearance on the scene. I would say at least 9 or 10 years, and I might add he is a highly regarded source of business by the company. Senator TYDINGS. And the company has a good deal of confidence in him? Mr. BLUMENFELD. Yes; we have a great deal of confidence in him. The business that he has generated probably ~epresents a rather nominal portion of the total company holdings. I don't believe the ~volume of business generated through Mr. Morgan's efforts at any time exceeded 4 or 5 percent of the total activity. Senator TYDING5. Of the Atlas Credit Corp. Mr. BLUMENFELD. Yes; which is not to say that that's an incon- siderable amount. Senator TinINGs. Is lie the largest single producer for Atlas? Mr. BLUMENFELD. I would say not; not by a long shot. Senator TYDINGS. Who would be ahead of him? Mr. BLUMENFELD. The largest single source through which Atlas has acquired paper would be a gentleman in Pittsburgh, Mark Scoratow- Senator TimINGs. Who? Mr. BLUMENFELD. Mark Scoratow. S-c-o-r-a-t-o-w-who effectively performs the same functions as Mr. Morgan, in a different geographi- cal area. Senator TTDING5. Are there any others that produce as much as Mr. .Mor~an? Mr. BLD~1ENFELD. Any others who produce as much? There are many svho produce more over the period of time that I have been associated. Senator TimINGs. Have they? Mr. BLUMENFELD. Yes. Mr. Morgan would be regarded as a rela- tively average or small-sized dealer. Senator TYDING5. Does either the Atlas Credit Corp. or the Atlas Financial Corp. do any business directly here in Washington, or does either have subsidiaries here? Mr. BLUMENFELD. No. There is no subsidiary, as such, known as Atlas subsidiary of the District of Columbia. Atlas operates-that is. Atlas Financial Corp. operates primarily through subsidiaries in which there are domestic corporations in most of the geographical areas in which it doe.s business. There does not happen to be a sub- sidary with a designation of the District of Columbia, nor is there a IMaryland corporation. The company through which it normally acquires its business from the District of Columbia is known as Atlas Suhsidiary of Delaware; it is a Delaware corporation. And I might add that the doing of business, for instance, the legal terms, most jurisdictions hold that the pure purchasing of notes receiv- able and the incidental activities attendant to collecting does not con- :stit.ute doing business within th~ ~n~aning of th~ particular statutes. PAGENO="0217" 211 Senator TYDINGS. Insofar as protection, as the holder-in-due-course,~ Atlas Associates of Delaware would be a holder of papers in due~ course? Mr. BLUMENFELD. I would hardly think so. I might comment on that because you and Mr. Morgan exchanged some views about the de- sirability or the effect of the removal of the holder-in-due-course con- cept in your particular bill. I think the Atlas has systematically gone about destroying itself from its position as a holder-in-due-course by virtue of the many activities that it performs in trying to assure itself that the paper was fair on its face. I think by causing investigations to be done into the circumstances~ giving rise to the signing of the note and the deed of trust and the contract, going through rather extensive rechecking after the acquisi- tion of the note before the first payment could become possibly due that we really have destroyed our position as a holder-in-due-course. I can't picture our being able to carry the day in any court saying we are without knowledge of any defenses or defects, because we cer- tainly do gain that knowledge, and we haven't really placed any great store in the position of being a holder-in-due-course. So, I would tend not to be so. alarmed by the presence of that provi- sion in your bill because I don't think it is taking away from the finance company any great protection that it had before. I might interject that I would be happy to see some kind of provi- sion which would make it incumbent upon finance companies to ac- tually perform the so-called checkouts or rechecks. I think that would' be much more effective in trying to deal with the general problem of protecting the consumer through legal refinements, which I am sure you realize are a matter of mechanics and sometimes become quite weighty. I think the pragmatic approach might be much more effective. As Mr. Morgan said., and it was not a glib statement, no finance company is interested in purchasing a receivable which is not going to pay, nor do we want the dubious privilege of asking a. trustee to post a property for sale. We are not in the real estate business a.nd we don't. want to own property in Washington, and the existence of a real estate lien as security is merely as a collection tool. Any finance corn-* pany operates on the premise that the obligor notes the advice, can pay and will pay and in the absence of that can probably be made to~ pay by the exercise of leverage. The same situation pertains to mortgages. If you don't pay, a fore- closure may cause you to pay. Of course, you may lose the property.. The history of our foreclosures in this particular jurisdiction is very nominal, and I might say, so is the case throughout the country. Senator TYDINGS. Paper that you acquire from Mr. Morgan in the District-do you check out the sources of any of his paper? Mr. BLUMENFELD. You really don't have to do that because ~t a. certain point the cost of going through a really exhaustive analysis into the financial responsibility and integrity of each individual con- tractor would become prohibitive. We rely heavily on a brokerage situa- tion such as Mr. Morgan's, that he will sift down, find the marginal operators, as you characterized them, people who might be guilty of generating paper that isn't collectable soon will emerge like oil will float to the top, and we are not interested in buying their paper. The paper that we purchase in other areas through our own salaried em~ PAGENO="0218" 212 plovees, we do investigate the financial responsibility and integrity of the individuals. It is axiomatic in the business that if a contractor or generating source of paper is looking for a way to put it over on the finance com- pany, that he will find it. The finance company is victimized just as often as the consumer in this area if it isn't on its guard, and any- thing that the finance company can do to ferment regulations which makes it difficult for marginal operators to literally defraud consumers as well as finance companies, have always been wholeheartedly sup- ported by our companies. We are not interested in having our money being spent for receiv- ables which are not collectable. Senator TYDINGS. But insofar as the legitimacy of the sources o1 your paper in Washington, you rely on Mr. Morgan? Mr. BLUMENFELD. In the District of Columbia we have relied large- ly on Mr. Morgan. Senator TYDINGS. Do you investigate any of the types of transac- tions and their legitimacy connected to the different types of paper? Mr. BLUMENFELD. Yes. As Mr. Morgan told you, we expect him to do a credit investigation and title search, a prejob conversation with the prospective account debtors, ask them if they understand the na- ture of their obligation, the significance of a note a.nd deed of trust. Now, all of this is done. There is a phenomenon that occurs in the business which finance companies become sophisticated and wise to and is known as prepping the account, respective account debtor or eonsumer and they say that you are going to get a call from somebody and you are going to get a call from the finance company and this is what you say to them. This can happen. There is really no defense against this. You will know that a given dealer has generated what is called in the trade as hot paper. Of course, you won't buy his paper and lie can sting a finance company or a broker like Mr. Morgan once or twice, but reputation does run rather quickly in the industry. As to legitimacy, I think by that you mean whether it is free of the defense of fraud or forgery, et cetera. Yes; we go to great ends to try to ascertain that, but another phenomena occurs known as buyers' remorse, very often in this business, and people will not tell you that they won't pay in so many words. They have to have a reason for not paying. They are sometimes embarrassed, perhaps, that they were the victims of a glib salesman's pitch such as was described by one of the earlier witnesses, so they conjure up reasons. They say that they never saw that. I have seen this happen. Atlas never becomes the leading case in any jurisdiction as to whether or not such and such was a fraud or a. forgery. Normally, when that kind of defense is interposed we seek to have an amicable settlement. and give it up because we don't need the notoriety and publicity. We get more than our share of that because of the fact that marginal opera.- tors have been successful in placing certain amounts of receivables. Reference was made to one of the companies that is now no longer in existence. We have probably a hundred or so accounts of that par- ticular contractor. It is not. a significant amount of paper. We have had no great. amount. of difficulty, so I would have to presume that most of that. is free of the defense of forgery which you alluded to in your earlier remarks. PAGENO="0219" 213 There really isn't any way that you can go much beyond that. We do telephone checkouts and they will not reveal those defenses because they may not necessarily be real. Senator TimINGs. So that your basic reliance is on the phone in- formation which Mr. Morgan outlined in his testimony earlier? Mr. BLUMENFELD. Plus, it is corroborated by our own home office iersonnel. We have, I guess our annual telephone bill is probably around $150,000 a year. We make calls from our own office, even if the paper is purchased on a salaried employee or staff officer. There is another phenomena in the business in which a salaried employee could be bribed by a local contractor to takepapers, so we have to be ever ~vatchful that that situation doesn't occur, so we check even in situa- ~tions where our own salaried people perform the functions that Mr. `Morgan performs for us in Washington as an independent contractor. Senator TYDINGS. How does that work after Mr. Morgan has sold `the paper to the home office? Mr. BLUMENFELD. Somebody will get on the phone from the office in Philadelphia and call the consumer, the account debtor and say, "We bought your note from whatever source it may have, been," and go through the same thing that Mr. Morgan recited to' you before in an attempt- Senator TYDINGS. You do that with every single note? Mr. BLUMENFELD. Yes; effectively every single note. It's a .function, `but sometimes the volume of business' makes it impossible for us to have every single one checked out. This business doesn't, unfortunate- ly, come in a smooth and level fashion. There are peaks and valleys `of activity and we don't staff our acquisition force for the peaks of `activity. The greater percentage of those deals which had already been checked at least once or twice by a broker such as Mr. Morgan- Senator TimINGS. Do you ever contact anybody for a credit report other than the customer whose note you are buying? Mr. BLUMENFELD. Oh, certainly. Yes; we have learned that credit reports can be falsified. We wouldn't want to characterize anything particular. Senator TYDINGS. Do you get an independent credit report on this? Mr. BLUMENFELD. Yes. We employ young ladies in our home office who do credit checking just to verify that the credit information as given, or as listed, is accurate. It is a common phenomena for there to be a considerable discrepancy. Senator TYDINGS. But you don't go out and get a private credit report on the individual? Mr. BLUMENFELD. You mean. purchased from another agency? Senator TYDINGS. Yes. Mr. BLUMENFELD. Oh. yes. Mr. Morgan would normally send a retailer or somebody's report to Philadelphia with the deal. Now, that is merely used as a jumpingoff point or as a guideline. The credit checkers in the home office will call some of those listed and try to get cross references to see that all of the outstanding obligations of the prospective debtor have been accurately stated. Senator TimINGS. Did you ever have a situation where a person says that he doesn't owe that money or it was an illegitimate transaction? Have you ever had such a situation? PAGENO="0220" 214 Mr. BLUMENFELD. Oh, yes. Senator TYDINGS. In Washington? Mr. BLUMENFELD. Oh, certainly. Senator TYDINGS. What happens then? Mr. BLUMENFELD. We tell Mr. Morgan that we have a bad one and he is obligated to buy it back. If it is not fair on its face and people do not understand the nature of their obligation, or if they have, as I said before, remorse and have conjured up some reason, real or imagi- native, for not wanting to deal, we don't want it and we say look, we did not buy something that wouldn't pay. Either you get it straight- ened out or we don't want it, and he would repurchase it. I would guess over a period of these 4 years t.hat I have been familiar with Mr. Morgan's activities, he has bought back upward of 100 such transactions, perhaps more. I am sure he could show you his canceled checks. Senator TrmNGs. What percentage? Less than 10 percent? Mr. BLUMENFELD. Oh, certainly less than 10 percent, but the number would be considerable, and most impressive, I think. I don't know what Mr. Morgan does wit.h the deals after Atlas refuses to take them.. Presumably he tries to collect them himself. Senator TYDINGS. He said he had a few groups of lawyers in the District. Mr. BLUMENFELD. Perhaps. Senator TYDINGS. What percentage of your not.e holdings do you foreclose on? Mr. BLU~1ENFELD. IVell, there is a distinction between institution of foreclosure proceedings and the consummation of them. I would say that threats of foreclosure are quite common as a collection tool. Going so far as to post the property or institute foreclosure proceedings. probably occurs in about 5 percent of the company's total portfolio. The actual attainment of title by the foreclosure proceedings prob- ably occurs in about 2 percent or less. We are not in the business of owning rea.l estate. The equity that exists, or extensively exists, a man's home is his castle, is a very effective collection weapon. It isn't so much what the value of that property may be at the time of foreclosure under~ an action, it is what the man thinks he has-the equity, imagined equity. A man buys a house in 1955 with an FHA mortgage for $10,000;~~ and pays it down to $7,000 in 7 or 8 years; and he thinks that the real estate appreciated to where t.hat property is now worth $12,500; and~ he thinks he has got $15,000 equity. The psychology of it is that he isii't going to let that $5,000 equity be taken from him for the want of making a. $50 or $60 payment, so that foreclosure to obtain title to the real estate and to reap a profit by resale is not the finance com- pany's goal. It is really an effective collection tool and we only very reluctantly end up with the property because we have then got the problem of trying to sell it, and in many cases we have the problem of trying to refurbish it to make it salable. Senator Tinixos. Do you have any idea what percentage of fore-~ closures are forced to go through with it? Mr. BLUMENFELD. Very nominal. I would guess 1 or 2 percent. We don't keel) statistics on that. I think the company now, with 43.000 accounts, has an inventory probably somewhere in the neighborhood. PAGENO="0221" 215 ~of 300 houses throughout the United States that it has either gained ~title to by taking a quitclaim deed where the people throw up their hands and say, "I just can't pay. Take the house." And the balance of them would come by the form of foreclosure proceedings. In many jurisdictions there remains an equity of redemp- `tion for as long as a year where you can't even get effective occupancy of the house to dispose of it. Senator TImINGS. What discount do you take in buying the paper? Mr. BLm%IENFELD. That's not a simple question. I will try to answer it reasonably because. I think the answer needs to be received in the light of what geographical area `yOu are talking about, and what quality of credit risk you are talking about. We have found there are certain areas in the United States where you can't get any rate adequate to the risk involved. We had some rather bad experiences in the State of Michigan, which is apparently a heavily debtor granted and heavily oriented toward personal bank- ruptcies. It profits us little to buy paper for any add-on rate there because we know from our experience we are just not going to get paid, people do not mean to pay. Senator TYDINGS. Well, take the State of Pennsylvania or Indiana. Mr. BLUMENFFLD. Pennsylvania, of course, `is a regulated State and we don't do a great deal of business in Pennsylvania because we think ~that rate is unrealis'tic. It's an 8 add-on which for a receivable having an initial maturity for 5 years is a true simple interest yield of 14.2 j~ercent. Taking into account the cost of borrowing, which, with com- pensating balances, comes to in excess of 8-'percent simple, and `adding ~on to it operating expenses plus his loss experience, it is unprofitable for a finance company to lend money `to 14 percent. I think the rates that are outlined in your bills are a little more realistic, but perhaps even a little bit higher than need be. The 20-percent simple, I think, would be something like 111/2 to 12 add-on and I think that that might just impose a little bit too much of a burden on a typical real-estate-secured consumer. I think that the real-estate-secured consumer might be entitled to a little preferential rate. I think probably 18 percent would be top rate ~that I would recommend for home improvement receivables. Senator TYDINGS. What is your approximate average yield on Mr. ~f organ's paper? Mr. BLUMENFELD. Probably-simple interest yield? Senator TYDINGS. Yes. Mr. BLUMENFELD. Probably somewhere in the neighborhood of 15 to 16 percent. Senator TImINGS. Insofar as the Washington area and Mr. Morgan, did you have any idea of th~ average amount of the notes? Mr. BLUMENFELD. I would-this is conjecture, but I know what the average gross balance of the notes that we `buy throughout the country are, and I would have to guess that Washington is a little higher, and I will tell you why. Our average balance is $2,850. That includes finance charges. That's the gross notes `throughout the country. I would think that in the Washington area it might tend to be a little bit `higher for this reason: The equities, the real estate equities in Washington have been very PAGENO="0222" 216 good. I don't reall any situations where we have ever suffered a total loss on our principal in an account that was real estate secured in Washington, the reason being, of course, real estate values here are quite good and we have a rough rule of thumb that there must be sufficient paper equity in a property to cover the principal, the cash price of the deal, so that if we were to purchase a deal for $2,000 that was written say at an 8 or 9 or even 10 add-on, having a gross balance of $2,800,$2,900, or $3,000, we would have to have at least $2,000 worth of equity, and those equities in the District of Columbia and the coun- ties of Maryland and Virginia tend to hold up. Senator TYDINGS. Do you have any idea of the average income of your borrowers or customers in the area? Mr. BLUMENFELD. District of Columbia area? Senator TYDINGS. Yes. Mr. BLUMENFELD. Yes. We do an analysis of what we call a cash flow analysis a.t the time of acquiring a note to see that the debt serv- icing ability of the consumer is sufficient for what our experience has told us he needs in that area. It varies from area to area. In the South, for some reason, a cash flow of about $8 or $9 per week per person will enable a man to service his debt. You can't do it in Washington or in some of the higher cost-of-living areas. In Washington you need a cash flow of about $15 a head. Now, we count an automobile, a wife and children. An automobile is roughly the equivalent of servicing another month, and as to net. spendable income of the average it is about $110 to $120 a week, and that is not a considerable figure in this particular area. Senator TYDINGS. Do you know what percentage of your customers. in the Washington a.rea are Negro? Mr. BLUMENFELD. No, I wouldn't know that. I would have to guess a considerable portion of them, but we do not buy predominantly Negro. Some of the contractors that were mentioned in the earlier discussions obviously, the Monarch business, the Negroes who predomi- nantly live in brick rowhouses were the obvious prospects .for this type of sale. Our experience with this type of receivable has been very, very good. Our bad experience came with things involved in referral pic- ture to which you alluded before, such as the intercoms and water softeners, but that ha.ppens to be a fact of life in the business. The specialty items, or some reason, a.re producing a great deal of trouble,. and or that reason we don't buy a great deal of them. If it had not been for the fa.ct that Mr. Morgan felt that the people selling these items were legitimate purveyors and the receivables were~ fair on their fact, .1 am quite sure that we wouldn't have bought them. They cause more grief than actual dollar return to the finance com- pany. You must realize that a $600 cash purchase price, even if it were written at a 12 add-on for 3 or 4 years, because it wouldn't justify 5 years financing, generates only $150 of finance charges and our cost accountants tell us that it costs $150 almost to set a deal up on the books. Senator TIDINGs. Do you have any idea. of the average discount or the amoirnt that Mr. Morgan makes on each account he sends you? PAGENO="0223" 217 Mr. BLUMENFELD. I have an idea. I think he would be unhappy if he thought that I knew it. There is supposed to be-this is supposed to be pretty much of an arm's length trading that goes on between us, and I would be very unhappy to know that Mr. Morgan is buying notes at a considerable discount, and from my dealings with Mr. Morgan I would say that he probably buys most of the paper for par, and in some cases gets a 5-percent discount. Historically, he has turned those discounts in to Atlas to be used as a dealer reserve against that particular kind of paper, because we won't buy par paper that isn't par paper. It could be that Mr. Morgan has achieved greater discounts, but I would be surprised to find out. Senator TYDING5. How is he reimbursed? Mr. BLUMENFELD. Well, he gets-he gets paid in cash the purchase price of the particular receivable, pius a 5-percent premium which really will just about offset the cost of acquisition that he would incur, so he dosen't make any money on that. He does participate in the finance charges that will be earned prospectively to the extent that the paper will pay over its contractual history and he will get one-tenth of the charges, so that if there are $1,000 worth of charges on a $2,000 deal Mr. Morgan will earn, over the life of that receivable, $100 of $1,000 in commissions. So, he is building up a future in much the same way as an insurance salesman does in his renewal commissions. Senator TYDING5. Mr. Blumenfeld, are you familiar with the legis- lation which is pending before this subcommittee? Mr. BLUMENFELD. Yes, I am. Senator TYDINGS. Do you feel that it would be an undue burden on you or any legitimate company to meet the restrictions of this legis- lation? Mr. BLTJMENFELD. Only in certain of the provisions having to do with giving statements of account. I think that might be an inordinate imposition even though the .provisions, as I recall, call for some reim- bursement after one or two inquiries. But, that is not so easy to do, what with the advent of automation. Access to individual account records is sometimes a problem, and we run into account debtor un- happiness or disenchantment from time to time when income tax time comes around, and we want to know the amount of interest they have paid. It isn't because of a lack of desire to be cooperative with the people. The accessibility to information having to do with the payment rec- ords, et cetera, of a large company is not quite so easy as the average individual might think. That aspect of it, I think is burdensome. But, in general, I don't believe there are any particular provisions of your bill or Senator Morse's bill which any legitimate company would find too onerous. Senator TYDINGS. Do you think that you could live with the holder- in-due-course? Mr. BLUMENFELD. Well, as I commented earlier, I don't think that's any great shakes for a finance company that does what it is supposed to do. Senator TImINGS. Do you think it is an anachronism at present? Mr. BLUMENFELD. I think it probably is an anachronism. If I might make a general comment about the reaction that I have to the legisla- PAGENO="0224" 218 -tion of this type, most of the abuses that characterize the home im- provement industr~r, or for that matter any `consumer installment type of lending, cause a r~action the other way. Whenever you have what I call a legislative void or vacuum it induces the marginal operators as a concomitant. There are abuses. The finance companies go to a great deal of expense in trying to police this and are generally not too effective at doing it. So, in that vicinity, any company which has had the length and `breadth of experience that Atlas has had welcomes this kind of legis- lation so long as the legislation that replaces that void doesn't go to the other extreme. I think in some of the jurisdictions that have focused on this problem there has been a tendency to over-regulate without producing the desired effect. I would be hopeful that some of the burdens that you, or as you said, the burdens of your bill, would pro- duce the desired effects. I think there might be some simpler ways, as I said before, to achieve the same practical ends. I think a provision that would make it incumbent upon the finance company to do the kind of checking that I have said we do, would be much more effective. Completion certificates, experience has told us that these can be ob- tamed by fraud. The people don't know what they are signing. Or, `they can also be disavowed when they were signed in good `faith by the people, the cooling off period in which the individual consumer has time to reflect over what has happened to him or what he has done, they are good so long as after those cooling off periods no defenses would be available. I think at some point in time, after the consumer has been protected to the satisfaction of the legislators whose interest they have at heart, there ought to be a `defense, a stop or a bar to any a.nd all defenses, because the finance companies, and I am not characterizing them as the poor victimized finance companies, do have a considerable practical ~problem. It is `expensive to try to collect when people don't want to pay for reasons that are either real or imagined, and I would be very unhappy to see the finance industry come to the conclusion that it is no longer `profitable to purchase this type of receivables. I think there is a real need for finance companies t.hrbughout the country, so long as the rates that are available to them are realistic so that they can collect and take their losses just like the insurance com- panies do on the basis of a spread of risks, service the debt which they buy- Senator TYDINGS. Do you have anything specific on any of these bills? Mr. BLUMENFELD. Yes. As I mentioned before, I don't like the pro- vision of mandatory statements. The cost- Senator TYDINGs. Anything other than that? Mr. BLUMENFELD. No; nothing other than that. I think the bills are a fine job so far as I am concerned, and I am pleased that they are now forthcoming. Senator TYDINGS. Well, thank you very much, Mr. Blumenfeld. We appreciate your being with us. We will stand in recess until 10 o'clock tomorrow. (Thereupon, at 12:40 p.m., the hearing, was recessed, to be recon- vened Thursday, February 1, 1968, at 10 a.m.) PAGENO="0225" CONSUMER PROTECTION LEGISLATION FOR THE DISTRICT OF COLUMBIA THURSDAY, FEBRUARY 1, 1968 US. SENATE, SUBCOMMITTEE ON BUSINESS AND COMMERCE, OF THE COMMITTEE ON THE DISTRICT OF COLUMBIA, Washington, D.C. The subcommittee met, pursuant to notice, at 9 :30 a.rn. in room 6226, New Senate Office Building, Senator Joseph D. Tydings (chairman of the subcommittee) presiding. Present: Senator Tydings. Also pre.sent: Chester 1-I. Smith, staff director; Owen J. Malone, associate counsel; Howard A. Abrahams, assistant counsel; James S. Medill, assistant counsel ; Richard E. Judd, professional staff member; and Robert A. Burt, legislative assistant. Senator TYDINGS. The hearings of the Subcommittee on Business and Commerce of the U.S. Senate Committee on the District of Columbia are called to order. This is a part of the continuing study of legislation pending before the Subcommittee on Consumer Protec- tion Legislation for those who buy in the District of Columbia. The bills under consideration are S. 316, introduced by Senator Morse, and Senate bills S. 2589, S. 2590, and 5. 2592 introduced by myself. The first witness before us today is Miss E. Pauline Myers, repre- senting the Greenbelt Consumer Services, Inc. We are delighted to wel- come you, Miss Myers. If you would like anyone to accompany you, we are delighted to have them. STATEMENT OP MISS E. PAULINE MYERS, CHAIRMAN, WASHING- TON, D.C., AREA SUBCOMMITTEE ON CONSUMER LEGISLATION OP THE GREENBELT CONSUMERS SERVICE, ACCOMPANIED BY DORO- THY WHEELER, CHAIRMAN, THE METROPOLITAN LEGISLATIVE COMI\IITTEE, AND PRANK B. MONDAY, ANACOSTIA COIqSUMER ACTION PROGRAI~ Miss MYERS. Mr. Chairman, I do have a group of organizations which concur in our report, and they are here with resolutions of their own, as well. Senator TYDINGS. Fine. Will yu introduce them, please? * Miss MYERS. The other people with me are Mrs. Dorothy Wheeler, who is the general chairman of the Greenbelt Legislative Commit- tee, and Mr. Monday, who represents the Anacostia Consumer Action ~ Program. (219) 88-648-68-----i5 PAGENO="0226" 220 Senator TYDINGs. We are delighted to welcome you both. Miss Xfyrns. Mr. Chairman, I am here today to represent the District of Columbia Subcommittee of the Committee on Legislation of Green- belt Consumers Services. Mrs. Dorothy Wheeler, general chairman of the legislative commit- tee is here with me today. Greenbelt Consumer Services is the largest consumer cooperative in the United States, representing 19,000 families in the Metropolitan Washington area. Since the hearings you are holding here this morning are of such vital interest to all the consumers of the area, I am supported here this morning by representatives of large community organizations and present this testimony on behalf of the following: The Maryland and Virginia Subcommittees of the Virginia Sub- committees of Greenbelt Consumer Services; the Maryland Consumers Association; the Virginia Citizens Consumer Council; supporting organizations of Washington, D.C., including the citywide Consumer Action Council of UPO, the Phyllis Wheatley Branch YWCA of the National Capital area, the Townwomen's Council of the YWCA~ the Washington, D.C., Council of the Housewives League, the Metro- politan Federation of Colored Women's Clubs, the Anacostia- Southeast Community Consumer Council. Each one of these organizations have supporting resolutions to be included in the record. We have also brought a witness who is willing to testify if you, Mr. Chairma.n, have time to hear it. Senator Tn~IxGs. Do you have copies of the resolutions? Miss MYERS. Yes, sir; we have them. Senator TIDINGS. We will include them, at the completion of your testimony, in th& record. (See p. 226.) Miss MYERS. We are appearing in support of the four Tydings bills, 5. 2589, 5. 2590, 5. 2591, and 5. 2592. We acknowledge the fact that the Morse bill, S. 316, offers minimum basic protection for consum- ers, but we believe that there is need for stronger measures. to protect consumers against the grievous practices of merchants, peddlers, and lenders in the Washington D.C., community. Hence, we endorse the Tydings bills. We are supporting 5. 2589 because it provides for t.he establish- ment of a department of consumer protection with a broad mandate to protect consumers against fraudulent or deceptive retail practices in such areas as advertising, sales credit contracts, and collection practices. We believe that this department should have broad powers to conduct investigations to hold public hearings and to enforce regu- lations through court action. The low-income people, whom some of us represent in our daily course of duty, need the basic legal protection which would require detailed disclosure of the terms of consumer credit contracts, the amount of interest charged, the percentage of interest, and the pay- ment schedules. The low-income buyer especially needs to be enabled to initiate suit against the original seller for the return of his money when the terms of the original contract are not fulfilled, and he should be able to use PAGENO="0227" 221 his defense against payment to the finance company. This means the elimination of the so-called holder-in-due-course doctrine. We are supporting S. 2590 because it provides maximum finance and other charges in connection with retail installment credit sales in the District of Columbia. At present in the District of Columbia, there is no regulation of maximum interest rates for consumer credit sales generally. As a result, some merchants impose sky-high interest rates and other hidden charges which amount to exorbitant and wholly unreasonable expenses to consumers all out of proportion to the risks which sellers are taking, and to the returns which reputable business- men are obtaining for the same transaction. As recently as last week, we were informed of a popular neighborhood store which is charging 300-percent interest. S. 2590 would provide for the regulation of credit insurance charges and other charges which are often imposed as disguised forms of interest. Many salesmen engage in high-pressure, deceptive sales techniques which are especially hard for consumers to avoid when they are pur- sued in their homes. S. 2591 provides for a 3-day cooling off period for such sales in which the buyer can calmly consider his contract and talk it over with his family. During this.time he is free to cancel his contract. A number of homeowners in our vicinity have been victimized and have been dispossessed of their homes because they have either un~ wittingly or unknowingly signed a deed of trust which can be fore- closed at will without benefit of court procedure. Some people only know of the foreclosure of their home when the auctioneer arrives. Then they don't know what is happening and why, and the homeowner has no opportunity to protect himself. S. 2592 would require a court order before a security interest could. be enforced. In supporting the need for consumer protection legislation in the District of Columbia, I speak for the people of the outlying metro- politan areas who work and shop in downtown Washington, as well as the residents of the inner city. Victims of consumer exploitation are to be found in all income groups. Whether they be teachers, social workers, clergymen, doctors, con- struction workers, government workers, porters, maids, household employees or welfare clients, Washington, D.C., residents are vic- timized daily by unscrupulous merchants, door-to-door salesmen and even so-called respecta.ble financial institutions. Senator TYDINGS. Miss Myers, I wonder if you would be kind enough to hold up your testimony and let us take a 5-minute recess. Thank you. (Short recess.) Senator TYDINGS. We will reconvene t.he hea.ring now. You may pro- ceed, if you would, please. Miss M~ims. The outrages suffered by the poor, who are forced to spend more than they earn are measurable and demonstrative. The poor are given one of two choices, either to do without or be exploited. The system shuttles the poor as consumers of major durables to a class of sellers who can endure high risks because they exact high payment for it. There is no use to tell the poor to pay cash, for this amounts to PAGENO="0228" 222 telling them to do without, and this it not what they are going to do. Unfortunately for the poor, substantial numbers have met with exploitation in the marketplace, have become almost hopelessly en- tangled in installment debt and have been faced with legal penalties stemming from missed payments. They have encountered serious diffi- culties. Bad credit transactions plunge the poor deeper into poverty. Their personal belongings and household goods have been repos- sessed; they lose their jobs because of attachments; they are evicted from their homes because of rent delinquency resulting from con- sumer debts. The strain of consumer debt in some cases has sent the marginal family out on welfare and has sometimes broken it up altogether. We have examples of these families. At the present time, the laws regulating installment-buying unwit- tingly act in favor of the merchant. This is true because the poor know very little, if anything at all, about their legal rights. Judgments by default are frequent. Some families capable of maintaining payments, stopped paying when they discovered they had been cheated. But instead of gaining retribution, they have been subjected to legal sanctions brought upon them by the merchant. Merchants ~ho offer easy credit frequently sell their contracts to a ffnance company. Many low-income consumers do not understand this procedure. When they get letters instructing them to make payments to a finance company, they mistakenly believe that the merchant has gone out of business or that there may be some mistake. This practice of selling contracts to credit agencies has the consequence of absolving the merchant of his responsibilities to the customer. Quite frequently the failure of the customer to appear in court is the result of his having never received the summons. The poor usually know nothing about protecting their legal rights. He just does not appear in court to protect himself, hence the merchant secures the judgment by default. Let us look at some bad practices which have come to our center's attention: (1) Many so-called easy credit stores, small loan companies, auto credit loan companies and financial institutions rent you the use of their money at usurious credit terms. This is why many fly-by-night schemes are being peddled from door to door by unscrupulous and often fraudulent salesmen. Examples being construction companies who want to modernize the front of your house, put on a new roof, or install an intercom system. Some of these companies are operated by one man who comes into the city for I month. He hires some workmen on a day-to-day basis through the State employment or some private firm. These men may or may not have had experience. He uses these men to shingle the front of your house and install the windows and doors. He gives you a 1-year warranty and guarantees it to last or he will repair it. He charges you $3,000 for the job. As soon as he has been around the city for a month and he makes his ~various commis~ipns, he then sells the notes to some financial institu- tion and hurries out of town. Soon the shingles begin to fall off; the purchaser looks up his war- ranty and tries to get in touch with the company. The telephone is dis- PAGENO="0229" 223 connected. There is no trace of the company. Since the company has disappeared the purchaser feels he is no longer bound by the contract. At the end of the month he gets a bill from some finance company, with a coupon book and directing him to send his monthly or weekly pay- ments to them. The purchaser can't understand. He is not satisfied with the work. He wants it redone. He lacks full knowledge of the law. Senator TYDINGS. Miss Myers, let me incorporate the balance of your statement in the record to show that it was read in full and then if you would answer a question or two for me. Miss MYERS. All right. Senator TYDINGS. I was interested in one area in particular. You indicated that certain people who had been fortunate enough to move up in status had purchased certain durable goods that might be called status symbols. Miss MYERS. Yes. Senator TYDINGS. A good example might be an intercom system, or a Magnavox phonograph, or a recreation room. These so-called mid- dle-class people are victims and even though they had learned that they had been cheated, their pride was such that they did not want to admit it. Consequently they paid rather dearly for their pride. Would you comment on that and its prevalence? Miss MYERS. Yes; that is very true. We have examples of that. In going through even to analyze people who were suffering from bank- ruptcy or even people who have had these things happen to them, why they are afraid to have even the next door neighbor know it. Senator TYDING5. I think that it might not be as uncommon as one might think. A great many educated, intellectual people, who have been cheated or defrauded but whose pride is so great that perhaps they do not want to admit it either publicly in a court of law or to their neighbors, so they quietly take their punishment and pay through the teeth. The fraudulent operation is able to continue. Is this the type of situation you refer to? MiSS MYERS. That is it. Senator TYDINGS. That you are concerned with? Miss MYERS. And now, a number of these people who are-these merchants who deal in unscrupulous practices have been to the ghetto and have followed the status people into their new homes. Senator TYDINGS. I follow you. Miss MYERS. Mr. Chairman, I would like to call your attention to the fact that of the number of people who lose their homes without knowing about it- Senator TImINGs. Do you know of any instances ~ Miss MYERS. Like these notices which appear in the section of the paper are not read by the usual person. We do not read the financial page because we know that there is nothing on that page to concern the poor, and so they never read it, and it is almost in the finest print that you can find in the paper. You come to this little article at least once or twice a week which tells about a house at such and such premises located at such and such an address, will be autioned off at such and such a date and that you will-and unless the debtor pays $6,000 immediately, or something like that, and maybe the person never sees it in the paper. PAGENO="0230" 224 Senator TYDINGS. Have you known of- Miss Mi~s. And you do not know until the auctioneer gets there that the house is to be auctioned. Senator T1~mNGs. Do you have any personal knowledge of instances where people's homes were~ Miss MYERS. Yes; members of our staff at the IJPO office notify, make it a business to search these up, and we have noticed this, that it is almost always the same auctioneer and almost always the same board of trustees that have obtained the deed of trust. Sena.tor TYDINGS. Do you recall the name of the auctioneer? Miss MYERS. Owens Co. Senator TYDINGS. Owens Co.? Miss MYERS. TJh huh. Mrs. WHEELER. Thomas J. Owens. Senator TYDINGS. Thomas J. Owens? Miss MYERS. Yes. Senator TymxGs. How about the trustees? Miss MYERS. The trustees are the same. Mrs. WHEELER. Saul Peters, and I can't read the other; James some- thing. Miss MYERS. It is so fine, it seems to be a finer print than any other part of the newspaper. I would like to submit this. Senator Ti-mNGs. Can you provide the names to us, of persons whose homes have been sold or auctioned who did not know of the sale or auction until they were contacted by the TJPO? Miss MYERS. Yes; we can secure some names of people that we have notified. We have only notified Since we heard about this happening and we have been on the alert each week, calling up people if they come into our area, if it is in our area, notifying them. Senator TYDINGs. I follow you. Are there any other points you would like to stress, Miss Myers? You have presented us with a very compre- hensive statement. Miss MYERS. All of the members of our committee feel that we should stress the necessity for a consumer protection bureau. That, we feel, is needed and we feel that that bureau should not only be an enforce- ment bureau-I mean, should not only become interested in a case after something has happened, but as a part of that bureau we believe there should be a counseling service, personalized, so that individuals needing counseling about consumer debts and so forth, could receive information. Senator TYDINGS. An integral part of the bureau would be actually providing the consumer with advice and counseling? Miss MYERS. Yes. This we have-this we have known through the opera.tion of our own consumer services. Senator TYDINGS. Mr. Monday, do you have anything you would like to add? Mr. MONDAY. I might say personally that I have been taken, myself, a couple of years ago. I bought some furniture from the Douglas Furni- ture Co. I thought I would pay them by the year and I found out I was paying a finance company which instead of being $550, amounted to $660, and although I paid up in advance in about a year, I still got back only a rebate at the rate, or a refund at the rate of 6 percent instead of the 36 percent which the finance company was charging me, and also PAGENO="0231" 225 on a case like this I have just recently bought and said that I would pay an agent for the Negro history books which was around $72, and I have got a bill from the Calvert Finance Co. for $94, and although I am paying up in advance I feel that I will not get much back. That is a personal experience. Also, in the agency where I work we have numerous cases where the Aiiacostia Southeast Federal Credit Union has helped pay up finance companies and the people are paying from 36 to 42 percent interest and we have been able to help them on a number of occasions. That is all I have, Mr. Chairman. Senator TYDINGS. Thank you. Mrs. Wheeler, do you have any comment? Mrs. WHEELER. Nothing, Senator, except Greenbelt Consumer Serv- ices is very happy to have been extended this invitation this morning. We feel that these bills are very essential for the District and certainly for those of us who are going to shop in the District and are going to be protected by them. And, I cannot help but feel, too, that this kind of legislation in the District is going to lead to better protection in other States, for consumers, too. Thank you. Senator TYDINGS. Thank you. `We have in mind our own constituents, protecting them as well. `We know it is not just the District of Columbia residents. Mrs. WHEELER. That is right. Miss MYERS. Mr. Chairman, I would like to just introduce the pres- ent status of the groups that are here. Senator TYDINGS. We would be delighted to have you do that. Miss MYERS. The presidents of the groups, or the persons who are present representing the groups. I should like first to intrOduce the vice president of the Citywide Consumer Action Council, which rep- resents the poor in the community, Mrs. West. Senator TYDINGS. We are delighted to welcome you here, Mrs. `West. Mrs. WEST. Thank you. Miss MYERS. I would like to introduce next to her is Mrs. Hattie Miller, who represents the Townwomen's Council of the YWCA. Senator TYDINGS. `We are delighted to welcome you here this morn- ing. Mrs. MILLER. Thank you. Miss MYERS. Mrs. Murvene Brewer of the Housewives Association. Senator TYDING5. Mrs. Brewer, we are delighted to have you with us. Mrs. BIIEWER. Thank you. Miss MYERS. Mrs. Mary Gregory, who is representing the board of the YWCA. Senator TYDINGS. We are happy that you could stop by, Mrs. Gregory. Mrs. GREGORY. Thank yOu. Miss MYERS. And Mr. Jack Besanski, who represents the Maryland Consumers Association. Senator TYDINGS. Thank you for being with us. Mr. BESANSK. Thank you. Miss MYERS. And the others are members of the respective commit- tees. PAGENO="0232" 226 Senator TYDINGS. We are delighted to welcome you all in this hear- ing. We thank you very much. Miss MYERS. We appreciate very much having this opportmiity to appear. Senator TYDINGS. Thank you, Miss Myers, Mrs. Wheeler, and Mr. Monday. We will at this point in the hearing record insert the complete state- ment of Mrs. Myers, and several letters from groups supporting the proposed legislation. (Material referred to follows:) STATEMENT OF Miss E. PAULINE MYERS My name is Miss E. Pauline Myers, I live at 1311 Delaware Avenue S.W., Wash- ington, D.C. I am the Chairman of the Washington D.C. Area Sub-Committee on Consumer Legislation, Greenbelt Consumer Services. I am employed as Consumer Action Specialist Neighborhood Development Center #1 of UPO. My office is located at 632~ 0 street N.W., Washington, D.C. MR. CHAIRMAN: I am representing here to the D.C. Sub-Committee of the Committee on Legislation of Greenbelt Consumer Services. Mrs. Dorothy Wheeler the Chairman of the Metropolitan Legislative Committee is here with me today. Greenbelt Consumer Services is the largest Consumer Cooperative in the United States representing 19,000 families in the Metropolitan Washington Area. Since the hearings you are holding here this morning are of such vital interest to all the consumers of the area, I am supported here this morning by representa- tives of large community organizations and present this testimony on behalf of the following: The Maryland and Virginia Sub-Committees of Greenbelt Con- sumer Services, The Maryland Consumers Association, the Virginia Citizens Con- sumer Council, Supporting organizations of Washington, D.C., include the City- wide Consumer Action Council of UPO, the Phyllis Wheatley Branch YWCA of the National Capitol Area, the Townwomen's Council of the YWCA, the Wash- ington D.C. Council of the Housewives League, The Metropolitan Federation of Colored Women's Clubs, The Anacostia Southeast Community Consumer Council. Each one of those organizations have supporting resolutions to be included in the record. We have also brought a witness who is willing to testify if you Mr. Chairman have time to hear it. We are appearing in support of the four Tydings Bills S-2589, S-2590, S-2591 and S-2592. We acknowledge the fact that the Morse Bill S-316 offers minimum basic protection for consumers but we believe that their is need of stronger measures to protect consumers against the grievious practices of merchants, ped- dlers and lenders in the Washington, D.C. Community; hence we endorse the Tyding's Bills. We are supporting S-2589 because it provides for the establishment of a Depart- ment of Consumer Protection with a broad mandate to protect consumers.against fraudulent or deceptive retail practices in such areas as advertising, sales credit contracts and collection practices. We believe that this Department should have broad powers to conduct investigations to hold public hearings and to enforce regulations through court action. The low income people whom some of us represent in our daily course of duty need the basic legal protection which would require detailed disclosure of the terms of consmner credit contracts, the amount of interest charged, the per- centage of interest & the payment schedules. The low income buyer especially needs to be enabled to initiate suit against the original seller for the return of his money when the terms of the original contract are not fulfilled and be should be able to use his defense against pay- ment to the finance company. This means the elimination of the so-called "Holder- In-Due-Course" doctrine. We are supporting S-2590 because it provides maximum finance and other charges in connection with retail installment credit sales in the District of Co- lumbia. At present, in the District of Columbia, there is no regulation of maximum interest rates for consumer credit sales generally. As a result some merchants impose sky high interest rates, and other hidden charges which amount to cx- PAGENO="0233" 227 orbitant and wholly unreasonable expenses to consumers all out of proportion to the risks which sellers are taking; and to the return which reputable business men are obtaining for the same transaction. As recently as last week we were informed of a popular neighborhood store which is charging 300% interest. S-2590 would provide for the regulation of credit insurance charges and other charges which are often imposed as disguised forms of interest. Many salesmen engage in high-pressure, deceptive sales techniques which are especially hard for consumers to avoid when they are pursued in their homes. S-2591 provides for a 3-Day "Cooling Off" period for such sales in which the buyer can calmly consider his contract and talk it over with his family. During this time he is free to cancel his contract. A number of home owners in our vicinity have been victimized and have been dispossessed of their homes because they have either unwittingly or unknowingly signed a "Deed of Trust", which can be foreclosed at will without benefit of court procedure. Some people only know of the foreclosure of their home when the auctioneer arrives. Then they don't know what is happening and why, and the home owner has no opportunity to protect himself. S-2592 would require a court order before a security interest could be enforced. In supporting the need for consumer Protection Legislation in the District of Columbia, I speak for the people of the out-lying metropolitan areas who work and shop in downtown Washington as well as the residents of the inner-city. Victims of consumer exploitation are to be found in all income groups. Whether they be teachers, social workers, clergymen, doctors, construction workers, government workers, porters, maids, household employees or welfare clients, Washington, D.C. residents are victimized daily by unscrupulous mer- chants, door to door salesmen and even so-called respectable financial institutions. The outrages suffered by the poor, who are forced to spend more than they earn are measurable and demonstrative. The poor are given one of'two choices either to do without or be exploited. The system shuttles the poor as consumers of major durables to a class of sellers who can endure high risks because they exact high payment for it. There is no use to tell the poor to "pay cash" for this amounts to telling them to "do without" and this is not what they are going to do. Unfortunately for the poor, substantial numbers have met with exploitation in the market place, have become almost hopelessly entangled in installment debt and have been faced with legal penalties stemming from missed payments. They have encountered serious difficulties. Bad credit transactions plunge the poor deeper into poverty. Their personal belongings and household goods have been repossessed; they. lose their jobs because of attachments; they are evicted from their homes because of rent delinquency resulting from consumer debts. The strain of consumer debt in some cases has sent the marginal family out on wel- fare and has sometimes broken it up all together. We have examples of these families. At the present time, the laws regulating installment buying unwittingly act in favor of the merchant. This is true because the poor. know very little, if anything at all about their legal rights. Judgments by default are frequent. Some families capable of maintaining payments, stopped paying when they discovered they had been cheated. But instead of gaining retribution, they have been subjected to legal sanctions brought upon them by the merchant. Merchants who offer "easy credit" frequently sell their contracts to a finance company. Many low income consumers do not understand this procedure. When they get letters instructing them to make payments to a finance company, they mistakenly believe that the merchant has gone out of business or that there may be some mistake. This practice of selling contracts to credit agencies has the consequences of absolving the merchant of his responsibilities to the customer. Quite frequently the failure of the customer to appear in court is the result of his having never received the summons. The poor usually know nothing about pro- tecting their legal rights. He just does not appear in court to protect himself. Hence the merchant secures the judgment by default. Let us look at some bad practices which have come to our center's attention: (1) Many so-called "Easy-Credit" stores, small loan companies, auto-credit loan companies and financial institutions rent you the use. of their money at usurious credit terms. This is why many fly-by-night schemes are being peddled from door to doorS by unscrupulous and often fraudulent salesmen. Examples being construction companies who want to modernize the front of your house, put on a new roof or install an intercom system. Some of these companies are operated by one man who comes into the city for one month. He hires some workmen on a day-to-day basis through the State Employment or some private firm. These men may or may not have had experience. PAGENO="0234" 228 He uses these men to shingle the front of your house and install the windows and doors. He gives you a one year warranty and guarantees it to last or he will repair it. He charges you $3,000.00 for the job. As soon as he has been around the city for a month and he makes his various commissions; he, then sells the notes to some financical institutions and hurries out of town. Soon the shingles begin to fall off, the purchaser looks up his warranty and tries to get in touch with the company. The telephone is disconnected. There is no trace of the Company. Since the company has disappeared the purchaser feels he is no longer bound by the contract. At the end of the month he gets a bill from some finance company, with a coupon book and directing him to send his monthly or weekly payments to them. The purchaser can't understand. He is not satisfied with the work. He wants it redone. He lacks full knowledge of the law. The finance company holds the contract and he reminds the purchaser that the contract holds a lien on his home. The purchaser is not aware of this. He does not remember giving either a mortgage or a deed of trust. He becomes very confused and doesn't know where to turn. Sometimes he loses his home: some- times he loses his job; sometimes both. Sometimes he will not ask for advice; he is too proud to let others know- how- he has been taken. `Sometimes a house goes up for auction or sale without the owners know-ledge. Some `blue collar workers earning weekly wages often get fired in the event of a garnishee `because the boss does not keep or will not keep those kinds of records. `Often people `buy without reading the contract or understanding what they are signing. Most stores will not give you a copy of the contract. `Stores are not required to do so `by the present laws of the District of Columbia. That is why we are in need of a law. One man borrowed $230 from an Auto Credit Loan Company and ended up owing $400. Now this man first `borrowed ~150 they charged him $90 for the loan. This `made him ow-e $240. He was to pay it `back at $10 per week. He paid $60 this left him owing $180. He borrowed SS0 more this made him owe S260. Interest `and carrying charges amounted to $146 he ended up owing $400 to the loan company when he only had the use of S230. `Some `people begin buying an automobile, a television, a w-ashing machine without ever knowing what it cost or when they will get through paying for it. Sometimes people can't see or can't read and so they don't read the fine print of the contract. `Sometimes salesmen cover-up the contract so that you cannot see what you are signing Minority group members in high income categories, who have moved into upper class residential areas and are owning their own homes are also, in many instances, unknowingly victimized by sales representatives of stores with ques- ti'onable practices. These middle class people are consumers of certain dur~bles that might be called status symbols. Good examples of this might be an Inter- Corn System of a Magnavox Phonograph, Recreation Room, etc. In their quest to obtain goods which their incomes can scarcely afford, they become the easy victims to be preyed upon by these unscrupulous merchants. They purchase credit where it can be obtained cheaply and for which they pay dearly. Some of these merchants who have built-up millions of dollars worth of trade dealing with people in the ghettos, no longer are in need of the ghetto trade. They make a fortune by preying upon the status people. Now when these people get into difficulties they have too much pride to expose it. They endeavor to keep it hidden. They don't want their neighbors to know their predicament. This is why these unscrupulous merchants continue to prosper at the expense of these unfortunates. The time is ripe for the consumer to receive some protection from govern- ment. The seller should spell out, especially to the illiterate and semi-illiterate customer the true cost of the transaction at the time of sale and give the customer the opportunity to re-think the purchase. He may want to do without it. The passage of appropriate legislation will protect the would-be honest merchant who now feels he has to compete with the dishonest merchant in order to live. As things are now we find so-called reputable stores using "Bait and Switch" advertising. Likewise we find so-called reputable financial institutions serving as "Holder-in-due-course" for unscrupulous merchants and salesmen. Good legislation would provide the legal means by which the ethical merchants can refrain from competition with unscrupulous merchants who deal in fraudu- lent practices. PAGENO="0235" 229 In the past we lived under conditions and relationships in our American society where the concept of "Caveat Emptor" (Buyer Beware) prevailed and could be justified. A buyer of a h~use, cow, horse, or other not overly difficult item to un- derstand and appraise in value could protect himself by his own judgment. Today, however, society is so complex and so many schemes, and traps are de- vised by shrewd operators that the innocent, not too enlightened public, falls victim to these operators. It is necessary in our society today to provide protec- tion for the public in this regard, particularly that element of our public that can least protect itself. A separate Department of Consumer Protection should be an integral part of our District government. Everyone should know and have a clear understand- ing of the duties `of that office. People who have had experience in dealing with the poor should be connected with that office to give out information and to give personalized consumer counselling. Consumers ought to `be invited to come for information and advice `before they get into trouble `and legal `difficulties. There is a lack of organized resistance on the part of consumers to the fraud, deceit and otl~er undesirable practices that persist in the market place. There is ineffective protection at the present time on all government levels. According to a survey by the Department of Agriculture, Installment Debto'rs with incomes under $2,000 totaled about 2 million'. 22 percent of those with incomes under $2,000 had installment debts for cars, household durables or a'dditions and repairs to their homes. The people whom I represent believe that S-2b89, `S-2590, S-2591 and S-2592, will greatly benefit the consumers all over the United States, as well as the District o'f Columbia. While this legislation alone will not end poverty, it will strike a powerful blow. Respectfully submitted. E. PAULINE MYERS. PHYLLIS WHEATLEY BRANCH, Y.W.C.A., TVashington, D.C., January 30, 1968. RESOLUTION The Townwomen's Council of the Phyllis Wheatley Branch Y.W.C.A. went on record at their meeting January 22, 1068 in support of the four bills introduced by Senator Joseph Tydings on Consumer Protection. We have `been for for sometime concerned about s'uch legislation because some of our members have been victims of such unethical practices by certain mer- chants. We, therefore go on record as a supporter of such legislation. Respectfully yours, HATTIE MILLER, President, Townwomen's Council. MARYLAND CONSUMERS AssoCIATIoN, January 30, 1968. SUBCOMMITTEE ON BUSINESS AND COMMERCE, senate Committee on the District of Columbia, Washington, D.C. GENTLEMEN: The Maryland Consumers Association strongly supports the en- actment of S-2589. S-2590, S-2591 and S-2~92, all `bills to improve consumer protection in retail sales of consumer goods in the District of Columbia. Con- sumers in the State of Maryland would be benefitted by these bills because metrQ- poli'tan Washington is one large interrelated community and the protection afforded by these bills would extend beyond the District line. We commend Senator Tydings, who as representative of our State in the U.S. Congress, ha's introduced these bills and is guiding them through the Congress. The Marylan'd Consumers Association does not oppose S-316, an earlier `bill introduced by Senator Morse for the same purposes but the bills introduced by Senator Tydings are more comprehensive and more specific and would therefore be more effective in their purpose. Sincerely, W. W. FALCK, President. PAGENO="0236" 230 THE NATIONAL HOUSEWIVES' LEAGUE OF AMERICA, INC.; February 1, 1968. Mr. CHAIRMAN: My name is Mrs. Mervine B. Brewer, I am President of the Washington Housewives League, member of National Housewives League of America, Inc. Having a membership of 193 members, it is one of the oldest con- sumer organizations in the District of Columbia. - At our regular meeting on January 21, 1968, the Washington Housewives League Went on record as supporting the following Bills S-2589, S-2590, S-2591 and S-2592. We concur in the statement presented by the Chairman Miss E. Pauline Myers, of the Washington, D.C. Subcommittee on Consumer Legislation. Respectfully submitted. MERVINE B. BREWER, President of Washington Cli apter. PHYLLIS WHEATLEY BRANCH, Y.W.C.A., Washington, D.C., February 1, 1968. To: The Subcommittee on Business and Commerce Holding Hearings on Consumer Protection Legislation. Mr. CHAIRMAN: The Phyllis Wheatley Branch of the National Capital Area YWCX takes pleasure in endorsing and supporting the Four (4) Tydings Bills. We believe that the regulatory powers set forth in these bills are necessary to provide for the protection of the buyers of this community. There has come to the attention of our Branch located in the heart of the densely populated Shaw Area, many cases of residents u-ho have been victims of certain unscrupulous practices by merchants, money lenders, and peddlers. We do not believe that all merchants, money lenders and peddlers engage in unscrupulous practices because we know there are honest vendors. How-ever, we believe that protection is needed and therefore we wish to go on record on behalf of this legislation and we will continue to work for its successful passage by the United States Congress. The Phyllis Wheatley Branch, YMCA concurs in the statement presented by Miss E. Pauline Myers, the Chairman of The Washington 1).C. Sub-Committee On Consumer Legislation. Respectfully submitted. Mrs. MARY GREGORY, Legislative Representative. Mrs. ROSETTA MITCHELL. President, Board 0! Directors. SUPPORTIVE RESOLUTION FROM THE D.C. CITY-WIDE CONSUMER COUNCIL FOR THE DISTRICT OF COLUMBIA RETAIL INSTALLMENT BILLS Senator Tydings and members of the Committee, the D.C. City-Wide Consumer Council went on record as of December 21, 1961 in support of the District of Columbia Retail Installment Bills Numbers S-2589, S-2590, S-2591 and S-2592. All of these bills are necessary tools for the elimination of poverty in this urban area. The D.C. City-Wide Consumer Council is comprised of citizens representing thousands of people from ten poverty areas in the District of Columbia. Its members are genuinely concerned with good consumer legislation to protect the residents from abuse, hypocrisy and deceptive practices of unfair businesses. The four Tydings bills go a long way toward dealing with the more glaring abuses. The Council will be working continuously to promote the passage of these bills. We are, therefore, pleased to have the opportunity to appear here today and give our support. M. PAUL S~rrrn. President. JESSE WEST, Vice President, D.C. City-Wide Consumer Council-. PAGENO="0237" 231 REsoLUTIoN OF THE STAFF AND THE EXECUTIVE BOARD OF THE ANACOSTIA SOUTH- EAST COMMUNITY CONSUMER COUNCIL; REPRESENTING ABOUT 220 FAMILIES IN THE ANACOSTIA AREA . (Submitted by Fi~ank E. Monday, Educational Aide from the Southeast Neighborhood Development Program). Resolved. That we whole-heartedly support the following Bills before Congress: S. 316 by Senator Morse: Because it provides for a Consumer Protection Bureaa and although not too strong on some basic safeguards; it does embody an excellent approach to our consumer problems. S. 2589 by Senator Tydings: Inasmuch as S. 316 would authorize the D.C. City Council to make and enforce such practices as they may deem appropriate to prevent unconscionable practices in connection with retail installment transac- tions; 5. 2589 lays down specific guidelines to accomplish this. We strongly favor S. 2589 because it allows more "local determination over local matters". This conforms to former business community recommendations. Also, this Bill pro- vides for a Department of Consumer Protection. We feel this is important to all buyers, but more especially those in the lower educational and economic bracket. S. 2590 sets forth a methodological means of determining Finance charges, but endorses a higher rate of interest that we do not approve. There is a question on whether the new D.C. City Council has sufficient enabling legislation to enforce regulations designating reasonable finance charges. In regards to Repossession, S. 316 limits the demand, which may be made on the defaulting buyer for expenses in repossession, .to the amount realized from disposition of the collateral. This section provides nothing to be construed to relieve the debtor of liability for the defining, if any, outstanding after the col- lateral has been sold. Thus, the seller could repossess and still collect more money. Under S. 2589, however, the seller may elect alternative remedies when the buyer defaults. Hence, the seller may repossess without subsequent deficiency judgment or sue for unpaid balance without the right to levy on the goods involved. He may not do both. We support the approach of S. 2589, because it forces the seller to his election, to consider the item purchased as his prime collateral for the credit sale. We do not recommend under any circumstance the non-payment of legal obligations. But, if the buyer is unable to continue payments, the seller's basic collateral is the item he has sold him. There is no justification in taking away the customer's goods in addition to placing a deficiency judgment against him, as in present law. Often, the customer has made numerous payments. We recommend that 5. 2589 clarify its objectives stated above, so that existing legal practices may riot deter the primary intention of the Bill. In S. 316, the Holder-in-due-course adopts a certifying procedure, where 3rd party taking a note cannot enforce it as a holder-in-due-course, unless the retail- er's contract is accompanied by the buyer's certification that he received the goods purchased and that they appear to conform to his contract. Thus a note, accom- panied by a properly signed certificate is fully negotiable and the transferee may be able to enjoy the status of a holder-in-due-course, if he satisfies the re- quirements of the Uniform Commercial Code Section 28 3-302. For practical pur- poses, the holder-in-due-course concept is removed from retail installment sales transactions. We do not endorse the certification procedure, because we feel that it is unfair to assume that the buyer at any level of sophistication, will under- stand all the ramifications involved, when they sign such certificate. We would not understand. S-2589 meets this criteria. It would seem that legitimate finance companies would not seriously object to the holder-in-due-course concept form such retail installment transactions. A study of local finance companies con- fined in the District of Columbia, shows that at least % of them are self financed. Since Banks generally buy paper on a approved form, as drafted by themselves and handled by businessmen from whom they are prepared to buy, it seems un- likely that such Banks would not become holders-in-due-course, since they know their own customers; thus, would not need holder-in-due-course protection Principally, finance companies, who buy paper at a high discount from dealers of dubious financial stability would want to use the holder-in-due-course notes. The Supreme Court in Florida has said "It may be that our holding here will require some changes in business methods and will impose a greater burden on PAGENO="0238" 232 finance companies. We (the) public should have some protection along the line. We believe the finance company is better able to bear the risk of the dealers insolvency than the buyer and is in a far better position to protect his interest against unscrupulous and insolvent dealers". We urge this Honorable Committee to work for the passage of a Bill that will benefit all of the people in the District of Columbia. Senator TYr~IxGs. Mr. Warren Hauna, Acacia Mutual Life Insur- ance Co. STATEMENT OF WARREN L. RANNA, ASSISTANT COUNSEL, ACACIA MUTUAL LIFE INSURANOE CO. Senator TYDINGS. We are happy to have you with us. Mr. HANNA. Thank you. Mr. Chairman, and members of the subcommittee, my name is Warren L. Hanna, and I am assistant counsel of Acacia Mutual Life Insurance Co. in Washington, D.C. This statement relates to S. 2392 and is made on behalf of, and represents the viewpoint of, the live, domestic District of Columbia life insurance companies: Acacia Mutual Life Insurance Co.; Equitable Life Insurance Co.; Government Employees Life Insurance Co.; Peoples Life Insurance Co.; and United Services Life Insurance Co. Inasmuch as our five companies have a uniform position with respect to the S. 2592, this joint statement is made in the interest of conserving the time of your committee. Together, these five local area companies have mortgage loan in- vestments in District of Columbia property in approximately the amount of $70 million. Therefore, .the subcommittee can easily see the very vital and real concern a.nd interest that we have in connection with legislation such as S. 2592. It is our understanding that S. 2592, as introduced by yourself, is a part of a consumer protection package of bills introduced by you. S. 2592 proposes a.n amendment to District of Columbia Code, section 45-601, by adding subsection (b) to provide that no action to enforce a. security interest in any real property in the District of Columbia, including foreclosure under a mortgage or deed of trust, shall be effective except pursuant to an order issued by the U.S. District Court of the District of Columbia. We have given careful considera.tion to the bill, Mr. Chairman. We feel that if a.n amendment to the code is necessary to prevent the abuses referred to by you in the October 26, 1967, issue of the Con- gressional Record, then a much simpler and more direct approach can be used than is proposed to he provided by the present bill. Previous statements have been presented to the subcommittee on the burdens resulting from foreclosure through court proceedings. As testimony before the subcomittee has sta.ted, a court foreclosure is usually a time-consuming a.nd costly process. This can be a dis- advantage to both the proper owner and the lender. Not only does it cause the owner additional costs in the way of legal fees and court costs, but the delay involved increases the a.mount of interest owing by the time the property actually goes to sale, all of which costs reduce the owner's equity in the property. The lender in turn must face the prospect of property deterioration and decrease in value, and the pos- sibility of being required to advance amounts toward protection of its security which may never be recovered. PAGENO="0239" 233 MOreôvet~, the present bill will affect all mortgages and deeds of trust, and all borrowers and lenders will be subjected to the conditions described above. In this connection and as a practical matter, in making a mortgage loan the lender considers not only the credit of the borrower but the security offered for the lOan. If the security is less available because of a more restricted foreclosure procedure, the lender takes this into account in determining if the loan is to be made and the loan terms to be offered. Thus, a court foreclosure procedure may restrict the flow of mortgage money. This, I am sure, we all want to avoid. As stated, it is our feeling that any bill to provide for consumer protection in this area of foreclosure of deeds of trust and mortgages should be simple, to the point, easily understood, and easily applied. On this premise, it is our proposal that if the subcommittee deems it necessary to approve a bill fOr the amendment of the District of Columbia Code relating to foreclosure of deeds of trust and mort- gages that the bill approved he in the nature of a "notice provision" bill. We have attached to this statement a proposed bill for amendment to the District of Columbia Code. This bill, if enacted, would require that, prior to foreclosure of any deed of trust or mortgage in the District of Columbia, at least 30 days' written notice prior tO the date of the foreclosure sale be given to the Owner of the property and to the Commissioner of the District of Columbia. We feel certain that the members of the subcommittee will recog- nize the value of the notice to the Commissioner requirement. This notice will give the Commissioner or his agent an opportunity to con- sult with the borrower and counsel him as to the impending foreclosure sale, even including a suggestion that the bOrrower seek legal aid should it become apparent that the foreclosure results from a trans- action in which the borrower has been victimized. Moreover, we feel that the mortgage lender, being aware of the Commissioner's interest in the foreclosure, will cooperate with the Commissioner or his agent to the full extent necessary to show that the loan being foreclosed is not "tainted" with the abuses referred to by Senator Tydings. Certainly, this is the position of the companies on whose behalf I speak today. We realize the representatives of other organizations and associa- tions involved in mortgage lending in the District of Columbia may have suggestions or viewpoints with respect to 5. 2592 which differ from these expressed in this statement and as indicated in the bill pro- posed by us, which is attached. I can tell you that representatives of the five domestic life insurance companies will be pleased to work with these representatives and representatives of the staff of your subcom- mittee, subsequent to this hearing, in the presentation and explanation of the viewpoints of the domestic life insurance companies on the bill we have suggested. Thank you. Senator TYDINGs. These companies that you represent, do they deal in the Mr. HANNA. I am the assistant counsel of Acacia Mutual Life In- surance Co. PAGENO="0240" 234 Senator TYDINGS. Well, you stated that you are speaking on behalf of five companies. Mr. HANNA. That is correct, sir. Senator. TYDING5. Does your company deal in, orpurchase~ the. sec- ond- and third-trust paper on these? Mr. HANNA. No, sir; it does not. There is only one provision in the District of Columbia Code that would allow us to deal in such paper, which is commonly referred to as the basket clause under the insurance investment law, and I do not, know of any company-in fact, they have assured me that they do not deal in j~urchases of this type of paper. Senator TYDINGS. Do your'portfolios primarily consist of mortgages for first trusts? . Mr. HANNA. First trusts, sir. Senator TYDING5. If we were to accept these more rigid provisions relating to second trusts, would that alleviate your fears? Mr. TIANNA. Well, you could make the more rigid provisions relating to second trusts, but then you would get into what perhaps might be considered a title problem, or you get into a position where you are fore- closing certain types of trusts in one manner, and foreclosing other types of trusts in another manner. Senator TYDING5. I think that your idea of notice is a good one. However, I am not entirely certain that a notice in the District' of Columbia is automatically a notice to the individual. Also, I am not sure who you mean by the Commissioner of the District of Columbia, since the District does not have any Commissioners as such. But, would you mean to say a representative of the new Office of Consumer Protection? Mr. HANNA. We have put the Commissioner in because we did not know whether the other bill would be passed, 5. 2589. It could very well be an official of the Department of Consumer Protection. Senator TYDINGS. Am I correct in understanding your fear in re- spect to the court hearing to be first all the time? Mr. HANNA. Yes, sir. ` Senator TYDINGs. Judge~ are not available for the court hearings. This, I think, is a point well taken. Also, the legal costs might be greater, although your trustee's fees should be sufficient to cover those. With respect to foreclosure costs, the only people who win are the counsel and the't.rustees. ` ` Mr. JIANNA. Right. There'is a balancing there, Senator, I might say, that on `your lower loans, lower' a.moimt loans, say $3,000, the attor- ney-and I contacted the District of Columbia Bar Association, and they indicated that they did not have a set fee because they had never had any experience with this type of procedure before. They would probably charge by the hour, so on a $3,000 loan, as against a $20,000 loan, the `attorney would perform the same work; however, `the trustee's fee' would decrease as you went iiito the lower amoimts of loans; that is just a function of the percentage of the amount of the bid at the sale. Senator' TYDING5. What would your reaction be if, iather than re- quiring a court hearing, the consumer or borrower be afforded the opportunity of a hearing before the Office of' Consumer Protection? The Office would be empowered to make a finding, and if in the judg- PAGENO="0241" 235 ment of the consumer, the various fraudulent or sharp practices in said report should be brought to court, the petitioner would then have a right to petition the district court to intervene? Mr. ITANNA. Well, we would be opposed, I am afraid, with a hear- ing within this Department of Consumer Protection. Senator TYDINGS. Why? Mr. HANNA. Again, you have to have proof, there would have to be a prerequisite or there would have to be valid proof that the hearing had actually held. Again you would have the requirement of having to attend the hearing, of delays occasioned by the hearing. We do not know what the staffing requirements of this Department of Consumer Protection would be, and you might get yourself involved into a greater delay synonymous with a court foreclosure. Senator TYDINGS. This could be worked into the bill. The notice would go out within 60 days to the Commissioner and the hearing held within 30 days of that notice. And that if the hearing were not held, the foreclosure proceeding could go forward. Would that remove your objection? Mr. HANNA. Well, we would like to see the bill before-I mean, the actual ramifications worked out. I do think that at this time we would be opposed to any legislative or administrative type of hearing proc- essed. I know of no other jurisdiction in which this type of administra- tive process goes on prior to a foreclosure sale. What we are trying to get at here, Senator, is we feel that if you can somehow get notice to the Commissioner, or to his agent, which could be in the Department of Consumer Protection, that you immediately cast a protective umbrella over the consumer. This person, this official in the Department of Consumer Protection can get out and contact this borrower and say, "Look, they are about to foreclose on you," and if he says, "I didn't even know I had a deed of trust against my home," you can suspect immediately that there is going to be some sort of an abuse that has existed in connection with the transaction. Senator TYDINGs. What you are saying is that the Bureau of Con- sumer Protection be allowed sufficient time to make a check, and if it found any* evidence of sharp dealing, then it should be the one to intervene, and request the district court to have a hearing? Mr. HANNA; I have not asked that-who would advise this borrower to contact the various legal aid agencies for borrowers who are- Senator TYmNG5. You don't like the idea? Mr. HANNA. I-lie can get legal aid through- Senator TYDING5. I take it you would not like the idea of the Office of Consumer Protection actually protecting the consumer by advo- cating a formal hearing? Mr. 1-TANNA. That is correct, sir. Senator TYDINGS. What do you think the Office of Consumer Pro- tection ought to do, if it does not protect the consumeil Mr. I-IANNA. Well, we definitely feel. that the Department of Con- sumer ProteQtion should protect the consumer. Senator TYDING5. Well, if you find this out, if you say, you suggest the Office send a notice that it has found fraud, but you say it should not actually intervene itself but you should just tell the consumer 88-648-6S------16 PAGENO="0242" 236 to find himself a lawyer. What of the poor persoti who cannot a~ord a lawyer, which in most of these cases is quite the fact? What would you do? Mr. HANNA. Well, I think there are available to low-income con- sumers in Washington, D.C., today, through Neighborhood Legal Serv- ices or through the Legal Aid Society- Senator TYDINGS. The Neighborhood Legal Services and the Legal Aid Society do a good job, but legal services are not available to the poor like banking services are available through lending institutions. I was on the Board of the Legal Aid. If you are going to provide con- sumer protection, you ought to provide the protection and not a sham. Are you familiar with the system in the State of Colorado which does not permit the lender to handpick his own trustee. There, the court appoints a public trustee? Mr. HANNA. Yes, sir; I am. Senator TYDING5. What is your reaction? Mr. HANNA. Actually, the Colorado procedure, the public trustee is appointed by the Governor, with the advice of the Colorado Senate. The procedure there involved is that you do have a public trustee in any given county, and in order to foreclose a deed of trust under power of sale that public trustee must be named in that deed of trust. He must give notice to the borrower; however, the provision in the statute requires that the deed of trust, in and of itself, state the name and address to which the notice is to be given. Now, if the name and address- Senator TYDINGS. What function does the trustee perform? Mr. HANNA. He holds the sale, he is the trustee who holds the auc- tion sale of the particular property and he will account for all funds; he maintains an account book, he has to disbffrse the funds. I am not certain what his origins were. I would surmise that they wanted to constitute a trustee type of arrangement to handle all of the funds that have been disbursed in connection with foreclosure sale. He does have a requirement of notice and a requirement for advertisement, and there is a date- Senator TYDINGS. What is your reaction to the public trustee sys- tem? Mr. HANNA. I do not see that it is in reality any better than tue process that we have right here. We have a trustee appointed, and under court decision- Senator TYDINGs. The difference is that under our system the trustee appointed is concerned with one object, to protect the investment of the lender. He does not care about the borrower. Mr. HANNA. Well- Senator TYDINGS. I mean, is that a fair statement? Mr. HANNA. Well, Senator, under court decisions he is not supposed to be. Senator TYDINGS. In reality, when a court trustee is appointed, he is named and owes his appointment to the lending institution. This I know because I have drafted mortgages for financial institutions PAGENO="0243" 237 which I helped organize when I was practicing law. In many cases I named myself trustee. Mr. IJANNA. Well, that is correct. Senator TYDINGS. The fact of the matter is, because he owes his appointment to the lending institution, he is going to owe his alle- giance to them as well. Mr. HANNA. That is correct. Now, we have appointed a corporate in- stitution as a trustee in most of our deeds of trust in the District of Columbia. I contacted them prior to this `hearing and asked them just exactly what they conceded their role `to be. They have stated, and these are our trustees and I cannot speak for other mortgage lenders in particular, but our trustee states that he feels that is intermediary and that before they start the advertisement of sale and actually fore- close the property, they feel it necessary to try to contact the borrower and give him a waiting period to see if he cannot make some arrange- ments either with the mortgage lender to reinstate the loan or to pay the loan off prior to the time of foreclosure sale. Senator TYDINGS. I think this should be the position taken by any member of the bar who honors his oath. Many trustees are,, `however, not members of the bar. They are corporations an'd individuals, and they have no qualms about it. We are concerned with protecting the consumer. Mr. HANNA. Well, Senator, I understand that, and we are in reality continually willing to cooperite in any manner that we can Senator TYDINGS. The bar association is studyin~ this point. They are supposed to come up with suggestions. We certainly will entertain any and all the suggestions, but it is going to `have to provide protec- `tion to the consumer, as far as I am concerned. What the committee and `the Senate finally does is beyond my power. But I can tell you this, that it is just too easy under the present system for many poor people to have their homes sold right out from under them because of `fraudulent loans, and indebtednesses which is incurred with a pencil or `the stroke of a pen, which they `did imt really incur but were "hooked" into. `This i's not right. I do not think that your proposal a's it is presented here would provide sufficient protection. If you wish, contact the bar association to see what studies they are coming up with. Mr. HANNA. We will take this back and discuss this, Senator, and your remarks, and hopefully conta'ct Mr. Burke also~ Senator T~mINGs. I think the thrust of my concern is apparent from :the'pat.tern'of the questions I have directed at you. Mr. HANNA. Yes, sir. Senator TYDINGS. I am concerned that, somewhere in there, there is somebody involved who will genuinely, if there is a fraud, first of `all determine if there is a fraud, and if there `is will intervene and stop the proceeding. The Neighborhood Legal Services and Legal Aid are doing a great job. TJPO is also doing a great job, but there are still, I regret to say, a great many people, poor people, who are gypped and have never even heard of Legal Aid and Legal Services offices. I know that they are understaffed, while they are a step in the right direction, they are not enough. PAGENO="0244" 238 Mr. }IANNA. Well, we are trying to get at-we believe in protec- tion for the consumer. Now, what we have been trying to do is per- haps go half a step, Senator, and by getting some official of the Dis- trict of Columbia government interested in this type: of thing, and at least giving advice and consultation to this- Senatoi TYDINGS. Well, I think this is a step in the right direction. The only question is, Is it far enough? Mr. TIANNA. We are trying to balance the equity bet~veen the legiti- mate lending institutions, and there is a vast legitimate lending in- * dustry herein the. District of Columbia, and the-. Senator. TYDINGS. I cannot conceive of your company buying this * type of paper. Thank you very much for your interest, and I would appreciate it if you might talk with t.he bar association, because they are con- cerned with the same problems you are. Mr. HANNA. All right, Senator, I will be happy to do it. Senator TYDINGS. Thank you. Mr. HANNA. Thank you. (The proposed bill, for amendment of the District of Columbia Code follows:). A BILL ~To amend section 539 of the Act approved March 3, i901, so as to provide notice of the enforcement of a security interest In real property in the District of Columbia to the owner of such real property and the Commissioner of the District of Columbia Be it enacted by the Senate and House of Representatives of the United States of America' in Congress assembled, That section 539 of the Act' approved March 3, 1901 (31 Stat. 1274), as amended (D.C. Code, sec. 45-615), is amended by in- serting the words "and notice to be given" immediately after the words "Terms of sale" in the title of said section, inserting the subsection designation "(a)" immediately before the first word of such section, and by adding the follow- Ing: "(b) No foreclosure sale under a power of sale provision contained in any deed of trust, mortgage or other security instrument, may take place unless the holder of the note secured by such deed of trust, mortgage, or security instru- ment, or its agent, gives written notice, by certified mail return receipt requested, of said sale'to the owner of the real property encumbered by said deed of trust, mortgage' or security instrument at his last known address, with a copy of said notice being sent to the Commissioner of the District of Columbia, or his desig- nated agent, at least 30 days in advance of the date of said sale. Receipt by the Commissioner of the District of Columbia shall be conclusive evidence that said notice was given, both to the owner and Commissioner, and the 30 day period shall commence to run on the date of receipt of such notice by the Commissioner. The Commissioner or his agent shall give written acknowledgement to the holder of satd note, or its agent, on the day that be receives such notice, that such notice has been received, indicating therein the date of receipt of such notice. The notice required by this subsection (b) in regard to said mortgages and deeds of trust shall be in addition to the notice described by subsection (a) of this section. Senator TYDINGS. Bettin Stalling, chairman of the Council on Com- munity Affairs, D.C. Chapter of the Federal Bar Association, accom- panied by Wesley Williams, vice chairman of the council. Gentlemen, we a.re delighted to welcome you before this subcom- mittee this morning. ` . ` PAGENO="0245" 239 STATEMENT OF BETTIN STALLING, CHAIRMAN, COUNCIL ON COM- MUNITY AFFAIRS, D C CHAPTER, FEDERAL BAR ASSOCIATION, ACCOMPANIED BY WESLEY S. WILLIAMS, VICE CHAIRMAN OP THE COUNCIL Mr. STALLING. Thank you, Mr. Chairman. My name is Bettin Stalling. I am chairman of the Council on Community Affairs of the D.C. Chapter of the Federal Bar Association, and I might say briefly how the council became interested in this matter. The council is con- cerneci primarily with 5. 2592, and the reason for that concern is that all the cities today are concerned with riots. Now, we have found in our concern with community affairs as to what causes riots that you get pretty quickly to housing, and housing, particularly if a person feels that he has been robbed and cheated, and then you do not need many of these in an area that is congested, before the rumor circulates, and if you get 200 or 300 of them a year, some regard that as an insignificant amount because we have 15,000 mortgages made a year. The fact of the matter is, it is a very significant amount. And then you add this year what happened last year and the year before and the first thing you know you have people that are very willing to listen to others who feel that they do not understand what is going on and it causes great community strife and stress and leads to unrest. The council considers that individual home ownership is a beneficial and a stabilizing influence in the community; and a countervailing factor against blight and decay, with all its attendant evils. It is a recognized fact once an individual becomes an owner of the property he lives in, he has a stake in his community. He is concerned with what goes on in his neighborhood, and he and the members of his family develop a greater sense of civic responsibility. The council, concerned as it is with the welfare and safety of our city, strongly feels that the loss of one's home, by foreclosure, which sometimes means the loss of all a family may have, should not be per- mitted without the approval of a court, or without scrutiny by a duly authorized official. The anxieties and disruptive effect of losing one's home and being dispossessed, with its stigma and frustration, creates unrest and bitter- ness, part~cularly where the owner has been victimized. This adds to family and community strife, and to racial tensions. S. 2592, in our opinion, would afford the harassed homeowner an opportunity, in the first instance, to assert a legal defense and obtain relief, if appropriate and feasible, without incurring the additional expense of commencing a law suit after, or contemporaneously with the foreclosure proceedings. The council's area of special concern is in the foreclosure of mort- gages, deeds of trust, and other lien instruments on homes. While the foreclosure of investment properties held by corporate or sophisticated PAGENO="0246" 240 property owners may warrant consideration by this committee, we believe as a rule they are able to engage, or have counsel, and under- stand the intricacies of financing while many small homeowners do not~ The cruel fact is, that by far the great number of foreclosures which occur in the District of Columbia involve the homes of the relatively poor and illiterate. Significantly, from our observations, relatively few foreclosures on homes are commenced by savings and loan associations, banks, insurance companies and other institutional lenders on the security of first mortgages or deeds of trust. On the contrary, the great number of foreclosure proceedings are brought by holders of second, third and even fourth mortgages, or deeds of trust. The council in informed that 95 percent or more of the foreclosure cases in the District of Columbia involve these junior liens. Frequently these junior lien instruments involve excessive `and un- necessary charges of one kind or another, together with misrepresenta- tions and concealment amounting to fraud. There are other shameful `and unconscionable practices as was, at least in part, attested to in the recent investigations concerning home improvement practices resulting in mortgages unknowingly executed by individuals believing they were signing applications for home repairs. The Council on Community Affairs supports the principles of S. 2592, and hopes this committee will especially consider the plight of the homeowner in the District of Columbia. We would suggest that a home be defined in the bill as a residential property with accommodation for no more than four families. There is legal precedent for defining a. home in this fashion as far hack as' the Federal Home Loan Bank Act of 1932. the Home Owners' Loan Act of 1933, a.nd the National Housing Act of 1934. I wish to `thank this committee for having given us this opportunity to a.ppea.r and be heard. If it would not be. presuming on the commit- tee's time, I have Mr. Wesley Williarns, vice chairman of the council, with me, who has practiced here in the Dist.rict. for many years. I think his experience in connection with foreclosure proceedings may be of some help to the committee and if the committee would per- mit, Mr. Williams would like to be heard ~for the specific purpose of presenting a few pending `cases illustrative of some of the factors referred to in my statement. Thank you, Mr. Chairman. Senator TImINGS. That is a very fine statement, Mr. Stalling, and we would be delighted to hear from you, Mr. Williams. Mr. WILLIAMS. Well, Mr. Chairman, before I allude to any par- ticular ca.ses, I wish tha.t the record would reflect that the Laymen's League of All Saints Unitarian Church wish to go on the record as supporting S. 2592. As president of tha.t body, I ta.ke t.his opportunity to so apprise the committee. In addition, I had my executive committee on the Frontiers Inter- national, District of Columbia Chapter, which is a service organiza- tion, to support my view point and to authorize me, as president of that organization, to go on record as supporting S. 2592 that is under considera.tion. Now, Mr. Stalling has related to you that I would cit.e a few cases. I will take one in particular that would be illustrative of many of the PAGENO="0247" 241 questions that have arisen this morning, and since it is a matter of public record, I violate no trust or confidence in giving you the number of the case, Civil Action No. 899-67, in the U.S. District Court, Civil Action No. 104-67.1 refer particularly to 104-67. Senator TYDINGS. Could you give us the title of the cases? Mr. WILLIAMS 104-67 is the case of Amy Dunlap v. Monarch Con- structiort Corp., Wilson S. Kidwell, Auctioneer, Bernard Garfinicie, Trustee, and A. Rushing, Trustee. I will confine myself to that one case because it covers all the points. Senator TYDING5. We would be happy to have the other cases, just for the record. Mr. WILLIAMS. The other case is Lewis G. Queholland v. Wilson S. Kidwell, Auctioneer, William S. Thompson, T7irginaid L. Gaunton, and Frederick H. Evans. Now, in the my Dunlap case I bring to your attention particularly because this lady wa~ sued in General Sessions Court on a note for $3,500 by Monarch Construction Co. and an answer was filed. Within 2 months foreclosure proceedings were instituted arising out of security on the same note. The lady had a refinancial problem and thought she had paid off Monarch Construction the $3,500, but she was unaware of the fact that she had a second trust still outstanding on the property, so Monarch Construction then took the-- Senator TYDINGS. Do you mean when she paid she refinanced and paid off the first note that Monarch did not release the second trust? Mr. WILLIAMS. No, sir; they did not. Senator TYDINGS. Even though theywere paid off? Mr. WILLIAMS. Yes, sir. The reason for it is she thought she was paying it off, but the papers do not reflect that they were paid off. That is how we got in the case. Now, because of additional charges arising out of the transaction and the work that purportedly was done by Monarch Construction- and incidentally, the lady signed a completion certificate at the time she signed the contract. They told her this was necessary in order to complete the work. I know it sounds fantastic, but this is true. It is supported by the record. So, in any event, when the lady found her house was going to be foreclosed, she immediately called me because I had known her over the years, she had raised children and sent them to school and had difficulty with them, and what-not, and I went ahead and filed a suit in the district court for a temporary restraining order and then for an injunction and then for injunctive relief and a suit asking for damages. Now, ordinarily this would not have happened unless that lady had $300. You cannot pay your office staff and you cannot get other lawyers to participate in the case unless you pay them, and you can see the volume of writing that is necessary in order to effect just a little simple transaction. Now, the case is still pending. You asked a little while ago about the trustees. In this particular case, we still have not been able to find one of the trustees, even though he is listed on the trust. Trustees do not note their addresses on the trust instrument; therefore, you must fiddle PAGENO="0248" 242- around and try to find them out; but when this- case was filed, it was enough that we got the temporary restraining order, and as you know as a lawyer, you do not have to give notice, give notice, subsequently for the date when the case is set down for preliminary injunction. This case was filed on January 13, 1967. Senator TTYDINGS. Can you give us a little more information about the case? I do not think this case is typical. What did they try to sell the lady? Mr. WILLIAMS. Well, in this case they were selling her renovations and repairs to. her house, and she signed the contract for these renova- tions and repairs, and as I say- - . Senator TYDINGS. What were the repairs supposed to cost? Mr. Wmta~rs. They were supposed to cost $3,500, but in order to pay this $3,500, it would be necessary that she sign a. note, not only for that amount, hut for an additional amount which they could discount to immediately get their $3,500. - Senator TYDINGS. How much was the additional note she signed? Mr. WILLIAMS. I think all together it runs up around $7,000. Senator TYDINGS. You mean she signed, she obligated herself for an additional $3,500 and above of the initial $3,500. In other words, she wound up signing $7,000 worth of paper? Mr. WILLIAMS. That is correct. Senator TYDINGS. And in that paper she signed was their a lien or a mortgage against her home? Mr. WILLIAMS. A deed. of trust; yes. Senator TYDINGS. Deed of trust? . Mr. WILLIAMs. Yes. Senator TYDINGS. So what followed? Mr. ~\TILLIAMS. Then they sued her on the note, the $3,500 note, in the District of Columbia Court of General `Sessions. While that case was pending, a few months later, they-Monarch Construction Co.- filed for foreclosure proceedings. Senator TYDINGS. A moment ago you indicated that she had paid off her note to Monarch. Mr. WILLIA1~Is. She pa.id off the note, but she refinanced the property on the first occasion. Tha.t is true. Senator TImINGs. Who did she refinance with? Mr. WILLIAMS. I do not know offhand. I mean- Senator TYDINGS. But, when she paid off the note, was the deed of trust released? Mr. WILLIAMS. No; she only-she paid off the first $3,500. She was unaware that there was an additional encumbrance ,secured by the deed of trust. Sena.tor TYDINGS. Who did she refinance with and who did they pay .off? Mr. WILLIAMS. I do not know the company she refinanced with, but I can supply that for you. Senator TYDINGS. If it was not Monarch, was it a different com- pany? Mr. WILLIAMS. Yes; she refinanced her house, presumably through a legitimate company and asked them to pay off these notes. They paid PAGENO="0249" 243 off the $3,500 note, but she was unaware that there was an existing second deed of trust on her property, for the additional amount, that amounted to the sum that would be required to discount the note. Senator TYDINGS. How much was the new note or the refinancing? Mr. WILLIAMS. I understand the new note was an equal amount. Senator TYDINGS. Around $7,000? Mr. WILLIAMS. $3,500. Senator TYDINGS. $3,500? Mr. WILLIAMS. That is correct. Senator TYDINGS. Then the proceeds of that went to Monarch? Mr. WILLIAMS. That is right. Senator TYDINGS. But, did she initially sign two separate notes? Mr. WILLIAMS. She signed a series of papers, including the deed of trust. Senator TYDINGS. And she did not really know quite what she was signing? Mr. WILLIAMS. Well, this was the type of lady that would not know, and the reason I am making a point of that is because I can relate to you some professionals who have signed deeds of trust and did not know it. Senator TYDINGS. Our history is full of them, including very well- educated people, even Ph. D.'s. Mr. WILLIAMS. But unfortunately they did not develop into cases because I can call these various people and tell them to do such and such a thing `or I will such and such. I cannot use the language here, and it happens. I saw an article in this morning's paper where you re- lated to Atlas Corp. I call them up and told them that if they did not give inc a release on a second deed of trust on this teacher's property, somebody is going to jail. The reason for that is the teacher did not sign any second deed of trust knowingly because there was no acknowledgment made. But, the acknowledgment was handled-out in the community after they had signed this. Senator TIDINGS. Was there a notary present? Mr. WILLIAMS. No notary present at the time she signed; no. Senator TYDINGS. Did Atlas ever call her when they purchased the so-called paper? Mr. WILLIAMS. Oh, no. Atlas called me 2 weeks ago and said, "Oh, Mr. Williams, before we release that note you said that the lady was going to pay off the balance in her monthly installments." I said, "Well, I don't know. She's fired me, and now she's got another lawyer." I got my release and I am not interested. This is just 2 weeks ago they called me, bear in mind. Senator TYDINGS. Let us have the next case. Mr. WILLIAMS. This is not as revolutionary as that one. Senator TnING5. Let me ask you, Mr. Williams, have you run into Atlas frequently? Mr. WILLIAMS. Yes, I have, but I referred most of them to a Neigh- borhood Legal Services or to the Legal Aid Society, and I would 1-ike to make a point here now. The Neighborhood Legal Services does not accept cases where there is a pending foreclosure, where you must go and draw up restraining PAGENO="0250" 244 orders. They try to stay out of this civil aspect. I think because of the criticism and in addition because they do not have the staff, and our Legal Air Society in the District will call various lawyers, and there are very few lawyers who will take these cases, not that they do not have the time, out of due regard for them. Senator TYDINGS. I think you have illustrated very well, the dif- ficulty of intervening in a court foreclosure proceeding. The secretarial time alone necessary just to file the papers, is prohibitive. I think your point is well made. I am familiar with this, from my own practice. Mr. WILLIA~tS. That is very true. Now, in the other case you in- quired about, that is all settled now. There was a man by the name of Lewis Queholland who is represented by a lawyer in divorce proceed- ings, and subsequently the property was turned over to the lawyer's client because there was a settlement between husband and wife. Well, the husband happened to be an alcoholic, no question about it, and he thought he was paying the note to the office, but he was paying on the fees, and then sometime later we find that the property is being foreclosed. So, the original wife came into our office and stated that the property was worth a considerable amount of money in her part, $17,000 or $18,000, a lot of money. It is a lot to me, you understand, and she wanted to know what she could do to save the property because the property is in one of these areas that they were redeveloping, you know. I call it Georgetownizing. And we said, well, we will file an injunction against this, because your husband has been paying money, and he thought he was paying on the note, but he was paying fees and it happened that the lawyers who were holders of the note- Senator TYDINGS. They were foreclosing? Mr. WILLIAMS. Yes. Senator TYDING5. The lawyers were foreclosing? Mr. WILLIAMS. Oh, yes. Yes. Senator TYDING5. Who were the lawyers? Mr. WILLIA~rs. I prefer not to say that now. For the record, I will leave it. Senator TYDINGS. All right. Mr. WILLIAMS. So we called them and they told us this man is crazy, he hasn't paid on the deed in 4 years. Nonetheless we filed the injunction and the judge said, "You ought to call them up and they will release it to von." We said that we did not know. We called them up and finally we refinanced the property and the lady paid off the full amount.. There was not a uestion there involving fraud so much. One could think there was. I do not know and I wouldn't claim that there wasn't, but the question was that this man would never have had an opportunity to save his property had not his ex-wife been alert to find out what was happening because the prop- erty had enhanced in value so much that I think it was eventually- it is up for $35,000 now, I think it is. This is a 1966 case. Senator TYDINGS. In Washington the real estate property values have generally been going up. Mr. WILLIAMS. And that is the type of area. But, you have not heard the one case, and I do not want to consume too much time because there are other people waiting. PAGENO="0251" 245 Senator TYDINGS. Oh, we have a lot of time. Mr. WILLIAMS. But the last case that came in 2 weeks ago is the ~case of Robinson. It has not wound up in a case yet, but I told the client not to pay anybody. He bought his house in 1960 for $14,000. The Maryland Financial Corp. contacted him last year and promised to take care of all his indebtedness, take care of his bills, and just re- finance his house and informed him: "You have got nothing to worry about." He and his wife came in to me after lie left the veterans hospital, and wanted to know what I could do. `Well, they did not have much money, but they could get some money. I said, "Now, stop paying everybody else and pay me," to be quite candid. They have two trusts on their house, and maybe three, amounting to $16,100. He bought the house in 1960 for $14,000. He has not got a settlement sheet; I have not got an answer from my letter that I sent to the president of Mary- land Financial Corp. I do not have the address here with me but they are located across the line in the Silver Spring direction. So, this is where he stands. American Security & Trust called me the other day and said, "Mr. `Williams, lie hasn't paid on his FHA," and I said, "He's not paying :anybody until we find what happened to that money that he got from Maryland Financial Corp." So, these are the problems that I think this bill will in part solve :and that is why we enthusiastically support it, not only as I say with the Federal Bar Association, but with the Laymen's League and the Frontiers International. And we certainly hope, sir, that you can convince the committee of the wisdom of your bill and that the Senate will ratify it. Senator TYIING5. Have you ever had a client or aggrieved party whose papers or deeds of trust were going to be foreclosed by the Atlas `Co., come in and ask for your help? Mr. WILLIAMS. Sir, I would have to `search my files because most of them I refer out. It is just a time-consuming thing. You see, I started back in the 1940's with Seventh Street. I used to take the cases for nothing on Seventh Street because they paid off good in the long run, accidents occur in the family later, `and so forth, and they know where my office is. I mean, like people `buying diamond rings for $270-some that are worth around 18 bucks, and this is what I started out with back in the early 1940's. So, I am not unacquainted with what you are trying to do, and I think it is meritorious and you are to be commended for taking this bold step. I call it a bold step because you have muc~h opposition outside in the money interests, `and again I say it is not the first run lending institutions like the savings and loans and like the gentleman here testified here from the banks, because we do not have anything to do with the `case. They do not finance our property, anyhow. But this is not what we are concerned with. We `are concerned with the people who sneak `in the second trust, the third trust, and the fourth `trust. Senator TYDINGS. It has been suggested that we might be able to protect this consumer equally well if we required `the court procedure only in matters involving second, third, and fourth liens, and perhaps left the first liens alone. PAGENO="0252" 246 Do you think such a law might leave a loophole by allowing the operators to refinance and thereby create a third lien in order to get money? Mr. Wu~r~IAMs. Yes; I think they would, because I could see, myself, if I had a substantial second trust on the property and the first trust was down to about $3,000 I would pay it off and take it as a first. So I do not think you can exclude it, and then you may run into the question of discrimination, discriminatory practices against vari- ous lending institutions. Mr. Bettin Stalling, here, at one time was the regional counsel for the Home Owners Loan out in Chicago and that is why we got together on this, because there is so much injustice. Senator TTDINGS. I think Mr. Stalling has perhaps one of the finest statements I have heard. Mr. WILLIAMS. Thank you. Senator TYDINGS. It is very direct and went right to the point. Mr. WILLIAMS. And I think you will find, sir-I do not know, may- be your staff can tell you-that there are very few jurisdictions in this country that operate under the deed-of-trust process. Most of them have mortgage plans. Senator TYDINGS. That is right. The mortgage plan would provide additional protection. Mr. WILLIAMS. Thatis correct, sir. Senator TYDINGS. We have it in Maryland and it does provide more protection. Mr. WILLIAMS. That is correct, sir. Senator TYDINGS. Thank you very much, Mr. Stalling. Mr. WILLIAMS. I thank you for this opportunity of appearing, and I trust that the bill might go through. Mr. STALLING. Thank you. Senator TYDINGS. Mrs. Ben Watte.nberg, chairman of the District Affairs Committee, District of Columbia section of the National Council of Jewish Women is the next witness. We are delighted to welcome you here, Mrs. Wattenberg. STATEMENT OF MRS. BEN WATTENBERG, CHAIRJ~TAN, DISTRICT AFFAIRS COMMITTEE, DISTRICT OF COLUMBIA SECTION, NA- TIONAL COUNCIL OF 3EWISH WOMEN; ACCOMPANIED BY MRS. ROBERT SOLOMON. Mrs. WATrENBERG. Thank you very much. We are delighted to be here. Accompanying me i~ Mrs. Robert Solomon. Senator TYDINGS. We welcome you both. Please proceed Mrs. Wat- tenberg. Mrs. WAYrENBERG. I a~n Mrs. Ben Watt.enberg, chairman of the District Affairs Committee of the District of Columbia section of the National Council of Jewish Women. The National Council of Jewish Women is a national organization with an integrated program of education, service, and social action. It was founded in 1893 and has a current membership of over 100,000 women in 329 local communities throughout the United States. Our organization has had a long and continuing interest in the prob- PAGENO="0253" 247 lems that affect and plague the consumer and has supported much of the consumer legislation that has been heard in and passed through the House and Senate. The District of Columbia section of the National Council of Jewish Women was founded in 1895 and is presently composed of 650 women. The section's District Affairs Committee is currently studying con- sumer interests and it is to this subject that we have devoted time and thought and have participated in local community consumer groups here in the District. Our committee studied these bills and our findings and judgments were approved by our Public Affairs Committee and our board of directors. Since 1940, at our national conventions, we have affirmed our sup- port of measures "to protect the public in the production and market- ing of consumer goods" and "to protect the public against misleading information and unethical practices in lending and credit transac- tions." The bills introduced by Senator Tydings are intended to protect the consumer in the Washington, D.C., area against victimization by some retail merchants. Therefore, the District of Columbia section of the National Council of Jewish Women wishes to strongly endorse the principles enumerated in these bills with specific emphasis on the following points: That add-on and balloon payments be eliminated; That there be complete disclosure on the charges added on to the price of a retail installment sales contract; That the holder-in-due-course doctrine be eliminated; That a homeowner has the right to be heard in court before foreclosure on his home can take place; That there be regulation of the amount of finance and other charges on. retail installment sales contracts; and That there be established a Department of Consumer Protection. Now, there are two of these principles, one we slightly disagree with and one where we elaborate. Although we favor the principle of regulation of the amount of finance, credit insurance and other charges, we feel that establishment of a specific rate should be more spelled out and specific rates should be the responsibility of the City Council. And the women felt this method would insure flexibility of rates in response to changing busi- ness conditions. In other words, local bank interest rates change and the City Council would also be able to change finance rates. A consumer protection office is the logical first step for the imple- mentation of all consumer legislation. It will provide a center for coordinating and monitoring, a clearinghouse for charges and com- plaints, and it would affect not only these specific bills but all con- sumer law. We, therefore, feel that if it becomes necessary to separate the pro- vision for the establishment of such an office from the rest of S. 2589 in order to insure its immediate passage, we would favor doing so. We hope that legislation providing for a "cooling off" period fol- lowing a sales contract, as put forth in S. 2591, will be pursued fur- ther. We believe that a legitimate and well-presented contract will hold up through such a waiting period PAGENO="0254" 248 The consumer is the largest potential lobby and yet has been large-- ly silent through the years. Abuses of the consumer are obvious, many people say, but we have found that they are only obvious when peo- ple are aware. We applaud the introduction of this legislation and see it as an important first step in the education of the public and, therefore, the safeguarding of the consumer. The District of Columbia section, National Council of Jewish Wom- en, hopes and trusts the committee will report favorably on these- proposals. Thank you very much. Senator TYDINGS. Thank you very much. Do you have anything to add, Mrs. Solomon? Mrs. SoLo~roN. No; except that we thank you for the privilege of testifying in favor of your bills. We feel- that they are very fine and will be beneficial. Senator TYnINGs. Thank you for the pleasure of your company. You made one point which we want to give a good deal of consideration; namely, whether the establishment of an exact rate might better be- the responsibility of the City Council and its committee. We have had testimony criticizing us for rates that are too high and rates that are too low. Perhaps the City Council should determine this? Mrs. WATTENBERG. We-il, we realized yesterday in one or two of the things that Atlas said, that, you. know, we don't want legitimate lending companies out of commission because the legitbnate ones do have a good place. And, I don't know the whole story that he was telling about Pennsylvania, but apparently according to him- Senator TYDINGS. We do not know the whole story, either. Mrs WArPENBERG. Apparently legislated. enough to, do some of the business there, and I think that is something that should be con- tinued because the people do need a finance company in order to finance. Thank you. Senator TIDINGS. Thank you very much, ladies. We will stand adjourned now, subject to call, of the Chair, recess subject to the call of the- Chair. (Thereupon, at 11 :35 a.in. the hearing- was recessed,. subject to call of the Chair.) PAGENO="0255" APPENDIX * TIlE AMERICAN JEWISH COMMITTEE, WASHINGTON CHAPTER, December 13, 1967. Hon. JOSEPH D. TYDINGS, Chairman, Subcommittee on Business and Commerce, Committee on the District of Columbia, U.S. Senate, Senate Of/Ice Building, Washington, D.C. DEAR SENATOR TYDINGS: The Board of the Washington Chapter of the Ameri- can Jewish Committee has authorized me to express its judgment that there is a need in the District of Columbia for consumer protection legislation and for a department of consumer protection in the government of the District. I am enclosing a statement which I request be filed With testimony for con- sideration by your sub-committee. I take this opportunity to personally express my appreciation for the interest you are taking in this subject which as you know is sorely needed in the District of Columbia. Sincerely yours, ALFRED H. MOSES, Chapter Chairman. STATEMENT OF ALFRED H. MOSES, AS CHAIRMAN OF THE WASHINGTON CHAPTER OF THE AMERICAN JEWISH COMMITTEE, AND IN ITS BEHALF The more than 800 members of the Washington Chapter of the American Jewish Committee are constituents of the American Jewish Committee-a Na- tional organization with chapters and units in over 50 cities and with member- ship in over 600 additional communities in the United States which was orga- nized in 1906 and incorporated by a special act of the legislature of the state of New York in 1911. We believe fraudulent and unjust sales practices, including some associated with installment sales, are among the causes of the urban tensions afflicting our city. A poll of experts on the problems of the poor in the District of Columbia supports the conclusion that anger among our poorer citizens caused by feelings of frustration, and helplessness born out of unjust practices by some area merchants ranks close to th~ top among the factors contributing to the potential- ly explosive tension threatening the peace of our community. Similar situations exist in, other urban areas. In his testimony before the Na- tional. Advisory Commission on Civil Disorders on November 3, 19(37, Professor David Caplovitz, Bureau of Applied, Research, Columbia University said, "I have done a great deal of research on the low income marketplace. I have talked to. many `low-income persons who `feel that, they have been victimized by un- scrupulous merchants, and I can report that they are bitter and resentful as a result of theii~ experiences." As members of one of the oldest Human Relations agencies, in the United States we are particularly sensitive to inequities which affect any segment of our citizenry. Such inequities, and the resentment which they breed make mor8 difficult the resolution of urban problems requiring the cooperation, of all citizens. Therefore we are pleased that the subcommittee on consumer c,redit is consider- ing legislation, to eliminate sales.practices which are unjust and which contribute to resentment, frustration and even anger, on the part of so many of our citizens. The Washington Chapter of the American Jewish Committee believe that the District of Columbia needs consumer protection legislation and a department in its government to implement such legislation. In this regard we commend Mayor Waiter Washington for his announced intention to create a Department of Consumer Protection. We urge the Congress to provide the fiscal support necessary to make it an effective instrument. Whether the needed legislation should embrace the specifics covered in the various, bills before you, or should be enabling legislation which would allow the new District of Columbia Government to deal with consumer problems by regu- (249) PAGENO="0256" 250 latlon depend on which approach is more likely to elecit support from the Congress and the community as a whole. As is true with most legislation affecting the District of Columbia, the support of Congress is required for an adequate budget and the support of the population is required for adequate implementa- tion. In the case of consumer protection legislation which affects so many per- sons, the need for the confidence of the community should be taken into consid- eration when you make your decision. As so much will depend on the Depart- ment of Consumer Protection, we trust that whatever is done will result in an agency which has the wherewithal to do the job. If the frustration and resent- ment to which we made reference above is to be mitigated, the poor in our city must have a place to go with their complaints and persons to whom they com- plain must be armed with .the authority and means to do away with the in- equities. _______ MARYLAND CoNsuMERs AssocL&TIoN, Ixa., Annapolis, Md., January 30, 1968. SUBCOMMITTEE ox BusINEss AND CoMMERCE, ,S~enate Committee of the District of Columbia Washingtoa, D.C. GENTLEMEN: The Maryland Consumers Association strongly supports the en- actment of S-2589, S-2590, S-2591 and S-2592, all bills to improve consumer protection in retail sales of consumer goods in the District of Columbia. Con- sumers in the State of Maryland would be benefitted by these bills because metropolitan Washington is one large inter-related community and the pro- tection afforded by these bills would extend beyond the District line. We commend Senator Tydings, who as representative of our State in the U. S. Congress, has introduced these bills and is guiding them through the Congress. The Maryland Consumers Association does not oppose S-316, an earlier bill Introduced by Senator Morse for the same purposes but the bills introduced by Senator Tydings are more comprehensive and more specific and would there- fore be more effective in their purpose. Sincerely, W. W. FLACK, President. STATEMENT OF MORTGAGE BANKERS AssoCIATIoN OF METROPOLITAN WASHINGTON, Ixc. I am B. Francis Saul, II, President of the Mortgage Bankers Association of Metropolitan Washington. Our Association represents 43 mortgage banking companies in this area. 1 wish to testify with regard to Senate Bill 2.592. The Mortgage Bankers Association shares the concern of this Subcommittee that the right of all parties to foreclosure of real property in the District be equally protected. We suggest that the Bill be modified to exclude FHA and VA loans because adequate notice already exists; in addition, that commercial and business mort- gages be excluded because they are not applicable. Inaddition, we feel that the provisions of this Bill should apply only to single-family homes and apartment buildings of four apartments or less. We would also suggest a 30-day notice be required to be given to the Mayor's office or designee prior to foreclosure, along with notice to the borrower and owner of record and in addition, that notice be posted on the premises. We make these suggestions believing that they do not alter the intent of Bill 2592, but rather that they further the purpose of this Bill. As it now reads, Bill 2592 is not in the best interest of either borrower or lender, because it is unneces- sarily costly and time-consuming. The time required in the consummation of foreclosures is, in our opinion, impor- tant both to the borrower and the lender. For instance, many foreclosures are due to marital problems instead of financial ones. Both parties may leave the premises, even though the mortgage is paid down and a substantial equity exists. A fast disposition of this property is necessary to preserve the equity in such a case for the benefit of the borrowers. We are also concerned that any change does not unintentionally discourage mortgage money from investing in the District of Columbia; this would work' a hardship on all parties involved. Respectfully submitted. B. FRANCIS SAUL II, President, Mortgage Bankers Association of Metropolitan Washington. PAGENO="0257" 251 FEDERAL TRADE CoM~iIssIoN, Washington, D.C., March 12, 1968. Hon. JOSEPH D. TYDINGS, Chairman, Subcommittee on Business and Commerce, Senate Committee on the District of Columbia, U.S. Senate, Washington, D.C. DEAR SENATOR TYDING5: 1 have the honor to transmit herewith the economic study of the Federal Trade Commission entitled "Installment Credit and Retail Sales Practices of District of Columbia Retailers." I presented some of the highlights of this report in testimony before your subcommittee on January 30, 1968, regarding the proposed District of Columbia retail installment sales acts. You expressed interest in printing the text of the report in the record of the hearings. We would be happy to have you do this. The Federal Trade Commission will also print a limited number of copies to be avail- able for distribution in the near future. Sincerely yours, PAUL RAND DIXON, Chairman. FEDERAL TRADE COMMIssION ECONOMIC REPORT ON INSTALLMENT CREDIT AND RETAIL SALES PRACTICES OF DISTRICT OF COLUMBIA RETAILERS, MARCH 1968 FEDERAL TRADE COMMISSION Paul Rand Dixon, Chairman Philip Elman, CommiSSioner Everette Maclntyre, Commissioner Mary Gardiner Jones, Commissioner James M. Nicholson, Commissioner ACKNOWLEDGEMENTS This study was conducted under the general direction of Dr. Willard F. Muel- ler, Director, Bureau of Economics and Dr. Arthur T. Andersen, Chief, Division of Industry Analysis, Bureau of Economics, Dr. Frank G. Coolsen had primary responsibility for preparing the study. Mr. Philip W. Jaynes contributed sub- stantially to the preparation of the final draft of the report. SUMMARY AND CONCLUSIONS This report presents the results of a survey of installment credit and sales practices involving household furnishings and appliances in the District of Colum- bia. The purpose of the survey was to obtain a factual picture of the finance charges, prices, gross margins and profits, legal actions taken in collecting delin- quent accounts, and the assignment relationships between retailers and finance companies. The survey covered those D.C. retailers of furniture and appliances having estimated sales of at least $100,000 for the year 1966. The 96 retailers providing data had combined sales of $226 million, which represented about 85 percent of the sales of furniture, appliance, and department Store retailers in the District of Columbia. Use of Installment Credit by District of Columbia Retailers Sixty-five retailers with combined sales of $151 million indicated regular use of consumer installment sales contracts. The remainder sold only for cash or on a regular or revolving charge account basis. This report focuses primarily on re- tailers using installment contracts. These retailers were classified into two groups: those appealing primarily to low-income customers and those appealing to a more general market. D.C. stores varied widely in their use of installment credit. Some general mar- ket discount appliance stores made very few sales on credit. At the other extreme, a number of low-income market retailers sold entirely on installment credit. Installment credit was used much more extensively by retailers selling to low- income consumers than by retailers selling to other consumers. Low-income mar- ket retailers used installment credit in 93 percent of their sales. The comparable figure for general market retailers was 27 percent. SS-64S-GS----17 PAGENO="0258" 252 Customer Characteristics of Low-income Market Retailers A sample of installment sales contracts and credit applications was analyzed to identify the customer characteristics of low-income market* retailers. The analysis revealed substantial differences between customers of the low-income market retailers and all residents of the District of Columbia. The average family size was larger-4.3 persons compared to an average of 3.5 persons for the Dis- trict of Columbia. Almost half of the families of customers in the sample had five or more members. The median family income during 1966 of the sample customers was $348 per month. This is very low considering the larger than average size of the families. The Bureau of Labor Statistics recently estimated that the main- tenance of a moderate standard of living for four in Washington, D.C.. requires a monthly income of $730. Most customers were engaged in low-paying jobs. The largest proportion. 28 percent, were Service Workers, such as waitresses and janitors. Second in im- portance were Operatives (including such occupations as taxi drivers and laundry workers). Laborers and Domestic Workers also represented a significant share of the sample. Together, these four major occupational groups accounted for 75 per- cent of the customer sample. In comparison, only 36 percent of the general popu- lation in the District was classified in these lowpaying occupational groups. There were 31 welfare recipients in the sample, accounting for 6 percent of all customers in the sample. There were also a number of customers in the sample dependent on social security, alimony, support payments, and income received from relatives. A review of credit references noted in the 486 contracts subjected to detailed analysis revealed that 70 percent indicated no credit references or references with low-income market retailers only. Only 30 percent of the customers of this retailer, therefore, had established credit with general market retailers. Gross Margins and Prices of Low-Income Market Retailers The survey disclosed that without exception low-income market retailers had high average markups and prices. On the average, goods purchased for $100 at wholesale sold for $255 in the low-income market stores, compared with $159 in general market stores. Contrasts between the markup policies of low-income and general market retailers are most apparent when specific products are compared. Retailers sur- veyed were asked to give the wholesale and retail prices for their two best-selling models in each product line. These price data are typical of the large volume of products sold by each class of retailer. For every product specified, low-income market retailers had the highest aver- age gross margins reported. When similar makes and models are compared, the differences are striking. For example, the wholesale cost of a portable TV set was about $109 to both a low-income market and a general market retailer. The gen- eral market retailer sold the set for $129.95, whereas the low-income market retailer charged $219.95 for the same set. Another example is a dryer, wholesaling at about $115, which was sold for $150 by a general market retailer and for $300 by a low-income market retailer. Operating Expenses and Net Profits of Retailers ~nrveyed Despite their substantially higher prices, net profit on sales for low-income market retailers was only slightly higher and net profit return on net worth was considerably lower when compared to general market retailers. It appears that salaries and commissions, bad debt losses, and other expenses are substantially higher for low-income market retailers. Profit and expense comparisons are, of course, affected by differences in type of operation and accounting procedures. However, a detailed analysis was made for retailers of comparable size and mer- chandise mix to minimize such differences. Low-income market retailers reported the highest return after taxes on net sales, 4.7 percent. Among the general market retailers, department stores had the highest return on net sales, 4.6 percent. Furniture and home furnishings stores earned a net profit after taxes of 3.9 percent; and appliance, radio, and television retailers w-ere the least profitable with a net profit of only 2.1 percent on sales. Low--income market retailers reported an average rate of return on net worth after taxes of 10.1 percent. Rates of return on net worth varied considerably among various kinds of general market retailers. Appliance, radio, and television PAGENO="0259" 253 retailers reported the highest rate of return after taxes, 20.3 percent of net worth. Next in order were furniture and home furnishings retailers with 17.6 percent and department stores with 13.0 percent on net worth. Assignment of Installment Contracts Low-income market retailers typically held their installment contracts and did not assign them to finance companies or banks. Only one-fifth of the total contracts were assigned by low-income market retailers. Among general market retailers, appliance stores assigned almost all (98 percent) of their contracts to finance companies and banks. General market furniture stores assigned somewhat more than half of their contracts (57 percent.) Among the retailers surveyed, only the department store category involved no contract assignment. Finance Charges on Instalimenj Contracts.' There is considerable variation in the finance charges of D.C. retailers of furniture and appliances, particularly among the low-income market retailers. Most of the retailers surveyed determined finance charges in terms of an "add-on" rate based on the unpaid cash balance. When calculated on an effective annual rate basis, finance charges of general market retailers varied between 11 percent and 29 percent, averaging 21 percent when contracts were assigned and 19 per- cent when retailers financed their own contracts. Finance charges by low-income market retailers imposing such charges ranged between 11 percent and 33 per- cent per annum, averaging 25 percent on contracts assigned to finance companies and 23 percent on contracts the retailers held themselves. One low-income market retailer made no separate charge for installment credit. All of his finance charges were, in effect, included in the purchase price. Other low-income market retailers kept finance charges below the actual cost of granting credit. This practice of absorbing credit costs can give the illusion of "easy" credit, but the customer may be paying a great deal for such installment credit in the form of much higher prices. Judgments, Garnishments and Repossessions by Retailers One of the most notable facts uncovered by the study relates to the frequency with which a small group of retailers utilized the courts to enforce their claims with respect to installment contracts. Eleven of the 18 low-income market re- tailers reported 2,690 judgments in 1969. Their legal actions resulted in 1,568 garnishments and 306 repossessions. For this group, one court judgment was ob- tained for every $2,200 of sales. In effect, low-income market retailers make extensive use of the courts in collecting debts. While general market retailers may take legal action as a last resort against delinquent customers, some low- income market retailers depend on legal action as a normal order of business. Conclusions Installment credit is widely used in marketing appliances and home furnish- ings to low-income families. Often these families purchase durable goods, such as furniture, television sets, and phonographs through the mechanism of "easy" credit. Low-income market retailers specialize in granting credit to eonsii~ers who do not seek or are unable to obtain credit from regular department, furni- ture, or appliance stores. As a group, low-income market retailers made about 93 percent of their sales through installment credit. The real cost of this "easy" credit is very dear, however. Primarily it takes the form of higher product prices. Credit charges, when separately stated, are not notably higher than those imposed by general market retailers. Though some low-income market retailers imposed effective annual finance charges as high as 33 percent, others charged much less oir nothing at alL Markups on comparable products, however, are often two or three times higher than those charged by general market retailers. The findings of this study suggest that the marketing system for distribution of durable goods to low-income consumers is costly. Although their markups are very much higher than those of general market retailers, Iow4neome market retailers do not make particularly high net profits. ~hey have markedly higher costs, partly because of high bad-debt expenses, but to a greater extent because 1 These are finance charges as reported by D.C. retailers on their installment contracts. They do not necessarily reflect actual costs of granting installment credit. PAGENO="0260" 254 of higher salaries arid commissions as a percent of sales. These expenses reflect in part greater use of door-to-door selling and expenses associated with the collection and processing of installment contracts. The high prices charged by low-income market retailers suggest the absence of effective price competition. What competition there is among low-income market retailers apparently takes the form of easier `credit availability, rather than of lower prices. Greater credit risks are taken to entice customers. Insofar as the problem for low-income consumers is availability of credit, merchants who sell to them focus on this element. The success `of retailers who .price their merchandise on such a high markup in selling to low-income families leads inevitably to the conclusion that such families engage in little comparative shopping. It would appear that many low- income customers lack information or knowledge of their credit charges and credit source alternatives, or of the prices and quality of products available in general market retailing establishments. To the extent that door-to-door sales techniques `are utilized, `such families frequently make crucial purchases without leaving the home and without seeing the products they commit themselves to buy. The fact that low-income market retailers emphasize the use of door-to-door salesmen both reflects and encourages such behavior. The Commission is well aware that door-to-door selling as well as home-demonstration selling provides an opportunity for deceptive and high pressure sales techniques. Moreover, such selling methods are also very high-cost methods of distribution. It would appear, therefore, that the low-income consumers who can least afford mistakes in their buying decisions face two serious problems when they are confronted with a door-to-door or home-demonstration sales approach-(l) the high cost of this sales technique will ultimately be borne by the purchaser, and (2) the opportunity for high pressure or deceptive selling is great, thus dis- couraging comparative shopping and enhancing the probability that the consumer will agree to purchases he would otherwise not want. While public policy can help solve the problems of low-income consumers, legislation alone may not be sufficient. Legislation aimed at disclosure and regulation of finance charges will help low-income as well as other consumers make more rational buying decisions. Intensified programs on both state and federal levels to eliminate all deceptions and frauds in the advertising and oral representations of the terms of sale and credit charges will also help to insure that their money is spent advantageously. The poor, to a considerable extent, however, are not sophisticated shoppers. Many cannot afford the luxury of `shopping around" because their potential sources of credit are limited. Others, because of inadeçuate consumer education or lack of mobility, simply do not engage in comparison shopping. Thus, in attempting to deal with the phenomenon of the poor paying more for consumer goods, every effort should be made to improve consumer counseling. Many customers continue to buy from low-income market retailers even though they have sufficient income to qualify for credit at stores selling for less. Greater community effort in consumer education is needed. Beyond the matter of education is the question of credit availability. Many low- income families are quite capable of making regular payments. They should have the option of making payments on reasonably priced merchandise. Local com- munity effort in the development of effective credit sources could contribute materially to freeing individuals from dependence on "easy" credit merchants.1 Moreover, perhaps general market retailers can take steps to make it easier for low-income families to apply for and receive credit. Some retailers have already found that they can do so economically. Various community business organiza- tions might consider ways of more actively encourage low-income- families to seek credit frGm retailers selling for less. Increased competition for the patronage of low-income consumers would go a long way toward resolving many of the problems confronting them in the low- income market. Public policy should consider the various ways by which new entrants could be encouraged into these markets to increase the competitive viability of these markets. While the availability of credit is perhaps the major reason, why low-income families purchase from the low-income market retailers, it is only logical to con- 1 Credit unions organized to serve low-income people may be one answer to the problem. More than 400 Federal credit unions now serve substantially low-income groups. The Bu- reau of Federal Credit Unions, U.S. Department of Health, Education, and Welfare, is at- tempting to increase this number through its "Project Moneywise." With proper counseling and organizations, credit unions can be successful even with very-low Income groups. PAGENO="0261" 255 elude that the sales techniques of these retailers are also an important factor. Low-income retailers have every incentive to continue these techniques since their risk of loss is substantially reduced by their virtually unopposed access to judgment and garnishment proceedings to enforce payment or secure reposses- sion. The 2,690 actions taken by 11 low-income market retailers in 1966 suggests a marketing technique which includes actions against default as a normal matter of business rather than as a matter of last resort. At present, in the face of de- fault, creditors can seek both repossession and payment of the deficiency, includ- ing various penalties. It may be appropriate to require creditors to choose one or the other of these legal remedies, and not to have the option of pursuing both courses simultaneously. Repossession would then fully discharge the merchant's claim. It is equally necessary to ensure that purchasers receive aetuaZ notice of any such proceedings and have legal counsel available to defend them in court. Perhaps, consideration should also be given to some form of negotiation before a court-appointed neighborhood referee as a compulsory prelude to a default judgment. It is apparent that the solution to the problem of installment credit for the poor requires a variety of actions. A requirement that finance charges be clearly and conspicuously stated is a necessary but not a sufficient solution to the prob~ 1cm of installment credit for those consumers who are considered poor credit risks and are unsophisticated buyers. Among the complementary steps which might be considered are the following: (1) make reasonable credit more assessi- ble; (2) provide counseling services which will encourage customers to practice comparison shopping; (3) equalize the legal rights of buyers and creditors in installment credit transactions; (4) encourage additional businesses to enter. the low-income market; and (5) intensify consumer protection activiites on both federal and local levels to eliminate all fraud and deceptions in the advertising and offering of credit. CHAPTER I INSTALLMENT CREDIT AND THE Low-INCOME MARKET RETAILER INTRODUCTION As part of its continuing activities in the field of consumer protection, the Federal Trade Commission has undertaken a broad program to eliminate de- ception in the sale of goods and services through installment credit. Such deception can be a serious problem for consumers from all income groups. Abuses in the use of installment credit may fall most heavily, however, on the poor and disadvantaged. For this reason, the Commission felt it would be useful to obtain more detailed information about the use of installment credit by low-income consumers.1 Such information will provide valuable assistance in planning future consumer protection activities. This study is intended to provide objective information about installment credit practices, good and bad, as they affect consumers in the District of Columbia. A specific purpose is to compare the practices of retailers of furniture and appliances who sell primarily to a low-income market with those who sell to a more general market. It should be made clear that the study is limited in scope. It does not attempt to provide information about all aspects of the operations of low- income market retailers. For instance, the quality and durability of products is not directly examined in this study. Nor is the matter of selling methods dealt with in detail. While these are interesting areas of investigation, it was not feasible to cover them in this report. The study focuses primarily on the follow- ing points: (1) Percent of sales made through installment contracts (2) Gross margins of retailers (3) Comparative prices charged by low-income market and general market retailers (4) Amount of finance charges (5) Relationships between retailers and finance companies (6) Legal actions taken by retailers on delinquent installment contracts (7) Characteristics of a low-income market retailer's customers. 1 This report was prepared in response to a resolution adopted by the Federal Trade Commission, July 25, 1966. The text of the resolution is Included in the Appendix (p. 113). PAGENO="0262" 256 Types of Retailers and ~iIerehants hwlvded in This Study All retailers in the District of Columbia with estimated sales of over $100,000 per year who sold furniture and appliances were surveyed by the Federal Trade Commission. Several retailers were excluded because they had gone out of business since the survey period or were unable to provide usable information. Table I-I shows the total 1966 sales of retailers included in the survey. As a basis for comparison. 1963 Census of Bvsiness total sales for the District of Columbia are also shown. The survey data are for a later period, 1960. but it is unlikely that there has been much change in sales during the intervening years. Furniture and appliance sales of retailers located in the District of Columbia have not been growing rapidly because of an increasing trend toward use of shopping centers outside the District. TABLE -1.-COMPARISON OF 1965 SALES OF SURVEY RETAILERS WITH SALES REPORTED IN 1963 CENSUS OF BUSINESS FOR THE DISTRICT OF COLUMBIA [Dollar amounts in thousandsj U.S. Survey ret ailers, 1966 Total Total Type of retail store Census total sales, Number 1963 of retailers Total sales, all retailers Number of retailers sales, retailers offering install- ment credit Number of retailers sales, retailers not offer- ing install- ment credit Departmentstores(SIC531) $186,439 6 $144,864 3 $91,364 3 $53,500 Furniture and other home furnishings stores 50,442 59 51,255 38 33,929 21 17,326 (SIC 571) Appliance stores (SIC 572,, 573) 29,912 31 29, 693 24 25,677 7 4, 016 Total 266,793 96 225,812 65 150,970 31 74,84 2 1 Includes stores using revolving credit arrangements; 30-, 60-, 90-day credit arrangements; and stores operating on a cash basis. Source: FTC Survey; 1963 Census of Business, vol. III, pt. 2, p. 110-115. The survey included 96 retailers with combined sales of $226 million. This approximates 85 percent of the 1963 Census total sales of appliance, furniture, and department store retailers in the District of Columbia. Sixty-five retailers with combined sales of $151 million reported that they regularly used install- ment sales contracts. The remaining stores used revolving credit plans, charge accounts, or sold their merchandise only for cash. Of the $75 million in sales by this group, three large department stores accounted for $54 million. These department stores sold furniture and appliances through revolving credit arrangements. Although revolving credit is a significant element in the retail credit market, to simplify data collection and analysis this study focuses primarily on install- ment credit contracts. It is difficult to collect data on revolving credit because such accounts are usually continuing arrangements. Balances may be carried for years, with regular payments offset by periodic purchases. Also. a variety of goods in addition to furniture and appliances are financed by department stores under revolving credit arrangements. The exclusion of revolving credit greatly simplifies the analysis in this report and there is little reason to be- lieve that it creates any substantial bias in the results. Further tabulations included in this report are based on returns of retailers who used installment contracts. Appropriate mention will be made whenever applicable of the practices of other retailers not using such contracts. The survey revealed considerable variation among stores with respect to the percentage of sales made on installment credit. Some discount appliance stores made very few sales on installment credit or none at all. At the other extreme, a number of retailers sold almost entirely on installment credit. In addition, other factors such as gross margins or "markups" varied widely among stores. To analyze differences in credit practices, retailers surveyed were classified in various groups. One means of classification was by type of establishment, i.e.. department store, appliance store, or furniture store. Type of store did not, however, appear to be the most crucial element in determining credit practices. A second PAGENO="0263" 257 method of classification was by income of customer, i.e., low-income market retailers vs. general market retailers. Since direct data were not available on income of customers served by various stores, two criteria were used to identify retailers serving low-income customers: (1) location of store and (2) adver- tising practices. `As `a first approximation retailers located in or adjacent to low-income residential areas *were considered to serve low-income customers primarily. Identification of low-income residential areas was done on the basis of 1960 Census data. In general, it was relatively easy to identify whether or not stores were located in low-income areas. The District of Columbia is characterized by a wide variation in family income. Additionally, there is a close relationship between geographic sections within the city and income level. The most extensive source of demographic information on the District and the surrounding metropolitan area is the 1960 Census of Population. Data are provided for 124 individual Census tracts within the city. While incomes were substantially higher in 1966, the period covered by this sur- vey, the relative positions of different areas probably has not changed greatly since 1960. The principal exception would be the Southwest Washington urban renewal area. The distribution of family incomes within the District of Columbia is indicated below: Percdnt 1959 income distribution Under $2,000 9. 4 $2,000 to $3,999 18. 5 84,000 to $5,999 22. 2 $6,000 to $7,999 16. 0 $8,000 to $9,999 12. 2 $10,000 to $14,999 13. 7 $15,000 to $24,999 5. 7 $25,000 and over 2. 3 Total 100. 0 There is also a definite geographic pattern in income distribution within the city. For the city as a whole the median income was $6,000. However, of the 124 Census `tracts, 16 had median incomes of less than $4,000 in 1959. Ten of these tracts were located in the compact section of Northwest Washington which is often referred to as the Cardozo area. Four were in the southwest section of the city, one in the southeast, and one in the northeast. In contrast, 15 Census tracts had median incomes over $10,000 per year. All were located in a contiguous group west of Rock Creek in the upper northwest area of the city. Low-income market retailers were, for the most part, located in what could be described as neighborhood shopping areas in or adjacent to low-income areas. A characteristic of low-income market stores is that they are unlikely to draw any substantial volume of business from the more affluent sections of the city or from the suburbs. The classification of stores as low-income market retailers was established not only by location but also on the basis of advertising practices. It is possible that a store could be located in a low-income area yet sell to a more general market through city-wide advertising. Leading Washington newspapers and radio stations which appeal to all income levels, rather than specifically to low-income groups, were checked and no retailers engaged in extensive advertising to the general market were included in the low-income market group. Thus, stores finally classified as low-income market retailers had to meet two qualifications: location in a low-income area and an absence of significant city- wide advertising directed to a general market. Eighteen retailers met these criteria. While classification of stores into the two groups, low-income market retailers and general market retailers, involved some arbitrary decisions, the basic differences between practices of the two groups `are quite clearcut. Of the 18 low-income market retailers, 14 could be described as furniture stores; 2 as appliance stores; and 2 as miscellaneous merchandise stores. These distinc- tions did not appear particularly important for purposes of analysis, however, and the low-income market retailers were treated as a combined group. T7ezr'iations in Installment Credit sales A striking characteristic of low-income market retailers is the high proportion of their total sales accounted for by installment contract transactions. Table 1-2 I Source: 1960 U.~S. Census of Population, Vol. I, Part 10. p. 54. PAGENO="0264" 258 indicates that installment credit transactions accounted for 92.7 percent of the total sales of the 18 low-income market retailers. In contrast, installment credit accounted for only 26.5 percent of total sales of general market retailers. Most of the low-income market retailers made more than 90 percent of their sales through credit; none of the general market retailers had such a high proportion of instailment credit sales. Many of the general market retailers in fact had the bulk of their sales accounted for by cash transactions or by non-installment credit. TABLE 1-2.-VALUE OF INSTALLMENT CONTRACTS AS A PERCENT OF SALES, DISTRICT~OF COLUMBIA RETAILERS, 1966 [Dollar amounts in thousands[ Type of retailer Number of companies Net sales lost aIlment contracts Value Percent of As percent total of set sales Total Low-income market retailers General market retailers Appliance, radio, and television Furniture and home furnishings Department stores 65 $150,970 $45,251 100.0 30.0 18 47 7, 874 143, 096 7, 296 37, 955 16. 1 92. 7 83. 9 26. 5 22 22 3 25, 089 26, 643 91, 364 8,466 10,608 18, 881 ii. 7 33. 7 23. 5 39. 8 41. 7 20. 6 Source: FTC survey. While extent of installment credit sales is the primary factor distinguishing low-income market retailers, there are also significant differences in the general business methods employed by this group. Prices and gross margins tend to be substantially higher for low-income market retailers. Bad debt expenses are also considerably higher. Extensive use of credit together with higher prices and gross margins form a distinctive pattern for low-income market retailers. How- ever, before discussing the findings concerning these differences, it is useful to place low-income market retailers in proper perspective with respect to the total market for appliances and home furnishings in the District of Columbia. A Perspective on the Importance of Low-Income Market Retailers The 18 low-income market retailers had net sales for 1966 of $7.9 million (table 1-2). This amounts to only 5.2 percent of sales of all retailers surveyed. Never- theless, it is a substantial amount when compared to total expenditures by low- income consumers on furniture arid appliances. Low-income consumers within the District of Columbia accounted for only a fraction of total expenditures on furniture and appliances. The low-income market for such goods is considerably smaller than the total consumer market. No statistics are available on total expenditures for furniture and appliances by low-income consumers, but it is possible to make reasonable estimates. We estimate that District of Columbia households with an annual income under $5,000 in 1966 had total income of about $260 million.1 1 Sales Management magazine, June 10, 1907, "Survey of Buying Power," page D 47, pub- lished estimates of the percent distribution of disposable household income in the District of Columbia for 1966. About one-third (32.2 percent) of District of Columbia households had after-tax incomes of less than S5.000 in 1966. For purposes of analysis. this bottom third of the income distribution will be considered the low-income group. In Chapter IV of this report, the family incomes of a low-income market retailer's customers are tabulated. Three-fourths (76.1 percent) of the sample of customers had before-tax incomes of 86.000 per year or less. This would roughly correspond to after-tax incomes of 80.000 or less. It seems plausible that most of the customers of other low-income market retailers would also have family incomes of less than $5,000 after taxes. We can estimate the total income of ssach customers for 1966. The total number of households in the District of Columbia was estimated to be 270,500 in 1966. Sales Management data indicate 16.6 percent of these, or 44.900 households, had incomes of less than S3.000 per year. There were 15.6 percent. or 42.200 households. with incomes from S3.000-S5.000 per year. If we assume that the sneasr incom~ of households in the under-$3.000 category was $2000, and that the mean income of families in the next category was $4,000, then the total income of families with incomes below $5,000 would be $259 million. No. of Mean Total After-tax income group households income income TInder $3,000 income group 44, 900 X 82, 000 = $89. S million $3,000-$5.000 income group 42, 200 X $4, 000 = 8168. 8 million All households under $5,000 $258. 6 million PAGENO="0265" 259 Additionally, we estimate that *in 1966 these households spent about $18 million on furniture and appliances.' Low-income market retailers surveyed had total sales in 1966 of $7.9 million, about 44 percent of our estimated total expenditures by low-income households for furniture and appliances.2 This suggests that the low-income market retailers surveyed are definitely an important factor in the low-income marketplace, even though they did not account for a major portion of total retail sales of furniture and appliances in the District. General Market Retailers Forty-seven of the stores surveyed were classified as general market retailers, appealing either to a broad consumer market or primarily to middle and high- income groups. General market retailers were further classified into the follow- ing sub-categories: furniture stores, appliance stores, and department stores. This was necessary for comparative and analytical purposes because, unlike the relatively homogeneous low-income market retailers, there were some differences in pricing and credit policies of the various types of general market retailers. Appliance, Radio and Television.-There are two types of merchandise that are customarily sold and serviced ~y appliance, radio, and television retailers- brow-n goods and white goods. Television sets, radios, and stereo-phonographs are electronic home entertainment merchandise, collectively referred to among retailers as "brown goods." Washing machines, dryers, refrigerators and freezers are collectively called "white goods." Sewing machines and vacuum cleaIiers are other household appliances customarily sold by brown and white goods retailers. The general market classification of appliances, radio, and television retailers included 22 companies operating stores primarily selling these types of mer- chandise. These retailers sometimes sell furniture and floor coverings, but only as secondary merchandise lines. Discount stores and full-service retailers are included in this retailer classification. Furniture and Home Furnishings.-Those retailers that specialize in the selling of furniture and home furnishings to a broad consumer market-a total of 22- have been grouped together for anniysis. Retailers selling furniture primarily to low-income consumers are included in the low-income market retailer classifica- tion. Among furniture and home furnishings retailers are those that carry a wide line of furniture, as well as a secondary line of appliances, and those that spe- cialize in particular home furnishings items, such as rugs and carpeting. Department Stores-The category of department stores, of which three in- cluded in this study sold goods on installment credit, includes large stores selling apparel in several merchandise departments, but also having departments en- gaged in selling furniture, home furnishings, appliances, radios, and television sets. Such stores are an important outlet for furniture and appliances. To qualify as a department store, a retail establishment must employ 25 people or more. Some smaller stores, classified in this study as low-income market retailers, also carry apparel and soft lines of home furnishings, as well as appliances and furniture. The Bureau of Labor Statistics conducted a study (Consumer Erpenditures and In- conic, Washington, D.C., 1960-61, Bureau of Labor Statistics, Report No. 237-53, February 1964) in 1960-61 of family expenditure patterns in the District of Columbia. We will as- sume that low-income families spent the same percentage of their income on furniture and appliances as did other families. (Actually the BLS study suggests that low-income families spent a lower percentage of their income on furniture and appliances, but the sample was too small to provide conclusive evidence on this point.) Household furnishings and equipment accounted on the average for 4.9 percent of after- tax expenditures. Purchases of television sets, radios, etc., were included in the "recreation" category, which accounted for 4.2 percent of expenditures. We will assume that half the expenditures in this category may have gone for such appliances. This would give a total of 4.9+2.1 or 7.0 percent of income spent on furniture and appliances. Multiplying this percentage by estimated total income will give an estimate of the low-income market for furniture and appliances: 7.0 percentX $258.6 milllon=$18.1 million 2 While most of the sales of low-income market retailers were accounted for by furniture and appliances, other lines of merchandise were sold. The actual proportion of furniture and appliance sales is not known, but examination of survey returns indicates it is about 80 percent of total sales for low-income market retailers. On this basis, such retailers would account for about 35 percent of sales of furniture and appliances to low-Income customers. PAGENO="0266" 260 Limitations of the Survey This survey was limited to stores actually located within the District of Co- lumbia. The District itself is part of a larger metropolitan area encompassing suburbs in Maryland and Virginia. In 19(30 the population of the entire metro- politan area was 2 million, while the population of the District alone was 764,000. In terms of total retail sales, the 1963 Census of Business indicated that the District accounted for about 42 percent of metropolitan area retail sales. The proportion probably is somewhat lower for furniture and appliance sales alone. At first glance, it might seem that the survey is limited because data on subur- ban area retailing is not included. This is not likely to be a serious problem, however, when comparing practices of retailers selling primarily to low-income consumers with those selling to a more general market. Census data indicate that most of the low-income consumers live w-ithin the District itself rather than in the suburbs. Median 1959 family incomes for components of the Washington Standard Metropolitan Statistical Area are shown below-: 1 Area Median income Washington, D.C 85. 993 Montgomery County, Md .9. 317 Prince Georges County, i~Id 7. 471 Arlington County, Va 8. 670 Fairfax County, Va 8. 607 Alexandria, Va 7. 207 Falls Church, Va 8, 721 Entire SMSA 7. 577 1 Source: 1960 Census of Population, Series PHC(1), Part 11, p. 15. All of the suburban areas have a significantly higher median income than the District itself. While it would be useful to have data on suburban stores selling primarily to higher income consumers, it is doubtful that such data would alter the basic findings of the survey. One reason is that many of the large volume suburban stores are branches of retailers located in the District and probably follow similar policies. Also, inclusion of suburban discount retailers of furni- ture and appliances would tend to sharpen the contrasts in prices and margins found in this survey rather than to weaken them. This survey was restricted to retailers of furniture and appliances. A more extensive survey would probably indicate the existence of a low-income market for other goods and services also. There is ample reason, based on information received from consumers by the Federal Trade Commission, to believe that many of the practices found in this survey are also prevalent in the sale of clothing, variety goods. jewelry, and services such as re-upholstering and auto repairs. It u-as not possible to cover all forms of retailing in a single survey, however, and the focus was placed on furniture and appliances because this is a large segment of retailing and is reasonably homogeneous in terms of product lines sold. The survey did not include any retailer w-ith estimated 1966 sales of less than $100,000. Very small retailers were excluded for two reasons. First, such retailers do not usually keep detailed records and many would have probably found it impossible to complete the survey questionnaire. For example, many small re- tailers of furniture sell both new- and used merchandise. In most cases such retailers could not meaningfully separate sales of the two types of furniture. Second, while there are a large number of small furniture and appliance stores, their total sales volume is not great. The 1963 Census of Business indicated a total of 264 establishments in SIC 571 (furniture and home furnishings), SIC 572 (household appliances), and SIC 573 (radio. TV, and music stores). Of these 264 establishments. 124 had three employees or less. This would be roughly equiva- lent to less than $100,000 per year in sales. While almost half the establishments fell in this small size category, their combined sales were only 7 percent of the total. In SIC 531 (Department stores) the Census indicates no establishments with sales of less than $100,000 per year. Even restricting the survey to stores with over $100,000 in sales did not elimi- nate all sample problems. A substantial number of retailers had moved, gone out of business, or were unable to complete the survey questionnaire. Usually these were the smaller stores. The final group included 18 low-income market retailers and 47 general market retailers. We believe the 18 low-income market retailers surveyed provide an adequate sample to make meaningful generalizations about this type of retailer in the District of Columbia. Those retailers that could have been considered low-income market retailers but were not included in the group PAGENO="0267" 261 represented a much smaller combined sales volume than the 18 that were included. Moreover, table I-i clearly indicates that the bulk of total sales in the categories surveyed ~ras included. CHAPTER II GRoss MAPGIN5, PRIcEs, AND Paorirs In addition to obtaining information on the use of installment credit, the Commission survey requested financial statement data as well as wholesale and retail prices on popular appliance and furniture items. This information was classified by type of retailer and indicated that operating results for low-income market retailers differed significantly from general market retailers in a number of important respects. Gross Margins Gross margins represent the difference between the wholesale cost of goods and total revenue derived from their sale at retail as a percent of selling price. Gross margin is the amount remaining to the retailer to cover operating ex- penses, including salaries, commissions, rent, equipment, other overhead expenses, and net profit. Though gross margins for different types of retailers in the survey sample varied, the most significant variation was found when margins of low-income market retailers were compared with those of general market retailers (table IT-i). The 18 low-income market retailers had an average gross margin of (30.8 percent. The average for general market retailers was 37 percent, ranging from a low of 30 percent for appliance, radio, and TV stores to a high of 41 percent for furniture and home-furnishing stores.1 TABLE Il-i--NET SALES AND GROSS MARGINS OF DISTRICT OF COLUMBIA RETAILERS, 1966 [Dollar amounts in thousandsj Type of retailer Number of com- panies Net sales Percent Value of total Gross m Value argin 1 As per- cent of sales Low-income market retailers General market retailers Appliance, radio, and television Furniture and home furnishings Department stores 18 47 $7, 874 5. 2 143, 096 94. 8 $4, 790 52, 988 60. 8 37. 0 22 22 3 25, 089 16. 6 26, 643 17. 7 91, 364 60. 5 7, 586 10,979 34, 423 30. 2 41. 2 37. 7 Total, retailers using installment contracts Retailers not using installment contracts 65 31 150, 970 100. 0 74,842 57, 778 26,902 38. 3 35.9 Total, all retailers surveyed 96 225, 812 84, 680 37.5 I Gross margins reported by different types of retailers may not be strictly comparable. one low-income market retailer included finance charges and 1 general market appliance retailer included service charges in their net sales. Adjustments were made in these instances, but other retailers in the sample may have included such charges in their net sales and not reported their inclusion. To the extent that finance, service, and other charges might have been included in net sales and no corresponding adjustment made in cost of gonds snid, gross margins for these retailers would be slightly over- stated. However, every effort was made to calculate gross margins in this study net of finance and other charges. Obviously, the higher the gross margin on a particular product, the higher will be its retail price. On the average, goods purchased for $100 at wholesale sold for $255 in low-income market stores, whereas the retail price was $159 in general market stores (see figure 11-1) ~2 Thus, low-income market retailers marked up their cost two and a half times to determine their selling price. This was the average for the 18 low-income market retailers in the sample. The re- tailer with the largest volume of sales in this group had a gross margin of (37.9 percent of selling price, which means that he marked up his merchandise on the average to more than three times its cost. 1 Subjecting these differences to statistical analysts Indicated that there was only one chance in 100 that they reflected simple random variation. In other words, there is every reason to believe that differences in gross margins of low-income market retailers and general market retailers are systematic. °These are cash prices and do not include separately Imposed finance charges. PAGENO="0268" Type of Retailer LOW-INCOME MARKET RETAILERS GENERAL MARKET RETAILERS: Appliance, Radio & Television Stores Furniture & Home Stores Department Stores ALL RETAILERS USING INSTALLMENT CONTRACTS RETAILERS NOT USING INSTALLMENT CONTRACTS ALL RETAILERS SURVEYED Source: FTC Survey. 262 FIGURE 11-1.-Average selling price, assuming $100 wholesale cost, by type of retailer. General market retailers that used no installment contracts were also con- tacted in the survey and their gross margins, as indicated in table 11-1, did not differ significantly from the average for general market retailers as a whole. One appliance, radio, and TV dealer, who sold on a strictly cash basis, re- ported a gross margin of 7.2 percent. This meant that any appliance seffing at wholesale for $100 was resold at retail for only $107. This case is very excep- tional, of course. A number of substantial general market furniture stores reported that they relied on revolving credit accounts and used no installment contracts. The gross margins of these retailers were somewhat higher than those that used install- ment contracts, averaging 46.6 percent of sales. Likewise, there were three de- partment store companies that reported no installment contract sales, employing 0 F + I PAGENO="0269" 263 instead revolving charge account plans. Their average gross margin of 34.9 per- cent of sales was somewhat lower than the average gross margin of 37.7 percent shown in table IT-i for those department stores using installment contracts.1 TABLE 11-2.-AVERAGE GROSS MARGINS OF DISTRICT OF COLUMBIA RETAILERS ON BESTSELLING ITEMS OF AP- PLIANCES AND FURNITURE, 1966 Av Low-income Merchandise items market retailers erage percent gross margin of- General market retailers Appliance Furniture Department stores 1 stores 1 store Television sets 46. 4 23. 7 28. 4 25. 2 2 Carpets Refrigerators Washing machines Stereophonographs Freezers 50. 0 50. 6 51. 0 52. 7 53.7 37. 24. 5 24. 9 34. 6 25. 0 32. 3 35. 3 33. 0 36. 5 34.7 24.8 33.7 37. 7 Dryers Furniture 53. 9 56. 2 25. 7 28. 47. 5 50. 4 4 Vacuum cleaners Radios 57. 9 60. 0 26. 3 30. 2 23. 4 38. 0 27. 9 42. 7 Sewing machines 66. 3 49. 0 1 Appliance and furniture stores have been classified on the basis of their principal merchandise lines. Furniture stores carry appliances as a substantial secondary merchandise line, and for this reason average gross margins of appliances sold by furniture stores are included in this table. Source: FTC survey. Gross Margins on Specific Merchandise Retailers surveyed were asked to select two "best-selling" items in each appli- ance and furniture line of merchandise and report their wholesale costs and selling prices. The difference between these figures (selling price minus cost of goods) represented the gross margin, which was expressed as a percent of selling price. Table 11-2 gives the average gross margins on each merchandise item for each type of retailer surveyed. In some instances the gross margins given were for items especially reduced in price for volume sales. Consequently, the averages of these gross margins are somewhat lower than the average gross margins shown for each type of retailer in table IT-i. For every merchandise item specified, low-income market retailers had the highest average gross margins reported-ranging from 66.3 percent on sewing machines, to 51.0 percent on washing machines, and down to 46.4 percent on television sets. General market appliance retailers had the lowest gross margins for 9 of the ii merchandise items. Certain merchandise items showed some consistency as to the market level of gross margins. Television sets were sold by all three types of general market retailers at gross margins below 29.0 percent, and this item sold at the lowest (46.4 percent) average gross margin reported by low-income market retailers. Furniture had relatively high gross margins for all types of retailers. There were some items, however, on which there was no consistency between types of re- tailers. For instance, radios were the second highest gross margin item (60 percent) for low-income market retailers and the lowest gross margin item (23.4 percent) for general market appliance retailers. Thus, a consumer who would have paid $250 for a radio from a low-income market retailer could have pur- chased a radio of comparable wholesale value at a general market appliance store for $130. Table 11-3 converts these gross margins to a comparative price basis. Since the cost of the merchandise has been arbitrarily held constant, the "retail prices" shown in table 11-3 directly reflect absolute differences in average gross margins by type of store and make it possible to compare relative prices on each best- selling item when purchased from low-income market retailers or general market appliance, furniture or department store retailers. As shown in table 11-3 and figure 11-2, a television set that cost retailers $100 could have been bought for 1 These margins for department stores in our survey conform very closely to the national averages compiled by the National Retail Merchants Association, which reported that in 1064 average gross profit margin for department stores with sales over $1, million per year was 35.3 percent of sales. Operating Results of Department and ~pecialtii stores Sn 1964, Controllers' Congress, National Retail Merchants AssociatIon, 1065, p. 11. PAGENO="0270" 264 $131 in a general market appliance store, but would have been priced at retail to the low-income consumer at $187 by the average low-income market retailer. A washing machine with the same wholesale cost sold on the average in general market appliance stores for $133, in furniture stores for $148, in department stores for $155, and in low-income market stores for $204. The other merchandise items in table 11-3 and figure 111-2 provide similar comparisons. In each instance the "retail price" projected for the low-income market retailers is the highest because reported average gross margins were highest, but the amount of the differential varies by merchandise items. Merchandise 0 $50 $100 $150 0203 5250 0300 Steno ~ ~ Television 4 ~Th.j~1~- 001 __________ ___ ~ ~ Carpet ~ ~ 6~Za4~. Reingeratoc ..tL4' ~ ~ .o.:-v~~t. ~ ~ _________ Washing :~W#~ !~***i~ Machive ~ %s;~ Ii ~ ~WE~:i3~ t~O TWWW p. .T.~.; ~`~~iii~ Freroer NA~ -. T/T~"2,/~~ ;~Z?/~Z'Z~2~i :M~ ~ Deyee ~ ~ Fa raiiore (:~*~0. ~ ~ ~ ~ ~= ~ ~ Roctta ~ Sowing ____________________________________________ Machine N.h.' ~///////~ /`~/Z~W///W/////~ 0 $50 $103 $150 $200 $250 $300 ~ ~ C Grass Margtn `Nat Avaitabie LEGEND: ~Lnw-hinnnie hlarhet ReDuces ~Gnnerat Machot Farnitnre Stores Saarce: FtC Sarrey. ~Dnnnrat Starhet Appliance Ounces ~Gnnnrat Machot Department Stares FIGURE II-2.----Average retail prices, assuming $100 wholesale cost, of comparable merchandise items purchased from low-income market and general market retailers Direct Price Comparisons Hypothetical price comparisons are useful for purposes of generalization, but we need not depend on just such comparisons. `See also discussion Chapter IV, pages 106-109. PAGENO="0271" 265 TABLE 11-3.-AVERAGE RETAIL PRICES OF DISTRICT OF COLUMBIA RETAILERS ON BESTSELLING ITEMS OF APPLIANCES AND FURNITURE IN 1966, ASSUMING WHOLESALE COST OF $100 FOR EACH ITEM' Merchandise item Average retail price assuming $100 wholesale cost Low-income market retailers General market retailers - Appliance Furniture Department * stores2 stores2 stores Television set Carpet Refrigerator $187 200 202 $131 $140 $134 160 150 132 133 153 Washing machine Stereophosograph Freezer 204 211 216 133 148 155 149 157 153 133 151 Dryer Furniture 217 228 135 138 160 190 202 Vacuum cleaner 237 136 143 157 Radio 250 130 161 139 Sewing machine 297 196 174 I These are cash prices and do not reflect separately imposed finance charges. 2 Appliance and furniture stores have been classified on the basis of their principal merchandise lines. Furniture stores carry appliances as a substantial secondary merchandise line, and for this reason average retail prices'' of appliances sold by furniture stores are included in this table. Source: Calculated from average gross margins in table 11-2, FTC survey. The striking differences between the low-income market and the general market perhaps may best be illustrated by a comparison of prices for similar (in some cases identical) products. Table 11-4 matches similar makes and models of appli- ances sold by low-income market retailers as well as general market retailers. Not all of the products shown are identical models, but the similarity in whole- sale costs suggests that the comparisons are valid. It should be pointed out that in a great many cases low-income market retailers simply did not carry !the same lines of products as general market retailers. As a result, in most instances price comparisons could not be made. While table 11-4 illustrates extreme differences, it should be remembered that the retailers themselves reported prices for their two best-selling models in each product category. These comparisons were not made by researchers poking around in dusty corners of stores looking for grossly overpriced or mismarked items rarely sold. They are based on the retailers' own reported prices. TABLE 11-4.-COMPARISON OF REPORTED WHOLESALE AND RETAIL PRICES FOR BEST-SELLING PRODUCTS, LOW-INCOME MARKET AND GENERAL MARKET RETAILERS Wholesal e cost Retail price' Products Low-income market retailer Gene~aI market retailer Low-income market retailer General market retailer Televsion sets: Motorola portable Philco portable Olympic portable Admiral portable Radio: Emerson $109. 00 108.75 2 90. 00 94.00 16.50 $109. 50 106.32 85. 00 91.77 16.74 $219. 95 199.95 249. 95 249.95 39.95 $129. 95 129.95 129. 95 129.99 25.00 Stereo: Zenith 32.99 32.99 99.95 36.99 Automatic washers: Norge General Electric 144.95 183. 50 140.00 160. 40 299.95 339. 95 155.00 219. 95 Dryers: Norge General Electric 80.00 206. 90 87.00 205. 00 249.95 369. 95 102.45 237. 76 Admiral 112.00 115.97 299.95 149.95 Vacuum cleaners: Hoover upright Hoover canister 39. 95 26. 25 39. 95 24. 55 79. 95 49. 95 59. 95 28. 79 1 Retail prices are cash and do not include separately imposed finance charges. 2 Reported as approximate wholesale cost. Source: FTC survey. PAGENO="0272" 266 The general conclusion that emerges from data contained in table 11-4 is that the low-income market is a very expensive place to buy durable goods. On tele- vision sets (most of which are the popular 19" black and white portables) the general market retailer price is about $130. In the low-income market a customer can pay up to $250 for similar sets. Other comparisons include a dryer selling for $149.95 from a general market retailer and for $299.95 from a low-income market retailer; and a vacuum cleaner selling for $59.95 in the general market and $79.95 in the low-income market. These comparisons indicate that the poor often do pay more when they buy durable goods from retailers catering to the low-income market. Why would anyone pay such high prices? The most probable reason is that the poor often can- not pay cash for such items and are attracted by the more liberal credit policies. General market retailers offering low prices have tighter credit policies. Low- income market retailers, on the other hand, feature "easy credit," but the customer pays a great deal for this privilege in the form of grossly higher prices. Table 11-4 does not take into consideration the finance charges.' As shown in Chapter III, finance charges of low-income market retailers are generally somewhat higher than those of general market retailers. Low-income market retailers often can recover the wholesale costs of mer~ chandise when less than half the payments have been made. For example, suppose a customer buys the Motorola television listed in table 11-4 from a low-income market retailer. He pays $219.95 plus finance charges. Assume the customer pays one-tenth or $22.00 down. This leaves a balance of $197.95. At a 13.5 percent add-on rate,2 his finance charges would be $20.72 for one year. The total amount owed would be $197.95 +$25.72 *or $224.67. If the customer makes 12 monthly payments, the amount of each payment would be $18.72. In this circumstance, were the customer to default after making only 6 of his scheduled 12 payments, the low-income market retailer would already have recovered more than his wholesale cost. The six payments plus the original amount down equals $134.32-compared to the wholesale cost of $109.00 for the TV. Even if the low-income market retailer were to make no additional charges for financing, six months of payments would be more than sufficient to cover the original wholesale cost.3 A general market retailer would be in a much different position if a customer defaulted after making only half his payments. Assume that he sold the same TV set for $129.95, also with one-tenth, or $13.00 down. Using the 12 percent add-on rate,4 the balance including finance charges would be $130.98. Monthly payments would be $10.92 for 12 months. If the customer defaulted after six payments, the general market retailer would have received only $78.52-com- pared to the wholesale cost of $109.50. Thus, he (or the finance company that held the contract) would suffer a substantial loss. Operating Eapenses and. Wet Profits Not all of the low-income market retailers covered in this survey maintained and submitted financial statements adequate for detailed analysis of expenses and net profit. Likewise, most of the small-volume general market retailers did not submit detailed financial statements. Of the 18 low-income market retailers, however, 10 submitted statements permitting some analysis of specific expense items. These 10 low-income market retailers were matched with 10 general mar- ket retailers of comparable size and mix of merchandise who submitted state- ments permitting a comparative analysis of expenses and profits. A comparison of expenses and profits as a percent of sales for the matched samples of 10 low-income market retailers and 10 general market retailers of furniture and appliances is shown in table 11-5. The 10 low-income market re- tailers paid only 37.8 percent of their sales revenue for the merchandise they sold, while the cost of goods sold by the general market retailers was 64.5 per- cent of their sales revenue. As previously noted, low-income market retailers sell comparable merchandise at much higher retail prices, which accounts for this wide difference in cost of merchandise as a percentage of sales. The remain- ing gross margin for the 10 low-income market retailers was 62.2 percent and 1 Finance charges refer to any extra charges imposed by, the retailer when merchandise is sold under installment contract. fi~hese charges do not necessarily reflect the true cost to the retailer of granting credit. 2 This add-on rate of 13.5 percent per year is equivalent to an effective annual rate of finance charges of 25 percent, calculated by the actuarial method (United States Rule). ~ If no additional charges were made for financing, payments would be $16.50 per month. The six payments plus the original amount down equals $111.00-compared to the whole- sale cost of $109.00. This add-on rate is equivalent to an effective annual finance charge of 22 percent. PAGENO="0273" 267 for the 10 general market retailers, 35.5 percent of sales. The gross margin to cover expenses and net profit was 26.7 percentage points higher for the low- income market retailers. TABLE 11-5.-COMPARISON OF EXPENSES AND PROFITS AS PERCENT OF SALES FOR 10 LOW-INCOME MARKET RETAILERS AND 10 GENERAL MARKET RETAILERS OF FURNITURE AND APPLIANCES IN THE DISTRICT OF COLUMBIA, 1966 10 low-income Revenue component market retailers 10 general market retailers Difference in margins and ratios - - Percentage Percent of points total 1966 net sales $5, 146, 395 $5, 405, 221 Operating ratios as percent of sales 100. 0 100. 0 Cost of goods sold 37. 8 64. 5 Gross profit margin 62. 2 35. 5 +26. 7 100. 0 Salary and commission 1 28. 2 17. 8 +10. 4 38. 9 Advertising expense 2. 1 3. 9 -1. 8 -6. 7 Bad debt losses 2 6. 7 0. 3 +6. 4 24. 0 Other expenses 3 21. 3 11. 2 +10. 1 37. 8 Total expenses 58. 3 33. 2 +25. 1 94. 0 Net profit return on sales 3. 9 2. 3 +1. 6 6. 0 1 Includes officers' salaries. 2 Includes amounts held back by finance companies to cover bad debt losses. o Other expenses, including taxes, after deduction of other income. Source: FTC survey. Practically all of the substantially higher gross margin of the 10 low-income market retailers was offset by higher expenses and did not result in markedly higher net profit as a percentage of sales. As shown in the right-hand columns of table 11-5, of the total difference in gross margin of 26.7 percentage points, 94 percent `of the difference (25.1 percentage points) was `accounted for by higher expenses and 6 percent of the difference (1.6 percentage points) was accounted for by higher net profits on sales of low-income market retailers. More than one-third (38.9 percent) of the higher gross margin of the 10 low- income market `retailers was spent on salary a:nd commission expense. This ex- pense item included all employees' compensation and officers' salaries and was 28.2 percent of sales for low-income market retailers, compared to 17.8 percent of sales for general ~narket retailers. A major reason for low-income market re- tailers' higher personnel expense is believed to be their use of outside salesmen who canvass house-to-house or followup requests for home demonstrations and often make collections of installment payments at the home of the customer. Several of the 10 low-income market retailers pay their `outside salesmen-col- lectors commissions `on both `sales and collection's. Other reasons for higher person- nel costs of low-income market retailers could be that they have more sales personnel and pay higher rates of compensation compared to small-volume gen- eral market retailers; and since they finance all or a larger proportion of their own installment contracts, thus requiring more employees to keep records of small payments on installment credit accounts. The proportion of sales revenue spent `on advertising was higher `for the 10 general market retailers `than for the 10 low-income market `retailers. This is con- sistent wit'h the lack of extensive citywide advertising among the low-income m'arket retailers in the total sample. The difference in advertising ratios was 1.8 percentage points. The 10 general market retailers spent 3.9 percent of their sales revenue on advertising, while the advertising by the 10 low-income market retailers `amounted to 2.1 percent of their sales `revenue. Higher bad debt losses of low-income market retailers accounted for about one- fourth (24 percent) `of `the total difference in gross margins. It was evident from `analysis of financial statements, fin'ance ch'arges, `and retail prices `of low- income market retailers that they often ch'arge higher prices anticipating that part of `the increased revenue will cover higher collection expenses of their method `of doing business. For the group of 10 low-income market `retailers, bad-debt loss was 6.7 percent of sales, while comparable size general market retailers had bad-debt losses of less than one percent of sales. 88-648-68----18 PAGENO="0274" 268 Other expenses accounted for more than one-third (37.8 percent) of the higher gross margin of low-income market retailers. The remaining items of ex- pense amounted to 21.3 percent of sales for the 10 low-income market retailers and to 11.2 percent of sales for the 10 general market retailers. Items of oc- cupancy, delivery, and administrative expense were included among the other expenses, but a comparative analysis of these items could not be made be- cause of inconsistency in expense account classifications and accounting meth- ods. Nevertheless, there were certain items of expense that appeared more often and in larger proportionate amounts on the low-income market retailers' statements, which account for part of their higher ratio of other expenses to sales. Since most of the low--income market retailers financed their ow-n install- ment sales, the expense of processing this credit and interest on borrowed funds appeared as substantial items on. their statements. Legal and pro- fessional fees were larger items of expense among low-income market retailers, reflecting cost of suits filed for the collection of delinquent accounts. Insur- ance costs w-ere generally higher as a percentage of sales for these retailers. Net profit as a percentage of sales for the 10 low-income market retailers was 3.9 percent. as compared to 2.3 percent for the 10 general market retailers. This difference of 1.6 percentage points in higher net profit for the low-income market retailers amounted to less than one-tenth (6 percent) of the total dif- ference in gross margins. The business methods employed by low-income market retailers involved substantially higher costs which offset the higher prices charged, leaving no markedly higher net profit as a percentage of sales.1 Net profit after taxes as a percent of owner equity was also determined for these two groups of retailers. This average net profit was 12.7 percent for the 10 low-income marget retailers and 8.1 percent for nine out of the 10 gen- eral market retailers~2 The variation in rates of return on owner's equity within each group of retailers was so great as not to warrant a conclusion that rates for one group were different from those of the other. Overall Xet Profit Comparisons The previous section compared profits for a selected sample of 10 low-income market and 10 general market retailers. Less extensive data on income and profits were obtained from other retailers. Almost half the retailers surveyed submitted profit and loss statements and balance sheets. The companies in- cluded corporations, partnerships, and proprietorships. There was a consider- able amount of variation in the accounting methods used and in individual firm returns. Nevertheless, it is possible to make some overall comparisons of net profits for each group of retailers. Low--income market retailers reported the highest net profit after taxes on net sales, 4.7 percent (table 11-6). Among the general market retailers, department stores were highest with 4.6 percent. Furniture and home-furnishings stores earned a net profit after taxes of 3.9 percent; and appliance, radio, and television retailers were last in order of profitability with 2.1 percent profit after taxes on sales. TABLE 11-6--NET PROFIT AFTER TAXES AS A PERCENT OF SALES AND RATES OF RETURN AFTER TAXES FOR DISTRICT OF COLUMBIA RETAILERS SURVEYED, 1966 Net profit after taxes Percent rate of return after Type of retailers as a percent of sales taxes on stockholders' equity Low-income market retailers 4.7 10. 1 General market retailers: Appliance, radio, and television stores Furniture and home furnishings stores Department stores 2. 1 3. 9 4, 6 20. 3 17. 6 13. 0 Source: FTC survey. 1 Statistical tests were applied to analyze differences In profit and cost elements for the 10 low--income and 10 general market retailers compared In this section. These tests have limited validity because of the small number of observations and. the non-random method by which the retailers were selected. They suggest, however, that the differences In profit rates indicated do not justify rejecting tine hypothesis that proflts are actually similar for both groups of retailers. Similar tests applied to gross margins and other elements of expense, notably salaries, bad debts, and other expenses, appear to justify~ accepting the hypothesis that expense experience for the two groups of retailers is different. One of the 10 smnhl-volume general market retailers had to be omitted from the net return on owners' equity analysis because of Incomplete financial statement information. PAGENO="0275" 269 Low-income market retailers reported an average rate of return after taxes on net worth of 10.1 percent. Rates of return on net worth varied considerably among general market retailers. Appliance, radio, and television retailers re- ported the highest rate of return after taxes, 20.3 percent of net worth. Next in order were furniture and home-furnishings retailers with 17.6 percent, and department stores with 13.0 percent of return on net worth. Data on profits reported above are limited and to some extent inconclusive. It does not appear, however, that low-income market retailers made profits which were substantially higher on the average than general market retailers. The high prices charged by low-income market retailers must have been accom- panied in many instances by substantially higher costs arising from their method of doing business. Some of these costs probably arose from greater losses on credit sales. To some extent, costs may have been higher because of smaller vol- ume and generally more costly and less efficient store operation. CHAPTER III CHARACTERISTICS OF INSTALLMENT CONTRACT ARRANGEMENTS Sixty-five furniture, appliance, and department store retailers surveyed in- dicated significant use of installment contracts in financing customer pur- chases. In 1966, a total value of $45.3 million in contracts were entered into by this group, equivalent to 30 percent of their total sales. The average value per contract was $146. The average value for general market department stores was only $100, while for general market appliance and furniture stores it was $210 and $359, respectively. The average value of contracts for low-income market retailers was $140 (table Ill-i). To understand better the current business practice with respect to the use of installment credit instruments, information was sought regarding contract assignment practices, rates of finance charges, and problems of default. Our findings on these subjects are summarized in this chapter. TABLE 111-1.-AVERAGE VALUE OF INSTALLMENT CONTRACTS OF 65 DISTRICT OF COLUMBIA RETAILERS, 1966 Type of retailer All contracts Assigned contracts Unassigned contracts All retailers Low-income market retailers General market retailers Appliance, radio, and TV Furniture and home furnishings Department store $146 140 147 210 359 100 $264 298 261 212 383 $117 124 116 141 332 100 Source: FTC survey. Installment Contract Assignment As a matter of practice, much installment credit is supplied indirectly by finance companies or banks rather than by the retailers directly involved in making purchase-loan transactions. Retailers have arrangements with one or more finance companies or banks to which, after credit approval, the condi- tional sales contracts or notes are assigned or discounted. The assignment may be coordinated with the purchase and delivery of the merchandise, or it may be made after the sale but before the first payment is due. In rare cases assignment may be made later. When a contract is assigned by the retailer, the customer's financial obligation is shifted to the "holder in due course' and, under the law, the customer's legal obligation for payment is not to the retailer but to a financial inter- mediary.1 This is true regardless of any subsequent dispute that may arise between customer and retailer involving the quality of the product. Of the $452 million in installment contracts reported for 1966 in the Commission's survey, $15.8 million or 35 percent was assigned to finance com- panies and banks (table 111-2). Among all retailers reporting installment credit sales, department stores alone assigned no contracts. General market ap- pliance and furniture stores were most dependent on assignment and to- gether accounted for 91 percent of all reported assignments. For appliance 1 This is true when contracts are assigned without recourse. If contracts are assigned With recourse, they are returned to the retailer in case of default and he, rather tlaan the assignee, hears the risk. PAGENO="0276" 270 stores almost all (98 percent) installment credit contracts were assigned; for furniture stores, 57 percent. Finance companies held virtually all of the appliance retailer assigned paper, but only one-third (36 percent) of the furniture retailer paper. Banks held the balance (64 percent) of assigned con- tracts involving purchases from furniture stores. TABLE 111-2.-NUMBER AND VALUE OF INSTALLMENT CONTRACTS ASSIGNED AND UNASSIGNED BY DISTRICT OF COLUMBIA RETAILERS, 1966 [Dollar amounts in thousands] Number r1et Total installment contracts Contract s assigned Contracts unsssigned (held by retailers) Type of retailers of com- panies sales Value as Value percent of net sales Value Percent of total value of contracts Percent of Value total value of contracts Total 65 $150, 970 $45, 251 30. 0 $15, 818 35. 0 $29, 433 65. 0 Low-income market retailers_ 18 7, 874 7, 296 92. 7 1, 441 19. 8 5, 855 80. 2 General market retailers 47 143, 096 37, 955 26. 5 14,377 37. 9 23, 578 62. 1 Appliance, radio, and television 22 25, 089 8, 466 33. 7 8, 323 98. 3 143 1. 7 Furniture and home fur- nishings 22 26, 643 10, 608 39. 8 6, 054 57. 1 4, 554 42. 9 Department stores 3 91,364 18, 881 20. 6 None None 18, 881 100. 0 Source: FTC survey. Despite the fact that more than 90 percent of sales by low-income market re- tailers was on an installment basis, this group assigned only 20 percent of their contracts. These typically were the largest contracts. Whereas the average value o~ unassigned contracts was $124 in 1966, the average for contracts assigned was $298 (table 111-1). In all, of the 65 retailers reporting sales on an installment contract basis, 49 assigned all or part of these contracts to ffiiance companies or banks (table 111-7). Twenty-one of 22 appliance retailers and 18 of 22 furniture retailers assigned contracts. Four low-income market retailers assigned all and 6 others assigned some of their installment contracts to finance companies. Only depart- ment stores assigned no contracts arising from installment sales. TABLE 111-3.-DISTRIBUTION OF TOTAL INSTALLMENT CONTRACTS ASSIGNED TO FINANCE COMPANIES AND BANKS [Dollar amounts in thousands] Contract assignment Va Amount lue Percent of total Num bar Amount Percent of total Total of all assigned installment cnntracts $15, 818 100. 0 59, 934 100. 0 Contracts assigned to finance companies Contracts assigned to banks 11,917 3,901 75. 3 24. 7 50, 845 9, 089 84. 8 15. 2 Total contracts assigned to finance companiesi Leading 4 finance companies 1 Total contracts assigned to banks 2 Leading 4 banks 2 11,917 9, 215 3, 901 3,782 100.0 77. 3 100. 0 96. 9 50,845 40, 786 9, 089 8, 860 100.0 80. 2 100. 0 97. 5 1 The total number of finance companies to which contracts were assigned by retailers surveyed was 21. The total number of banks to which cnntracts were assigned by retailers surveyed was 10. Source: FTC survey. Finance companies are most actively engaged in the purchase of installment contracts arising from retail sales transactions (table 111-3). Seventy-five percent of the total value of contracts assigned was assigned to finance companies, prin- cipally by general market appliance stores and low-income market retailers. Banks supplied 25 percent of all installment contract assignment financing, principally for general market furniture retailers. Nearly all of this business was done by four banks. For other retailers, most contracts were assigned to finance PAGENO="0277" 271 companies, four of which supplied 77 percent of the funding. General market appliance stores assigned virtually all of their contracts. Four finance companies took 90 percent of this paper. The pattern of assignments by low-income market retailers (who assigned only one-fifth of their paper) was less concentrated, with the top four finance companies accounting for only 65 percent of reported assignments. Installment Contracts Unassigned Of the $45.3 million in installment contracts reported for 1966 in the Com- mission's survey, $29.4 million or 65 percent was unassigned-held by the retailers themselves. The extent to which contracts were unassigned varied considerably by type of retailer. Department stores surveyed held all of their contracts; low- income market retailers held four-fifths (80 percent) ; and general market furni- ture stores held over two-fifths (43 percent) of the total value of their installment contracts. General market appliance retailers, however, held practically none (2 percent) of their installment paper (table 111-2). In total, of 65 retailers re- porting installment sales, 16 held all of their own contracts. They included 3 department stores, 8 of the 18 low-income market retailers, and only 5 of the 44 appliance and furiture stores. Finance Charges on Installment Contracts With one exception, the stated finance charges were calculated on an "add-on" basis by both low-income and general-income market retailers. This exception was a low-income market retailer who made no separate finance charges in cal- culating payments due on installment contracts. All of its sales were on a time basis and the price for these goods on the average was three times the cost of goods sold. This markup was somewhat higher than the average for low-income market retailers as a group, who, as a matter of course, added to their selling price additional charges for installment credit. Other retailers used "add-on" rate charts to determine customers' monthly payments. No account is taken of diminishing balances over the period and, consequently, the "add-on" is not a true or effective annual rate. Table 111-4 in- dicates that the average add-on rate for contracts assigned to finance companies and banks was 11.7 percent of the initial balance, and the average add-on rate for unassigned contracts was 10.7 percent of the initial unpaid balance.1 The true or effective annual rate that consumers were paying on these install- ment contracts was approximately twice the add-on rate. TABLE 11-4.-FINANCE CHARGES ON INSTALLMENT CONTRACTS ASSIGNED AND UNASSIGNED BY DISTRICT OF COLUMBIA RETAILERS, 1966 ]Dollar amounts Type of retailer Assigned contracts Finance charges on contracts as- signed to finance companies and banks Unassigned contracts Finance charges on unassigned contracts Percent Value of total Percent Effective add-on annual rate Percent Value of total Percent Effective add-on annual rate Totals' $15,818 100.0 211.7 221 `$27,174 100.0 210.7 220 Low-income market retailers 1 1, 441 9. 1 13. 4 25 `3, 596 13. 2 `12. 5 1 23 General market retailers 14, 377 90. 9 ` 11. 5 2 21 23, 578 86. 8 2 10. 4 219 Appliance, radio, and television re- tailers 8, 323 52. 6 12. 9 24 143 0. 5 10. 1 18 Furniture and homefurnishings re- tailers 6, 054 38. 3 9. 8 18 4, 554 16. 8 9. 2 16 Department stores None None 18, 881 69. 5 10. 7 20 I One low-income market retailer has been omitted, because it made no separate charges for installment financing. 2 Weighted averages. Source: FTC Survey. 1 The new Maryland "Retail Credit Accounts Law," which went into effect June 1, 1967, establishes a maximum of $12 per $100 per annum that may be added to the principal balance on Installment contracts that do not exceed $1,000. This is equivalent to a 22- percent effective annual rate of finance charges. PAGENO="0278" 272 This is because with each payment the amount borrowed was reduced, making the average balance borrowed about half the original unpaid balance. If it is assumed that equal payments are made at equal times (usually monthly) throughout the total period of the contract, the true or effective annual rate can be calculated by a relatively simple formula called the constant ratio method.1 This formula was applied and checked with actuarial rate tables to obtain the equivalent effective annual rates shown in Table 111-4 and subsequent figure and tables.2 For installment contracts entered into by the retailers surveyed, in 1966 the average effective annual rate of finance charges was 21 percent on those assigned to finance companies and banks and 20 percent on those held by the retailers themselves. Table 111-5 shows the distribution of all installment contracts by effective annual rates of finance charges for those retailers reporting charges on install- ment credit sales. The bulk of installment credit sales by low-income market retailers were at effective annual financing rates of 22 percent or more. Nearly half (47.9 percent) was at rates ranging from 26 to 33 percent. Contracts arising from sales by general market retailers rarely entailed such high charges. Three-fourths were at finance rates of 20 percent or less. This figure is heavily w-eighted by department store installment credit sales. Less than one percent of general market retailer contracts had finance charges exceeding 24 percent. Among general market retailers, only appliance stores had rates consistently exceeding 20 percent. These retailers assigned most of their contracts at effective annual rates of 23 to 24 percent. Thus, virtually all of the contracts involving rates exceeding 24 percent were written by low-income market retailers. Figure 111-1 summarizes the distribution of effective annual rates of finance charges on installment contracts of low-income market and general market retailers for all installment contracts, as well as for assigned and unassigned contracts. 1 The constant ratio method assumes that the allocation of the charge is proportional to the number of periodic payments. The formula is as follows 2mD i=P (n-i) In this formula `i" is the effective rate of finance charge per annum; "rn' Is the number of payments per year; "P' is the amount borrowed on principal; "D" is the financing charge in dollars; and "n" is the number of payments to discharge the debt. Neifeld, M. R., Neifeld's Guide to Installment Computations, Mack Publishing Company, Easton. Penn., 1951, Chapter XI. pp. 193-105; and Board of Governors of the Federal Reserve System, Consumer Installment Credit, Volume I, Part I (1957), p. 54. 2 The United States Rule prescribes the actuarial method of computation for finance charges. The use of the actuarial method is proposed in the pending "Truth in Lending" bill and the pending installment sales bill for the District of Columbia. The principle of the United States Rule is that "interest is to be computed on the amount due to the time of the first payment, then the payment applied, if it exceeds the interest up to that time, and a computation made of the interest on the balance to the time of the second payment, and so on." Neifeld, op. cit., p. 317. Tile effective annual rates shown in Table 111-4 and subsequent figure and tables were calculated from "add-on" rates by the constant ratio method and then checked against actuarial tables. Installment contracts for appliances and furniture seldom exceed 24 months. For this time period (under 36 months), the constant ratio method formula provides substantially the same results in effective annual rates as the actuarial method (United States Rule). Effective annual rates in Table 111-4 and subsequent figure and tables have beeen rounded to the nearest whole number. PAGENO="0279" 273 Effective Annual Rates of Finance Charges ______________________________ ~ None ASSIGNED CONTRACTS 3133m None 26- 30% ~ ~ `~i5~~ 5 0.7% 21-25% ~164.3% None 16 - 20% J 21.6% 1 15°~ 1 - 0 Rate not None available 31 - 33% ~j~0~~10.0% UNASSIGNED CONTRACTS 26 - 30% 21 - 25% ~ 6.6% 16-20% ~ 43.1% 1 15 113.6% 31 - 33(7/ ~:~~ji.i% ALL CONTRACTS None 26 - 30% 21 - 25% 16 - 20% ~ ~ 61.. ~. 4.0% 11-15/0 Rate not NIne avallableJj 1.8% I I 0 10 20 30 40 50 60 70 80 110 Percent of Total Value of Installment Contracts Low-Income Market Retailers Source: FTC Survey. General Market Retailers FIGURE III-1.-----Distribution of effective annual rates of finance charges on installment contracts of low-income and general market retailers, 1966. PAGENO="0280" 274 TABLE 111-5.-INSTALLMENT CONTRACTS DISTRIBUTED BY EFFECTIVE ANNUAL RATE OF FINANCE CHARGE (ASSIGNED AND UNASSIGNED)' Ioollar amounts in thousandsj Value of con Effective annual rate of finance charge Low-income market retailers (percent) Value of Percent of tracts at each effective annual r ate for- General market retailers All retailer s combined Value of Percent of Value of Percent of contracts total contracts total contracts total 33 $360 7.1 $360 0.8 29 283 5.6 $99 0.3 382 .9 27 1,087 21.6 26 685 13.6 1,087 685 2.5 1.6 24 23 22 871 17. 3 20 18 1,550 30.8 17 16 3, 541 9. 3 4,576 12.1 1, 173 3. 1 16,872 44.4 173 .5 6,311 16.6 77 .2 3, 541 4,576 2, 044 16,872 1,723 6,311 77 8.2 10.6 4. 8 39.2 4.0 14.7 .2 15 187 3.7 14 3,210 8.5 460 1.2 3,397 460 7.9 1.1 13 115 .3 115 .3 11 14 .3 635 1.7 649 1.5 Rate not available 713 1. 8 713 1. 7 Total 5, 037 100. 0 37, 955 100. 0 42, 992 100. 0 `Includes all installment contracts for which saparate financn charges were specified. Source: FTC survey. Contractnai Arrangements for Assignment of Installment Credit To better understand the factors determining finance charges, contracts were analyzed on the basis of whether they were assigned to finance companies and banks or held by retailers themselves. Assignment of contracts is a method of transferring the costs and, in many cases, the risk of handling installment con- tracts from the retailer to the finance company. There is a variety of contractual arrangements between retailers and finance companies or banks for the assign- ment of contracts. The nature of these arrangements is an important factor in determining finance charges. Contracts that are unassigned often have different risk characteristics than those that are assigned. Thus, finance charges may vary depending on whether or not retailers assign their contracts. Finance Charges on Assigned Installment Credit Uontracts.-Sixty-eight percent of the value of all assigned contracts carried finance charges yielding an effective annual rate of 22 percent or more. For low-income market retailers this proportion was 98 percent. Sixty-two of all assigned contracts had rates ranging between 22 and 24 percent (table 111-6 and figure Ill-i). Contracts assigned at these rates were, for the most part, entered into by general market appliance retailers. Practically all of the assignments at 17 percent or less were by general market furniture stores and, as noted below, usually involved recourse arrange- ments with banks. PAGENO="0281" 275 TABLE 111-6--ASSIGNED INSTALLMENT CONTRACTS DISTRIBUTED BY EFFECTIVE ANNUAL RATE OF FINANCE CHARGE [Dollar amounts in thousands[ Value of contracts at each effective annual r Effective annual rate of finance charge Low-income market retailers General market retailers (percent) - Value of Percent of Value of Percent of ate for- All retailers combined Value of Percent of contracts total contracts total contracts total 29 $283 19.6 $99 0.7 27 25 1.6 $382 2.4 23 .2 26 480 33. 3 480 3. 0 24 3, 535 24. 6 23 4,576 31.8 22 627 43.5 1,137 7.9 17 3,105 21.6 15 14 1. 0 2 (1) 14 460 3.2 3, 535 22. 3 4,576 28.9 1,764 11.2 3,105 19.6 16 - 1 460 2.9 13 115 .8 115 .8 11 14 1.0 635 4.4 649 4.1 Rate not available 713 5. 0 - 713 4. 5 Total 1,441 100.0 14,377 100.0 15,818 100.0 I Less than 0.1 percent. Source: FTC survey. Recourse Arrangements on Assigned Uontracts.-Most commonly, finance companies, in accepting assignment of installment credit contracts from retailers, reimburse the retailer for an amoimt equivalent to the unpaid cash balance in- dicated on the contract. In the simplest type of transaction, the finance com- pany's income from providing credit is equivalent to the stated financing charge and is designed to cover all costs of credit, collection, and risks of default. In fact, however, there are many possible variations on this type of trans- action. A number of these variations were uncovered in the course of our sur- vey. `The first and simplest relates to the question of recourse. Typically, con- tracts `assigned to finance companies are on a non-recourse basis. In such cir- cumstances the finance company assumes all risks associated with default and is solely responsible for any proceedings to enforce satisfaction of `the debt. A'ssignment, `however, may be on a recourse basis, in which case the retailer assigning the contract in effect guarantees it in the event of customer default. In terms of total value, almost all contracts on a recourse basis involved banks serving general market furniture retailers.' More than 50 percent of total assignments [and 73 percen't of `assignments to finance companies] were at rates yielding effective `annual finance charges of 23 to 24 percent (table 111-6 and appendix table A). The highest yielding non- recourse assignments to finance companies were by low-income market retailers. Fifty-five percent of such assignments yielded 26 to 29 percent. Assignments with the lowest finance charges (17 percent or less) involved, for the most part, banks who took paper on a recourse basis (appendix table A). Th'e latter's activity, however, was limited almost entirely to contracts involving sales by general m'arket furniture retailers. 1 There were instances, however, when finance companies took assigned installment contracts only on a recourse basis. These were usually on contracts assigned by low-income market retailers. PAGENO="0282" 276 Participation and Holdback Arrangements-In addition to recourse consid- erations, agreements between finance companies and retailers may specify par- ticipation or holdback fees. A participation arrangement, frequently referred to as a kickback, is a bonus given by a finance company to a retailer assigning a contract. This bonus involves some percentage return over and above the initial unpaid balance of the contract. It is the equivalent of the retailer and finance company splitting finance charges. Twenty-nine of the forty-nine retailers in our sample reporting installment contract assignments had a participation ar- rangement with one or more ftnance companies (table III-?). These returns to the retailer ranged between .5 percent and 5.0 percent of the amount of the unpaid cash balance. TABLE 111-7.-SPECIAL PROVISIONS INCLUDED IN CONTRACTUAL ARRANGEMENTS BETWEEN RETAILERS AND FINANCE COMPANIES OR BANKS Number of Type of retailer retailers assigning contracts Number of retailers reporting Partici patios arrangements IIoldback requirements I-Ioldback Range of by holdbacks financer (percent) Partici- patios (kickback) Range of No participation partici- (percent) patios Low-iscomo market retailers 10 4 1.2-2 6 5 5-30 General market retailers: Appliance, radio, and television retaiIers~ 21 17 1. 0-4 4 1 3-5 Furniture and home furnishing retailers. - 18 8 . 5-5 10 3 3-5 Department stores (t) Total 49 29 .5-5 20 9 3-30 1 Nose. Source: FTC survey. Holdback arrangements may be viewed as the reverse of kickbacks. There were nine retailers who reported a holdback requirement by finance companies. This is a restrictive provision assessed upon retailers who are in a poor bargaining position and have generally poor-risk paper that they want to assign. Finance companies and banks in these cases are reluctant to take the contracts unless the retailer is willing to take less than the full amount of the initial unpaid cash balance. In other words, the retailer must literally "pay" the finance company or bank to take the assignment. This is a payment over and above the finance charges paid by the customer originally signing the contract. Holdbacks, which ranged from 3 to 30 percent were reported primarily by low-income market retailers. These payments are held in reserve by the financer until all contracts are liquidated. Losses are charged against this reserve and holdback payments are returned to the retailer only if the losses do not exceed the amount held back. Low-Income market retailers were unable to assign a significant volume of installment contracts at less than 26 percent (effective annual rate) without some form of holdback arrange- ment. Other retailers assigning large quantities of paper, usually at 23 percent to 24 percent, for the most part, had no holdbacks charged against them. FInance Ci~arges on Unassigned Contracts Sixty-five percent of reported installment credit was unassigned (table 111-2). The volume of unassigned contracts on which finance charges w-ere made ($27.2 million) was heavily weighted by department stores who accounted for $18.9 million or over two-thirds of the total (table 111-4). Department stores were alone among retailers assigning no contracts. Installment sales amounted to 20 percent of their total sales. Other unassigned installment credit was supplied by general market furni- ture stores and low-income market retailers. General market furniture retailers held $4.6 million in contracts, equal to 43 percent of their credit sales and about 17 percent of total sales. Low-income market retailers held unassigned contracts of $5.9 million, equivalent to 80 percent of all their credit sales and nearly the same percent of their total sales. For those low-income market retailers imposing separate finance charges on installment credit, the value of unassigned contracts was $3.6 million, equal to 64 percent of this group's total sales. virtually all of which were on an installment credit basis. PAGENO="0283" 277 Ninety-three percent of the total value of unassigned installment contracts carried finance charges yielding an effective annual rate of 20 percent or less (table 111-8 and figure Ill-i). This was heavily affected by the relatively low rates on unassigned contracts financed by general market department stores and furniture stores. Finance charges on unassigned contracts of department stores ranged from 17 to 20 percent. Our survey indicated that most contracts (89 percent) were at tIne 20 percent rate (`appendix table B). Finance charges by general market furniture store's for the most part (8 percen't) ranged between 15 and 17 I)ercent. Finance charges by low-income market retailers were more variable. Among this group of retailers one large company, which sold entirely on installment credit, made no finance `c'harges on its unassigned installment contracts, pre- ferring instead to price its merchandise to cover installment costs. Other low- income market retailers charged an average effective annual rate of 23 percent on unassigned installment contracts. The highest effective annual rates of finance charges made were 33 perc'ent and 27 percent. Total con'tracts at these rates accounted for about 40 percent of the total value of contracts held by those low-income market retailers making finance charges. The other pre- dominant effective annual rate was 18 percent and accounted for 43 percent of the total value of contracts (table 111-8 and figure 111-i). TABLE 111-8-8.-UNASSIGNED INSTALLMENT CONTRACTS DISTRIBUTED BY EFFECTIVE ANNUAL RATE OF FINANCE CHARGE' [Dollar amounts in thousandsj Value of co Effective annual rate of finance charge Low-income market retailers (percent) Value of Percent of ntracts at each effective annual r ate for- General market retailers Value of Percent of All retailer s combined Value of Percent of contracts total contracts total contracts total 33 $360 10.0 27 1,064 29.6 26 205 5.7 $360 1,064 205 1.3 3.9 .8 24 22 244 6. 8 16 (2) 36 0. 1 6 280 (2) 1. 0 20 18 1,550 43.1 17 16 15 173 4. 8 16,872 71.6 173 .7 3,206 13.6 77 .4 3, 208 13. 6 16,872 1,723 3,206 77 3, 281 62.1 6.3 11.8 .3 12. 5 Total 3,596 100.0 23,578 100.0 27,174 100.0 1 Includes all installment contracts for which separate finance charges were specified. 2 Less than 0.1 percent. Source: FTC survey. Judg;neats, Garnishments, and Repossessions by Retailers When an account under an installment sales contract becomes delinquent, the holder of that contract can proceed to collect by several legal means. A judgment can be obtained that will permit repossession of the merchandise or garnishment of the wages of the purchaser.1 If the retailer has assigned the contract without recourse, the finance company or bank takes the risk of loss and proceeds to exercise its legal rights. Consequently, retailers are not involved in the collection process if they assign without recourse. If a delinquent account comes `back to the retailer who has assigned with recourse or if an account originally financed by the retailer himself becomes delinquent, the retailer does not `become involved in legal processes if he turns the account over to a collection agency. For :these reasons, many `retailers in `this survey had no records on the volume of judgments, garnishments, or repossessions. 1 Repossession can be accomplished without court action by the bolder of the Installment conditional sales contract. In such instances, if the proceeds of a public sale of the re- possessed Item does not cover the unpaid balance plus fees, the holder can still sue on the contract and get a judgment for the deficiency. PAGENO="0284" 278 fABLE 111-9.-JUDGMENTS, GARNISHMENTS, AND REPOSSESSIONS ON DELINQUENT INSTALLMENT CONTRACTS REPORTED BY DISTRICT OF COLUMBIA RETAILERS, 1966 Type of retailer Number of retailers reporting Total Judgments resulting in- judgments Garnishments Repossessions Low-income market retaIlers General market retailers: 11 2,690 1, 568 306 Appliance, radio, and television retailers Furniture and home furnishings retailers Department stores Total 3 8 1 3 70 26 13 29 9 23 2,789 1,603 322 Source: FTC survey. Eleven low-income market retailers obtained 2,690 judgments in 1966. Their legal actions resulted in 1,568 garnishments and 306 repossessions (table 111-9). In contrast, general market retailers reported very few judgments. The eight furniture and home furnishings stores providing such data reported only 70 judgments for the year 1966. Low-income market retailers obtained almost that number of judgments in an average weeh~. One large department store, whose 1966 sales far exceeded the total for the entire low-income market group, reported only 29 judgments. To gain additional perspective on the extent to which the courts are being used as a collection agency, the number of suits filed in 1966 by the surveyed retailers in their own names was determined from the records of the District of Columbia Court of General Sessions. These suits included actions for collection of 30-day, revolving credit, and installment contract accounts. They did iiot include suits filed by collection agencies as assignees of retailers' accounts. During 1966, the 18 low-income market retailers in this study filed 3,030 suits, the equivalent of one suit for every $2,599 of their net sales. Among the general market retailers in the sample, 22 appliance stores filed 53 suits; 22 furniture stores, 207; and 3 department stores, 356 (table 111-10). All together, there were only 616 suits filed by the 47 general market retailers, which averaged one suit for every $232,299 of their net sales. An additional unknown number of suits involving default on merchandise credit sales was filed by collection agencies. Various retailers may prefer to assign delinquent paper to a collection agency. This shifts the responsibility for obtaining legal assistance and minimizes whatever risk of bad publicity credit suits might incur. TABLE 111-10.-DEBT SUITS FILED IN THE DISTRICT OF COLUMBIA BY LOW-INCOME MARKET AND GENERAL MARKET RETAILERS, 1966 Type of retailer Number of suits filed Number of retailers Net sales 1966 (thousands) Nat sales ser debt suit Total ssmpie of low-income market and general market retailers Low-income market retailers General market retailers Appliance, radio, and television Furniture and home furnishings Department stores 3. 6t6 65 $150, 970 $01, 407 3.030 616 18 47 7,874 143, 096 2,599 232. 299 53 207 356 22 22 3 25, 089 26,643 91,364 473. 377 128,710 255,640 Source: District of Columbia Court of Goneral Sessions, Debt Suit Files; FTC survey. Nevertheless, it is clear that general market retailers resort to the courts, either directly or indirectly, much less frequently than do low-income market retailers. If the 47 general market retailers bad obtained judgments at the same rate as did the low-income market retailers, a very large niimber of court cases would have occurred. Instead of the 616 judgments which they actually PAGENO="0285" 279 obtained, general market retailers would have had a total of 55,000 judgments if they had filed one suit for every $2,509 in sales, as did the low-income market retailers (table 111-10). In fact, the total number of suits tin 1966 involving claims of $10,000 or less was 49,000, only a part of which were claims for pay- ment for merchandise purchases. The latter figure involved claims for a multi- tude of causes: auto accidents, small loan defaults, failure to pay utility bills and the like. Clearly, a number of low-income market retailers have come to view the courts as an integral part of their credit-collection system and in so doing have put a heavy burden on our legal system. CHAPTER IV CUSTOMER PROFILE OF LOW-INCOME MARKET RETAILERS: A CASE STUDY This chapter provides a `profile of the familial, age, income, occupational and certain other characteristics of the customers of a low-income market retailer of furniture and appliances. It also explores the credit alternatives available to these customers, the products they most frequently purchase, and the length of their installment contracts. The analysis is based on a sample of 486 install- ment contracts and credit applications on sales made by one low-inc;ome market retailer and provides an insight into the unique nature `of the low-income con- sumer market. Customer Characteristics Marital Status and Sew-Almost two-thirds (63.0 percent) of the customers in the sample were married couples (table IV-1). Whenever possible the s:'a'les- man endeavored to have both the wife and husband sign the `contracts. In many cases, however, only the signature of the wife was obtained. TABLE V-i--MARITAL STATUS AND SEX OF CUSTOMERS Married Single Men Women Divorced Men Women Separated - Men Women Widowed Men V/omen Total Married couples Individual men Individual women Total 306 63.0 68 14.0 27 41 8 1.6 74 15.2 11 63 30 6.2 29 486 100.0 306 63. 0 40 8.2 140 28.8 486 100.0 Source: Bureau of Economics, Federal Trade Commission. Most of the remaining customers were women (29 percent). Half of these women were divorced or, separated. Age Distribution of Customers.-Since in most instances data were given for both husband' and wife, the age distribution was made for the combined sample of men and women. Most of the sample of customers were between 20 and 40 years old (table IV-2), the. largest group being between 20 and 29. Few sales were made to customers under 20 or over 50 years of age. Status and sex Number of customers Percent of total PAGENO="0286" 280 TABLE IV-2.-COMPARISON OF AGE (OVER 20) DISTRIBUTION OF CUSTOMERS WITH 1960 U.S. CENSUS AGE (OVER 20) DISTRIBUTION FOR ALL DISTRICT OF COLUMBIA RESIDENTS Age distribution Percent of number reporting in-i Sample of U.S. Census 2 customers 2 20 to 29 years 30to39 years 40. 1 22. 1 31.6 21.0 400049years 500o59years 60yearsand over 17.4 19.7 7.7 17.3 3.2 19.9 Total 100.0 103.0 1 Does not include 13 customers (1.7 percent) undnr 20 years of age. 2 The sample included a total number of 748 individuals over 20 years of age. 3 Percentages derived from U.S. Census of Popu!atiss, 1960, vol. I, `Characteristics of the Population," pt. 10, District of Columbia, p. 19. Source: Bureau of Economics, Federal Trade Commission. The sample included almost twice the proportion of individuals in the 20 to 29 years age group as was reported in the 1960 Census. The proportion in the 30 to 39 years age group was also considerably larger than that group shown in the Census age distribution. This is not surprising since installment purchases of furniture and household items are most likely to be made by individuals during their active years of family formation. Size and Type of .Pamilies.-The number and type of families or households with 2 or more persons represented by the customers in the sample are shown in table IV-3. Leaving out unrelated individuals, there was a total of 420 families. Two characteristics of family organization can be noted. First, there was a com- paratively large number of families with female heads-of-household (24 percent). Almost one-fourth of the customers were single, separated, or widowed women who were primarily responsible for family support. TABLE IV-3.-SIZE AND TYPE OF CUSTOMERS' FAMILIES DISTRIBUTION OF CUSTOMERS BY TYPE OF FAMILY Type of family Number Percent of total families Husband-wife 306 72. 9 Other male head 15 3. 5 Female head 99 23. 6 Total families Unrelated individuals 420 66 100. 0 Total customers 486 SIZE DISTRIBUTION OF CUSTOMERS' FAMILIES COMPARED WITH 1960 U.S. CENSUS SIZE DISTRIBUT1ON OF DISTRICT OF COLUMBIA FAMILIES Number of Percent of total families Size of family customer families Customers U.S. census1 2 persons 78 18. 6 40. 6 3 persons 74 17.6 21.3 4 persons 85 20. 2 15. 2 5 persons 78 18.6 9.5 6 persons 40 9. 5 5. 7 7 or more 65 15. 5 7. 7 Total 420 100.0 100.0 Average per family 2 4, 3 1 Percentages derived from U.S. Census of Population, 1960. vol. I, "Characteristics of the Population," pt. 10, District of Columbia, p. 92. 2 Census average per family is 3.5 persons. Source: Bureau of Economics, Federal Trade Commission. PAGENO="0287" 281 Second, customers' families were larger than average when compared to all District of Columbia families. The average size of these families was 4.3 persons, as compared with a Census average of 3.5 persons per family. Only 19 percent of the sample was in the 2-person family category, as compared with 41 percent of the Census family population in this size group. The larger families were much more prevalent in the sample of customers. Almost half (43.6 percent) of custom- ers' families were of five persons or more, while less than one-fourth (22.9 per- cent) of the Census family population was in this size group. Types of Residence-The types of residence of customers are shown in table IV-4. Most of the sample of customers (93 percent of the total) rented an apart- ment, house, or room. Only 6.4 percent of the customers in this sample either owned or were buying their own residence. For 1960 the Bureau of the Census indi- cates that 61 percent of all housing units were owner-occupied. Among non-whites In the population the figure was 38 percent.1 TABLE IV-4.-TYPES OF RESIDENCE OF CUSTOMERS Type residence Number Percent of total Rental: Rent apartment1 Rent house Rentroom Total, rentals Ownership: Buying house Owns house Buying apartment Total, ownerships Live with relatives Total, sample 318 131 3 65.4 27. 0 .6 452 93. 0 27 3 1 5. 6 . 6 . 2 31 3 6. 4 . 6 486 100. 0 I Includes 1 customer who was a custodian and received the use of an apartment as part of his income. Source: Bureau of Economics, Federal Trade Commission. Income of Uustomers.-The distribution of customers by monthly income and annual income categories is shown in table TV-S. `The data used to prepare these tabulations included total family income earnings of husband and wife when `both were employed and income from sources `other than employment. TABLE IV-5.-INCOME OF CUSTOMERS MONTHLY FAMILY INCOME OF CUSTOMERS, 1966 Monthly income Number Percent of total Lessthan $100 $lOOto $199 $200 to $299 5 52 130 1.0 10.7 26.7 $300 to $399 $400 to $499 117 66 24.1 13.6 $500 to $599 65 13.4 $600 to $699 22 4.5 $700 to $799 $800 and over Total 17 12 35 2.5 486 100.0 Note: Median monthly income, $348. 1 Statistical Abstract of tine United States, 1965, p. 763, Table No. 1107. PAGENO="0288" 282 ANNUAL FAMILY INCOME OF CUSTOMERS COMPARED WITH ESTIMATES OF 1966 INCOME OF DISTRICT OF COLUMBIA HOUSEHOLDS Annual income Annual family income of customers 1 Estimated percent distribution of 1966 income of all households in the Number Percent reporting of total District of Columbia 2 Less than $3,000 $3,000 to $4,999 $5,000 to $7,999 $8,000 to $9,999 $10,000 and over Total 129 26. 5 193 39. 7 129 26. 5 26 5. 4 9 1.9 16. 6 15. 6 27. 8 12. 2 27.8 486 100.0 100.0 `Income for customers, reported in the spring of 1966, was projected to annual by multiplying monthly family income by 12. Income was repurted before taxes or deductions. 2 Estimates published by Sales Management magazine, June 10, 1967, `Survey of Buying Power," p. D-47. These estimates are of spandable or disposable income. They are not strictly comparable with before-tax income reported by customers. Note: Median annual income: Customers, $4,176; estimate for District of Columbia, $3,920. Source: Bureau of Economics, Federal Trade Commission. The median monthly family income of the sample of customers-with about one- half below and about one-half above this level-was $348 in 196G. This is very low when it is recognized that the average size of family for this sample was 4.3 per- sons. More than one-third (38.4 percent) of the total customers received income of less than $300 per month; about one-quarter (24 percent) received from $300 to $399 per month; and one-quarter (27 percent) received from $400 to $599 per month. Only about one-tenth of the customers received a monthly income of $600 and over during the year 1966. The Bureau of Labor Statistics recently estimated that the maintenance of a moderate standard of living for four in Washington, D.C. requires a monthly income of $730.' A comparison of annual family income categories of the sample of customers with estimates of the distribution of 1966 annual income of all households in the District of Columbia is given at the bottom of table IV-5. The estimates for 1966 are actually based on disposable income, which should be less than the gross income reported by the sample of customers. The median annual income of sample customers was $4,176, as compared with the median estimate of $6,920 for all families in the District of Columbia. Almost two-thirds of the customer sample (66 percent) had an annual income of less than $5,000, while for the District of Columbia as a whole only about one-third (32 percent) of the house- holds had incomes below $5,000. The moderate income bracket of $5,000 to $7,999 accounted for about one-fourth of the income of customers in the sample and estimated income of all families in the District of Columbia. There is a very sharp contrast for the income bracket over $8,000; the sample of customers in- cluded only 7 percent in tilts relatively affluent group, while it was estimated that 40.0 percent of all families in the District of Columbia had incomes of over $8,000 in 1966. These comparisons clearly indicate that the customers in the sample were individuals with below average income. ~S'ources of Income.-The principal source of income of customers was wages from occupations. The data in table IV-6 show a breakdown of wages and other sources of income for married couples, individual men, and individual women in the sample of customers. Out of a total of 306 married couples, in 119 cases (or 38.9 percent) both hus- band and wife were employed. Practically all of the individual men customers were employed. For the individual women in the sample, however, out of a total of 140, there were 37 (or 26 percent) who were not employed. 1 ThIs estimate is for a family of four living in a rented residence during 1966 in the Washington. D.C. metropolitan area. Phillis Groom, "A New City Worker's Family Budget," Monthly Labor Review, Bureau of Labor Statistics, November 1967, P. 3. PAGENO="0289" 283 TABLE IV-6.-SOURCES OF INCOME OF CUSTOMERS Source of income Marriod couples: Number Both husband and wife employed 119 Husband onlyworking 169 Wife only working 8 Neitheremployed 10 Total married couples 306 Social Security and pensions 14 Welfare recipients Individual men: Employed Not employed Total individual men 40 Social Security and pensions 2 Welfare recipients Individual women: Employed 103 Not employed Total individual women 140 Social Security and pensions 30 Welfare recipients 21 Alimony recipients 10 Income from relatives Income received from occupations: Both husband and wife (119 times 2) 238 Others employed _~~Z Total gainfully employed ~ Income from other sources: Social Security and pensions 46 Welfare recipients 31 Alimony recipients 10 Income from relatives Total other sources 92 Source: Bureau of Economics, Federal Trade Commission. Social Security and pensions w-ere a source of income for very few married couples and individual men customers. However, there was a considerable num- ber (30) of individual women, primarily widows, who received income from these sources. There were 31 welfare recipients in the sample, accounting for 6.3 percent of the total sample of 486 separate customers. Most of these (68 percent) were in- dividual. women, usually separated, who were receiving welfare payments for themselves and for support of children. Other sources of income were alimony payments and income received from rela- tives. There were a number of women (15) who were wholly or partially de- pendent on these income sources. Frequently low-income married couples, as well as individual men and women, received income from more than one source. Part-time employment often supple- unented Social Security and pension income, support payments, and alimony. Occupations of Uustomers.-A detailed tabulatioh of occupations of customers (including working wives) is shown in table P1-7. As is suggested by the prececi- ing data on incomes, the predominant number of customers were In low paid occupations. The largest occupational group was Service Workers (including food service, janitors, and hospital workers), accounting for more than one- quarter (28 percent) of total employment. The next largest category was Opera- tives (including truck and other drivers and laundry and dry cleaning workers), accounting for 18 percent of total employment. Laborers represented 15 percent and Household or Domestic Workers 15 percent of the employment of customers. These four occupational groups together accounted for three-quarters (75 per- cent) of all employment reported. Clerical Workers (both men and women) accounted for 12 percent of the sample; and Craftsmen (mostly construction) accounted for an additional 10 percent. The other occupational groups-Sales Workers, Professional Workers, Managers, and Members of the Armed Forces-taken together accounted for only 4 percent of the total employment of customers. SS-64S-6S-----19 PAGENO="0290" 284 TABLE lV-7.-OCCUPATIONS OF CUSTOMERS IBased on total of 555 individual men and women (including wiv en) reporting employment] Type of occupation Number Percent of total Service workers, except hounehold 153 27. 6 Food service workers Janitors, porters, and charwomen Hospital service workers Other service workers Operatives and kindred workers Truck, taxi, and other drivers Laundry and dry cleaning workers Other operatives Laborers, except farm and mine Household or domestic workers Clerical and kindred workers 61 40 30 22 11. 0 7. 2 5. 4 4. 0 99 17. 8 54 19 26 9. 7 3.4 4. 7 84 82 64 15. 1 14. 8 11.5 Mail carriers and clerks Other men clerical workers Other women clerical workers 12 23 29 2. 2 4. 1 5. 2 Craftsmen, foremen, and kindred workers 53 9. 6 Construction craftsmen Foremen Other skilled workers 37 5 11 6. 7 . 9 2. 0 Sales workers Professional and technical workers Managers and proprietors Members of the Armed Forces 6 5 3 6 1. 1 . 9 . 5 1. 1 Total 555 100.0 Source: Bureau of Economics, Federal Trade Commission. A comparison of civilian occupations of customers with the 1960 U.S. Census percent distribution of occupations among District of Columbia residents is given in table IV-8. Manual occupations of customers in five categories (Service Workers, Operatives, Laborers, Domestic Workers, and Craftsmen) accounted for 86 percent of total employment in the sample, while these same categories accounted for only 44.0 percent of the civilian employment in 1960 of all residents of the District of Columbia. Clerical Workers made up only 12 percent of the civilian employment of customers, while more than twice that proportion (29 percent) were employed in clerical work among the total population. Only 2 percent of customers in the sample were employed as Professional and Tech- nical Workers or Managers and Proprietors, while 23 percent of total civilian employment in the District of Columbia were in these two occupational categories. Credit Availability The family, occupation and income characteristics outlined in the preceding pages are central considerations in the granting of credit to any prospective customer. As a group, the customers included in the sample would be judged marginal risks by most prospective credit grantors. In fact, a review of credit references noted in the 486 contracts subjected to detailed analysis revealed that 70 percent indicated either no credit references or credit references from low- income market retailers only (table IV-9). For those with monthly incomes of less than $300, the figure was 78 percent. Except for limited purchases, customers in this group for the most part would be considered unqualified to receive credit from general market retailers. Access to alternative credit sources increases with higher income, even for the group included in the study sample. Only 22 percent of individuals with income below $300 per month had established credit at retail and financial establish- ments other than low-income market retailers; on the other hand, 43 percent of those with income exceeding $500 per month had such credit. For those with incomes in the $300 to $500 bracket, the figure was 31 percent (table IV-9). Somewhat surprising, however, is the high proportion of customers with income above average for the sample who had established credit only with low-income market retailers. Though some may still have failed to qualify for credit else- PAGENO="0291" 285 TABLE IV-8.---CIVILIAN OCCUPATIONS OF CUSTOMERS COMPARED WITH 1960 U.S. CEN DISTRIBUTION OF CIVILIAN OCCUPATIONS IN THE DISTRICT OF COLUMBIA SUS PERCENT * Civilian occupations of customers 1 1960 U.S. census of the District of Columbia 2 Occupation groups Percent of Number total (percent dix- tribution of civilian occupations) Service workers, except household 153 27. 9 Operatives and kindred workers: 99 18. 0 Laborers, except farm and mine 84 15. 3 Household or domestic workers 82 14.9 15. 1 9. 7 5. 5 5. 8 Clerical and kindred workers 64 11. 7 28.5 Craftsmen, foremen, and kindred workers 53 9. 7 Sales workers 6 1.1 7. 9 4.7 Professional and technical workers 5 . 9 16. 1 Managers and proprietors 3 . 5 Farmers and farm laborers 6. 6 .1 Total 549 100.0 100.0 1 Members of Armed Forces omtted. Consequently, total and percentages are different from preceding table. 2 Percentages derived from U.S. Census of Population, 1960, vol. I, "Characteristics of the Population," pt. 10, District of Columbia, p. 38. The civilian occupational distribution is for combined male and female employed persons. Source: Bureau of Economics, Federal Trade Commission. TABLE IV-9.-CREDIT REFERENCES OF CUSTOMERS' (CLASSIFIED BY INCOME GROUPS OF CUSTOMERS) Type of credit reference Less than $300 Month fy incom e groups of customers Total number of cus- tomers Percent of total Percent of group total $300 to $499 Percent of group total $500 and over Percent of group total No credit references submitted 99 53. 0 91 49. 7 44 37. 9 234 48. 1 Credit obtained only from other low-income market retailers 46 24. 6 36 19.7 22 19. 0 104 21.4 Subtotal 145 77.6 127 69.4 66 56.9 338 69.5 Credit obtained from other types of retailers and financial institutions_ 42 22. 4 56 30. 6 50 43. 1 148 30. 5 Total 187 100.0 183 100.0 116 100.0 486 100.0 1 Credit reference data obtained from credit applications submitted by customers to 1 low-income market retailer. Source: Bureau of Economics, Federal Trade Commission. where due to heavy indebtedness, numerous dependents, or uncertain job status, others surely could have qualified as acceptable credit risks of general market retailers. Apparently certain customers continued to buy at high-price, high- margin stores because of inadequate knowledge concerning alternative buying opportunities. Still others bought from such stores because of personal relation- ships maintained by the retailer. Personal selling is an important part of the marketing effort of these high-price retailers. Continuing contact with customers is maintained through the use of outside salesmen or as a result of frequent visits by customers to make installment payments. Upon each visit the customer may be subjected to additional sales persuasion.' Characteristics of Purchases and Installment Contracts From the sample of 486 contracts, it was possible to determine the size of pur- chases, kind of merchandise purchased, and length of contracts. Additional tabulations were made to indicate the purchases and payment schedules of wel- fare recipients and customers with the lowest monthly incomes. Size of Purc/u~se.-The total amount of purchases represented by the sample of 486 contracts was $100,613, or an average, purchase of $207. The contracts were for varied amounts, from less than $50 to $800 and over (table IV-10). More than half of the purchases (53.7 percent) amounted to less than $100. 1These and other factors are discussed in: David Caplovitz, The Poor Pay More, Fre' Press of Glencoe, 1063, a case study of low-income market retailers In New York City PAGENO="0292" 286 Purchases of $100 to $299 accounted for 15.0 percent of the total contracts. One- fifth (20.8 percent) of the contracts were for $300 to $400. Only 10.5 percent of the total number of purchases made were for $500 or more. TABLE IV-10.--SIZE OF PURCHASES Value of purchase Number of purchases Percent of total Lensthan$50 43 8.8 $50 to $99 218 44.9 $lOOto$199 34 7.0 $200 to $299 39 8. 0 $300 to $399 60 12.4 $400 to $499 41 8.4 $500 to $599 20 4.1 $600 to $699 14 2. 9 $700 to $79~ 9 1.9 $800andover Total 8 1.6 486 100.0 Note: Average size of purchase, $207.02. Comoutation of average size of purchase based on total of 486 purchases and $100,613 total sales. Source: Bureau of Economics, Federal Trade Commission. Length of Instalim ent Contracts.-Credit payment schedules were designed to fit the customers' income schedules. Typically, contracts for less than $100 were arranged with weekly payments over a period of a year. Other contracts required bi-weekly payments. The data in table 1ST-li are expressed in months although frequently payment periods were weekly or bi-weekly. Installment contracts for 6 months or less made up only 18 percent of the total contracts (table TV-il). Payments for 7 through 11 months accounted for 21.0 percent of the total. The largest number of contracts (28 percent) were for 12 months. Large purchases of furniture or household appliances were generally made under contracts extending beyond a year. About one-fifth of the contracts (21 percent) were for 13 through 17 months; and the remainder (12 percent) were contracts extending from 18 through 22 months. There were no contracts in the sample for a single merchandise purchase that exceeded 22 months. With regard to the maximum length of contract, it should be pointed out that this case study sample may not be representative of low-income market retailers generally. Commission records indicate that other low-income market retailers frequently extend their installment contracts on purchases of appliances and fur- niture to 24,30, and 36 months. Merchandise Purchased-Principal items and lines of merchandise pur- chased by the sample of 486 customers are shown in table IV-12. TABLE IV-11.-LENGTH OF INSTALLMENT CONTRACTS Lesgth of cs~tract P~Cr~ of 6monthsorless 87 17.9 7 to 11 months 102 21. 0 12 months 138 28. 4 13 to 17 months 103 21. 2 18 to 22 months Total 56 11.5 486 100.0 Source: Bureau of Economics, Federal Trade Commission. Purchases of furniture items accounted for 27.8 percent of the total number of 486 merchandise `purchases by customers in the sample. This was exceeded slightly by the combination of household utensil merchandise lines (cookware, chinaware, and silverware), which together accounted for 29 percent of total purchases. Home entertainment lines of merchandise (including television sets, stereo-phonographs, and radios) made up 21 percent of total items purchased. These three categories of merchandise together accounted for more than three- quarters (78 percent) of the total number of purchases by customers in the sample. PAGENO="0293" 287 TABLE IV-12.-PRINCIPAL ITEMS AND LINES OF MERCHANDISE PURCHASED Merchandise Number of purchases Percent of total Total 486 100.0 Source: Bureau of Economics, Federal Trade Commission. Other merchandise purchased included a variety of items in the home furnish- ings, appliance, and jewelry merchandise lines. Linens, curtains, and slipcovers accounted for 0 percent of total purchases; and fans, irons, and other small appliances, for another 6 percent. Major appliances, including washing machines and refrigerators, represented only 5 percent of total number of purchases. Jewelry merchandise, including watches and rings, made up 4 percent of the total; and other types of merchandise accounted for the remainder of 2 percent. On the basis of value of merchandise, rather than number of purchases, furni- ture was by far the most important merchandise line. Second in importance was the home entertainment merchandise line, including television and stereo-phono- graph sets. Although the most typical purchase was of merchandise valued at less than $100, the mean average of all purchases was raised to $207 by large- value purchases of furniture and home entertainment merchandise lines. Ewamples of Individual Pnrehases There were 38 examples of relatively large purchases, of over $300 in value, by customers reporting monthly income of less than $300. These substantial pur- chases of the lowest income group are summarized in table IV-13. Almost half of these customers (18 out of 38) had a prior balance which was unpaid at the time the substantial additional purchase was made. Payments and length of contract in these instances were based upon the new combined balance. Customers, in making such purchases, assumed very burdensome financial obligations.. For instance, the second example in table IV-43 shows that a family of four purchased a stereo-phonograph for $463, agreeing to pay $32 for 15 months, when their monthly income was only $184. Another example, eleventh in table IV-43, shows that a woman with three persons to supportbought furni- ture for $1,339, agreeing to pay $66 for 21 months, when her monthly income was only $288. Home entertainment items most frequently appeared among large purchases by low-income members of the sample. Of the 38 examples listed in table IV-13, 21 involved the purchase of television or stereo sets. The prices paid for these items were, without exception, extraordinarily high. The price range of televisions was between $309 and $566. Among the television sets purchased, only one was a color model and it sold for $566. The black and white model price range was between $309 and $412. For stereos the price range was $340 to $505. A review of television prices reported by general market retailers revealed that in no instance was any high-volume black and white television sold for more than $180. Most popular models were priced between $100 and $150. Although Merchandise items: Furniture Cookware Television sets Stereophonographs Linens Chinaware Fans Radios Watches and clocks Washing machines Refrigerators Other merchandiseitems 135 27.8 116 23.9 60 12.3 27 5.6 23 4.7 21 4.3 21 4.3 17 3.5 14 2.9 11 2.3 7 1.4 34 7.0 TotaL 486 100.0 Merchandise lines: Household utensils Furniture Home entertainment Home furnishings Small appliances Major appliances Jewe!ry Other merchandise 139 28.6 135 27.8 104 21.4 29 6.0 29 6.0 23 4.7 19 3.9 8 1.6 PAGENO="0294" 288 TABLE lV-13.-SUBSTANTIAL PURCHASES BY LOW-INCOME CUSTOMERS I Number of Prior New Monthly Payment Length of Customer persons in Item purchased Cost balance balance income per contract household month 2 (months) Female 1 20 Man and wife 4 15 Do 2 17 Female 1 19 Do 3 18 Do 8 18 Man and wife 5 18 Female 2 18 Do 4 19 Do 9 19 Do 3 21 Man and wife 4 20 Female I 17 Male 4 18 Do 1 18 Female 2 18 Man and wife 2 20 Do 2 17 Male 3 15 Female 1 18 Do 4 18 Man and wife 1 17 Do 6 19 Female 1 19 Man and wife - 4 17 Do 2 18 Female 5 19 Do 3 19 Do 3 21 Man and wife 6 18 Do 3 18 Do 5 18 Female 5 19 Man and wife 2 19 Female 2 19 Man and wife 4 20 Female 1 13 Man and wife 3 19 I All purchases of over $300 by customers having monthly income of less than $300 in the total sample of 486 customers. 2 Payments and length of contract were all converted to a monthly basis. Many of the actual contracts specified weekly or biweekly payments. Consequently, when converted the number of payments times the monthly amount of payment, in most instances, did not exactly equal the amount of the original unpaid balance. After conversion and for some that were already on a monthly basis, the last monthly payment to fully satisfy the balance was usually less than preceding monthly payments. Source: Bureau of Economics, Federal Trade Commission. color models were available at $000 and more, several of the most popular models sold for between $2-SO and $300. The price range on stereo sets was highly variable. Portables typically were priced under $100. Cabinet models ranged up to $600. Among the most popular models sold by general market retailers, three-quarters were priced to sell at less than $200. In only two instances (out of 50) was the most popular model priced at more than $400. For the seven purchases of stereos by customers with incomes below $300, the median price was $412 (table IV-13). Consumer Reports in a recent study recommended as a best buy for home stereo entertainment a model priced at less than $200.1 In table IV-13, one refrigerator and one washer purchase is indicated. The refrigerator sold for $360.2 No popular model refrigerator sold by general market retailers was priced so high. Most sold for between $200 and $250. A number were available at less than $200. The one washing machine purchase indicated in table IV-13 involved a $412 transaction. In iso instance did general market retailers report sales of popular model washers at prices exceeding $2.50; 21 of 36 examples of popular models sold for less than $200 and five for less than $1.50. There was a total of 31 welfare recipients in the sample of customers; ~ietaiIs concerning their purchases are given in table IV-14. Most of the purchases made by customers on welfare were in modest amounts of less than $100. The payments on these small purchases were arranged on a weekly or monthly basis, so that Stereo $505 $505 $240 $26 do 463 463 184 32 Furniture 506 506 262 30 do 689 689 220 38 Television 371 $47 418 248 24 Furniture 309 309 180 18 do 410 410 218 24 Television 309 309 220 18 Stereo 381 165 546 136 30 relevision 309 428 737 194 40 Furniture 1,339 1,339 288 66 Television 309 309 218 16 Stereo 391 391 206 24 do 412 412 260 23 Television 566 566 280 32 Furniture 319 714 1,033 200 60 do 792 792 270 40 do 372 372 240 22 Television 309 309 210 21 Furniture 412 412 280 24 Television 309 15 324 216 18 Furniture 370 370 296 22 Television 360 218 578 240 32 Furniture 463 463 268 25 Television 309 208 517 286 32 Furniture 463 100 563 200 32 do 515 515 238 28 Stereo 340 28 368 252 20 Refrigerator 360 15 375 240 18 Television 402 20 422 188 24 do 360 180 540 200 30 Stereo 412 188 600 200 35 Washer 412 318 730 245 40 Television 412 40 452 225 24 Furniture 721 25 746 200 40 Television 309 80 389 290 20 do 309 309 280 24 Furniture 412 249 661 237 36 1 (Thn.cunxer Reports. Busying Guide Issue, December 1967, p. 293. This was a standard single-door model electric refrigerator. PAGENO="0295" 289 with some effort on the part of these customers it would seem possible for them to have made `payments out of their low monthly welfare income. There are a number of examples of relatively large purchases, however, by the welfare reci- pients listed in table P1-14. Six purchases by individuals on welfare involved television or stereo sets. The five televisions sold ranged between $20G and $402 (table IV-14). The $402 set was purchased by a family of six with a reported monthly income of $188. This family agreed to installment payments of $24 a month. After siich a payment the monthly income per person for this family was $27. TABLE IV-14.---WELFARE RECIPIENTS-ITEMS PURCHASED, MONTHLY INCOME, AND PAYMENTS Customer 1 Number of persons in household Item purchased Price Monthly income Payments Female 5 Cookware $51. 45 $228 $4 a month. Do 4 do 51. 45 300 $1 a week. Do 4 Linen 51. 45 228 Do. Do 6 Fan 51.45 141 $4a month. Do 9 TV 308. 95 194 $40 a month. Man and wife 2 Cookware 51. 45 208 $4 a month. Do 4 Radio 51.45 150 $1 a week. Do 6 Fan and iron 97. 90 187 $10 a month. Female 3 Cookware 51. 45 103 $4 a month. Do 4 China 51. 45 160 Do. Do 7 Cookware 51. 45 276 $1 a week. Do 4 Furniture 94. 56 299 $10 a month. Do 5 Cookware 51. 45 260 $4 a month. Do 7 do 51. 45 279 Do. Man and wife TV 360. 45 240 $32 a month. Female Do 3 3 Stereo Cookware 339. 85 51. 45 252 164 $20 a month. $4 a month. Do Man and wife 1 3 0 Furniture TV 154. 45 205. 95 185 183 $12 a month.. $11 a month. Female Do 6 6 Appliance Furniture 25. 70 41. 15 275 312 $4 a month. Do. Male 1 do 41. 15 100 Do. Female Do 3 1 Slipcovers Furniture 53. 46 79. 95 252 120 $5 a week. $2 a week. Do 6 China 51.45 175 $4 a week. Man and wife Furniture 411. 90 237 $36 a month. Female 1 Cookware 51. 45 130 $5 a week. Do Man and wife 3 6 do TV 51. 45 257. 45 168 256 $1 a week. $15 a month. Do 6 TV 401. 65 188 $24 a month. Do 5 Cookware 51. 45 300 $1 a week. I of the 21 female heads of household that were customers and welfare recipients, 14 indicated they were separated, 4 reported they were single, 2 were widowed, and 1 was divorced. Source: Bureau of Economics, Federal Trade Commission. The preceding analysis of the customers and of `their purchases from one low-income market retailer has revealed some unique characteristics of con- sumers in the low-income market. The average customer of this retailer had a family of 5 which he was endeavoring to support on an income of $348 per month. This average income is far below the estimate of $730 per month which the Bureau of Labor Statistics recently estimated as the minimum needed to maintain a moderate staoadard of living for a family of only 4 in Washington, D.C. Yet, these customers made furniture and appliance purchases averaging over $200 on installment credit contracts. They paid substantially higher prices than they would have paid general market retailers for comparable merchandise, placing an additional strain on their meager incomes. The examples of relatively large purchases (over $300) made by customers in the lowest income group (under $300 a month) indicate that consumers in the low-income market are influenced by very strong motivations to buy furniture and appliances and they are willing and able, in most instances, to make small payments over a period of time to satisfy their needs and desires. PAGENO="0296" 290 REsoLUTIoN DIRECTING THE INVESTIGATION OF RETAIL SALES AND CREDIT PRACTICES IN THE DISTRICT OF COLUMBIA Am~A WHEREAS the Federal Trade Commission, by virtue of subsections (a) and (b) of Section 6 of the Federal Trade Commission Act, has the authority to in- vestigate the business and practices of any corporation engaged in interstate com- merce and its relation to other corporations, individuals and partnerships, and to require corporations engaged in such commerce to file written special reports with the Commission in such form as the Commission may prescribe, as to its business practices and relation to other corporations, partnerships and indi- viduals; and WHEREAS the sale of merchandise through installment credit constitutes an important means of distributing goods in the national economy and the District of Columbia, the purchase of such goods is of major importance to lower income groups, as well as other consumers; and abuses of retail credit and deceptive practices in the advertising and sale of such goods under credit arrangements may be of serious consequence; and WHEREAS it appears to the Federal Trade Commission that it is in the public interest for it to conduct an investigation of retail credit practices connected with the sale of goods in the District of Columbia for the purpose of aiding it in the enforcement and administration of the statutes committed to it for enforcement: NOWT, THEREFORE, IT IS HEREBY Resolved, that the Federal Trade Com- mission, in the exercise of the pow-ers vested in it by law, and pursuant to its published procedures and rules of practice (16 C.F.R. Sec. 1.1 et seq.), and with the aid of any and all compulsory processes available to it, including the use of subsection (b) of Section 6 orders to file special reports, forthwith proceed, through its Bureau of Economics, to investigate and collect information for the reasons and purposes stated herein from such businesses as may be designated by the Commission regarding their organization, business, conduct, practices, management, and their relation to other corporations, partnerships and individuals. By direction of the Commission, JOSEPH W. SHEA, Secretary. Dated: July 25, 1966. APPENDIX TABLE A.-VALUE OF INSTALLMENT CONTRACTS ASSIGNED TO FINANCE COMPANIES AND BANKS BY DISTRICT OF COLUMBIA RETAlLERS, DISTRIBUTED BY EFFECTIVE ANNUAL RATE OF FINANCE CHARGE [Dollar amounts in thousands[ Effective annual rate of finance charge (percent) Value of contracts at each effe ctive annual rate assigned to- Finance companies Banks 1 Value of contracts Percent of total Value of contracts Percent of total 29 $381 3.2 27 23 .2 - 26 480 4. 1 24 4,162 34.9 23 4,575 38.4 22 1,111 9.3 $27 0.7 17 206 1.7 2,900 74.3 15 17 .4 14 266 2.2 194 5.0 13 115 2.9 11 650 16.7 Rates not available 711 6. 0 Total 11,915 100.0 13,903 103.0 1 Practically all (99.2 percent) of the total value of contract assignments to banks was by general market furnitur6 retailers. Source: FTC survey. PAGENO="0297" 291 APPENDIX TABLE B.-VALUE OF UNASSIGNED INSTALLMENT CONTRACTS OF DISTRICT OF COLUMBIA GENERAL MARKET RETAILERS, DISTRIBUTED BY EFFECTIVE ANNUAL RATE OF FINANCE CHARGE [Dollar amounts in thousandsi Value of unassigned contracts at each effective annual rate for- Combination of all Effective annual rate of Appliance retailers Furniture retailers Department stores general market finance charge (percent) retailers Value of Percent Value of Percent Value of Percent Value of Percent contracts of total contracts of total contracts of total contracts of total 24 $6 4.2 $6 (1) 22 $36 0.8 36 0.1 20 $16,872 89.4 16,872 71.6 18 137 95.8 36 .8 173 .7 17 3, 206 70. 4 3, 206 13. 6 16 77 1.7 77 .4 15 1, 199 26. 3 2, 009 10. 6 3, 208 13. 6 Total 143 100. 0 4, 554 100. 0 18, 881 100. 0 23, 578 100. 0 1 Less than 0.1 percent. Source: FTC survey. MARCH 28, 1968. Hon. ALAN BIBLE, Chairman, Committee on the District of Columbia, U.S. Senate, Washington, D.C. DEAR SENATOR BIBLE: By separate letteis dated December 4, 1967, the District of Columbia. government reported on 5. 2589, 90th Congress, a bill to provide for the regulation in the District of Columbia of retail installment sales of con- sumer goods (other than motor vehicles) and services, and for other purposes, and on S. 2590, 90th Congress, a bill to provide maximum finance and other charges in connection with retail installment credit sales in the District of Co- lumbia. The report relating to S. 2589 noted that one provision of the bill, that dealing w-ith the doctrine of holder in due course, would be the subject of a supplemental statement. Similarly, the report on S. 2590 also noted that supplemental views would he submitted with respect to provisions relating to maximum finance charges in retail installment contracts. The Subcommittee on Business and Commerce, under the chairmanship of Senator Joseph D. Tydings, has in the meantime held extensive and thorough hearings on these and related hills. The testimony of witnesses representing a broad cross section of commercial and consumer interests in the community has illuminated the many problems and practices prevalent in the area. These hearings have vividly and emphatically underscored the need for consumer protection legislation in the District of Columbia. In the light of testimony at the hearings the District government has given further consideration to the provision of S. 2589 relating to the doctrine of holder in due course. It is apparent from such testimony that many consumer abuses flow from the unethical practices of some retail installment sellers who are able to exploit unwary purchasers-primarily the poor who are least able to afford such exploitation-by relying on the negotiation of retail installmesit instruments to third parties who are protected from the defenses that the buyer could otherwise make. The government of the District of Columbia therefore favors legislation that w-ould eliminate the effect of the holder-in-due-course doctrine in retail installment transactions and thereby prevent the unscrupulous practices that have developed. Accordingly, we would favor the enactment of the holder-in-due- course provision contained in 5. 2589. With respect to provisions in S. 2590 relating to maximum finance charges in retail installment transactions, the testimony of witnesses before the subcomin ittee indicated the need for a more flexible approach to the regulation of such finance charges, principally from the point of view of changing conditions and need for thorough study of costs in this particular market. In view of the desirability of a more flexible bill, the government of the District of Columbia prefers enactment of a measure that would enable the District of Columbia Council to, by regulation, establish maximum finance charges. Sincerely yours, WALTER E. WASHINGTON, Commissioner. PAGENO="0298" 292 SITPPLEMEXTAL STATEMENT OF THE METROPOLITAN WASHINGTON BOARD OF TRADE ON S. 316, S. 2389. AND S. 2~9O, MARCH 20, 1968 Mr. Chairman and members of the subcomnnttee. the undersigned, C. Robert McBrier, as Chairman of the Legislative Committee, Retail Bureau, Metro- politaii Washington Board of Trade. is subniittiiig the following statement as a supplement to the statement previously presented to your Committee on Decein- ber 13. 1967 during the course of hearings on S. 316. S. 2589 and S. 2590. The Board~ of Trade is most appreciative~ of the opportunity to further present its view-s and comments on certain specific areas and on certain detailed pro- visions of the proposed legislation. We would like to stress that the recommenda- tions which are covered by this supplemental statement are made in the interest of assisting your Committee in carrying out its objectives of protecting con- sumers and at the same time safeguarding the legitimate interests of reputable businessmen. The following specific modifications and additions to S. 2589 are recommended: Page 7, line 9: Refers to residential property `as herein defined" but the bill does not contain a definition of residential property. The suggestion is made that the definition employed might well be drawn from the home improvement regulations of the District of Columbia which, with minor change, w-ould provide as follows: `Residential Property" means real property or interest therein consisting of a single-family dwelling or two-family dwelling, including an individual apart- inent or residential unit in a cooperative apartment or condominium building, to- gether with any structure or grounds appurtenant to such apartment or single- family or tw-o-family dwelling. Page 7, lines 13-18: Defining `home solicitation sale"-X question is raised as to whether this definition is required in this Act since this Act does not undertake to deal with that subject. This subject is, however, dealt with in S. 2591. If the definition is to be left in the Act, the terminology or intent of "personal solicitation" as contained on line 18 should be clarified. In that con- nection. it should be made clear that the definition does not apply to those situa- tions where the seller has come to the home of the buyer or is otherw-ise dealing with the buyer at the request and invitation of the buyer. Page 8, line 12: Defines a "retail installment contract" as a contract which `has substantial contact with the District" requires clarification if it is to be left in the definition in order that the applicability or inapplicability of the law- to those transactions involving residents of D.C., Maryland and Virginia who deal across the District line. The terms `or has substantial contact with" should otherwise be deleted from line 12. Page 11, line 15: Substitute the word "would" for the w-ords "tends to." Page 13, line 14: Change "3" to "8" which was the figure established in the comparable section iii 5. 5. page 15. line 11. Page 14. lines 23-25: Substitute the following for existing Sec. 2.102: "Sec. 2.102. No regulation shall be adopted by the Council under the author- ity of this Act until after a public hearing has been held thereon, for the purpose of receiving evidence relevant and material to the proposed regulation. At the hearing, any interested person may be heard in person or by representa- tive. As soon as practicable after completion of the hearing, the Council shall act upon such proposed regulation and make any final regulations public. Such regulations shall be based only on substantial evidence of record at such hear- ing and shall set forth. as part of the regulations, detailed findings of fact on which the regulations are based. The Council shall specify in the regulation the date on which it shall take effect. except that it shall not be made to take effect prior to the ninetieth day after its publication unless the Council finds that emergency conditions exist necessitating an earlier effective date. in w-hich event the Council shall specify in the regulation its findings as to such conditions. In a case of actual controversy as to the validity of any regulation under this section. any person who will be adversely affected by such regulation if placed in effect may at any time prior to the ninetieth clay after such regulation is issued file a l)etition with the District of Columbia Court of Appeals. for a judicial review of such regulation. A copy of the petition shall be forthwith transmitted by the clerk of the court to the Council or other officer designated by it for that purpose. The Council thereupon shall file in the court the record of the proceedings on w-hich the Council based its regulation. If the petitioner applies to the court for leave to adduce additional evidence, and shows to the satisfaction of the court tl1at such additional evidence is material and that there were reasonable grounds for the failure to adduce such PAGENO="0299" 293 evidence in the proceeding before the Council, the court may order suc'h addi- tional evidence (and evidence in rebuttal thereof) to be taken before the Council and to be adduced upon the hearing, in such manner and upon such terms and conditions as to the court may seem proper. The Council may modify its findings as to the facts, or make new findings, by reason of the additional evidence so taken, and it shall file such modified or new findings, and its recommendation, if any, for the modification or setting aside of its original regulation, with the return of such additional evidence. TJpon the filing of the petition referred to in the second paragraph of this section, the court shall have jurisdiction to affirm the regulation, or to set it aside in whole or in part, temporarily or permanently. If the Council refuses to issue, amend, or repeal a regulation and such regulation is not in accordance with law, the court shall by its judgment order the Council to take action, with respect to such regulation, in accordance with law. The findings of the Council as to the facts, if supported by substantial evidence, shall be conclusive. The judgment of the court affirming or setting aside, iii whole or in part, any such regulation of the Council shall be final, subject to review by the United States Court of Appeals for the District of Columbia Circuit. Any action instituted under this section shall survive notwithstanding any change in the persons occupying the offices of the Council, or any vacancy in such offices. The remedies provided for in this subsection shall be in addition to and not in. substitution for any other remedies provided by law." Page 15, line 24: After the words "single document," add the words "or set of documents combined as one unit." Page 16, line 7, line 10, line 17 and line 22: These lines contain requirements as to specific size of type "twelve-point extrabold type" etc. It is recommended that any specification as to size of type to be used in contract notices, etc. be left to regulation by the Council. Page 17, lines 15-19: which provision requires that a seller, in his contract with buyer, should include a provision which advises the buyer to contact the D.C. Consumer Information Service or an attorney if he has any questions re- garding the legal effect of the agreement. The appropriateness of this provision is seriously questioned and its deletion recommended. Page 21, line 25: After the words "copy of the contract" add the words "and of compliance with the requirements of Sec. 3.105." The same language should also be added on page 22, line 5 after the word "contract" and on line 6 after the word "delivery" add the words "and such compliance with Sec. 3.105." Page 22: Insert new section between lines 9 and 10 and immediately preced- ing existing Sec. 3.107 as follows: "SEc. . MAIL OR TELEPHONE SALES-Any sale otherwise sub- ject to the provisions of this chapter which has been negotiated or entered into by mail or telephone without personal solicitation by a salesman or other rep- resentative of the seller, where the seller's cash and deferred payment prices and other terms are clearly set forth in a catalog or other printed solicitation of business which is generally available to the public, shall not be subject to the requirements that a copy of the contract be signed by the buyer or be de- livered to the buyer; provided, that the seller delivers to the buyer, before the date for the payment of the first installment, a memorandum of the pur- chase containing all of the essential elements of the agreement. The prohibition against blank spaces contained in Sec. shall not apply to the buyer w-here a sale is negotiated or entered into by mail." Page 23, lines 8-17: Substitute the following for existing Sec. 4.102: "SEc. 4.102. NEGOTIABLE INSTRUMENTS PR0IUBITED.-Notwithstanding sections 28 :3-301 through 307 of the District of Colum~~ia Code, in a retail installment transaction the seller may not take a negotiable promissory note or other negotiable instrument as evidence of the obligation of the buyer. If, as part of a retail installment transaction, a note is taken by the seller, such note shall refer to the installment agreement out of which it arises and, in the hands of any subsequent holder, such note shall be su~bject to all defenses which the buyer might have asserted against the seller." Page 23, lines 24-25: Delete the word "substantial" from line 24 and on line 25 add the words "a substantial default in" in front of the word "performance." Page 25, line 3: After the word "claim" delete "or" and substitute a `," for the word "or" and after the word "defense" add the words "or an express or implied warranty" so that line 3 should read "assignee, a claim, defense or an express or implied warranty arising out of the sale of." As a result of PAGENO="0300" 294 this addition to line 3, the entire lines 19 through 23 on page 25, consisting of subsection (H) should ~ie deleted. Page 27. lines 17-23: These lines should be modified to read as follows: `other statements or notices required by this Act, shall send to the buyer upon his written request a statement of account which shall list the following items designated as such: `(a) the amounts of each of the payments made by him or on his behalf, or the sum of the payments made by him or on his behalf during each billing period, depending on the manner in w-hich the seller or assignee maintains his records and setting -forth any refund aiid any payment of charges for delin- quencies, expenses of repossession and extension, to the date of the statement of account but not to-exceed a period of three years prior to such request;" Page 28, lines 11-14: Delete these four lines which are contained in Subsec- tion (3). Page 29, lines 20-21: Add the following paragraph which will be an addition to subsection (D) which begins on line 20: `In the eventof prepayment the seller, in any case, shall be entitled to retain a service charge of not less than Six Dollars (S6.00) ." (This is in conformity with Article S3. Section 153D (e) of the Maryland Code). Page 31, line 19: Substitute "60" for the word "20." Page 35, lines 9-20: Delete existing Sec. 6.105 and substitute the following: "SEC. 6.105. LDIITATI0N oc REPossEsslox ExPENsE5.-Notwithstanding Sec. 28 :9-504 of the District of Columbia Code, in cases of repossession of con- sumer goods which are serving -as collateral. no debtor shall be liable for such amount of expenses. attorney's fees, and legal expenses arising out of the re- taking, holding, or resale of such goods as may exceed the amount realized from the sale of the collateral, nor shall any debtor be liable for any deficiency re- maining -after the disposition of the collateral in excess of the balance which. at the time of repossession of such collateral remained unpaid under a retail in- stallment contract or open-end credit agreement. but nothing herein contained shall be construed to relieve the debtor of liability for reasonable costs accruing in connection with the collection of such unpaid balance." Page 37. lines 13-16: Delete existing Sec. 7.102 and substitute the follow-lag: `SEC. 7.102. PEXALTIES-ERROES.-SeC. 7.101 (A) or (B) shall not apply to any violation which a seller or assignee establishes by a preponderance of the evidence to he the result of a hona fide error. Any bookkeeping or clerical error and any unintentional failure (made in good faith) by the seller to comply w-ith any provision of this Act may be corrected w-ithin ten (10) days after the seller or assignee notices such failure or is notified thereof in writing by the buyer and. if so corrected. neither the seller nor the assignee shall be subject to any penalty under this Act." Page 37. lines 17-23: Delete existing Sec. 7.103 and substitute the following: "SEC. 7.103. I~ addition to remedies specifically provided by this Act, if the court finds that a retail installment contract or refinancing or extension agree- ment violates this Act, it may give such further relief as it deems equitable and just." Page 40. lines 6-12: which relate to tile powers of tile Commissioner to issue subpoenas-and to compel the production of boOks. records, etc. Some qualifications or restrictions should be placed upon tile broad authority to go on fishing expe- d~t~ons. w-hich -restrictions might he ill tile nature of a requirement that such action lie based upon a prior complaint or upon some initial information that a violation had in fact taken place. Accordingly. it is recommended that the w-ords "provided that a prior complaint has been made or upon some initial informa- tion that a violation of the Act has taken place." be added after the word "Act" Ofl line 12 and that the same language lie added after the word "Act" on page 42, line 9. Page 46, lilIes 5-8: which provide that reasonable attorneys' fees w-hich result from actions brought by the "Director of the District of Columbia Department of Consumer Protection" be deposited in tile Treasury of the United States to tile credit of tile District of Columbia. The appropriateness of the collection of such attorneys' fees w-hen such attorneys would presumably be furnished by tile Dis- trict Government and already paid by taxpayers' funds is questioned. It is rec- ommended that the words "and reasonable attorney's fees" be deleted from lines 5 and 6 of page 46 and tile sentence "Such attorney's fees shall be deposited in the Treasury of the United States to tile credit of the District of Columbia," be de- leted from lines 6, 7 and 8 of page 46. PAGENO="0301" 295 We again express appreciation for the opportunity to submit the position of the Metropolitan Washington Board of Trade on this important legislation and would welcome the opportunity to participate in any further discussion on it. Respectfully submitted. C. ROBERT MOBRIER, Chairman of the Legislative Committee, Retail Bnreazt, Metropolitan Washington, Board of Trade. 0 PAGENO="0302"