We also recommend deletion of Section 161(b)(ii) which includes in the definition of a billing error a statement of the extension of credit for which the obligor requests additional clarification. Although a customer's request for additional documentation may lead to the assertion of a billing error after the creditor has provided the evidence requested by the customer, the mere request for that evidence ought not to be defined as a billing error request. We recommend that the statute be amended to require a creditor to respond to this type of request for additional information but that the failure to do so should not be treated as a billing error violation. The creditor should be authorized to impose a reasonable charge for complying with such requests except in such cases in which the request for clarification is followed by the good faith assertion of a billing error with respect to the transaction in question. The complexity and structure of the Truth in Lending Act and Regulation Z prompted our Association to request my associate Mr. William J. O'Connor, Jr. and a committee of his colleagues to review the present law and the proposals before this Subcommittee so that our industry might be better apprised of how simplification would best be accomplished. Mr. O'Connor is present with me to address any questions the members of the Subcommittee might have regarding our statement and to provide any additional information that might be useful In this regard, Mr. Chairman, we to the Subcommittee in its deliberations. In summary, the American Bankers Association believes that simplification of the Truth in Lending Act is an important undertaking by this Subcommittee and that it can benefit all concerned, both creditors and the public. We therefore are fully supportive of this effort. Thank you for the opportunity to present these views. Senator RIEGLE. Mr. Evans, do you want to go next? STATEMENT OF ROBERT B. EVANS, VICE PRESIDENT AND GENERAL COUNSEL, NATIONAL CONSUMER FINANCE ASSOCIATION Mr. EVANS. Thank you, Mr. Chairman. My name is Robert B. Evans. I am vice president and general counsel for the National Consumer Finance Association which was organized in 1916. NCFA is a national trade association of companies engaged in the consumer credit business. In 1976, these companies made over 30 million extensions of credit exceeding $36 billion. Before I begin, Mr. Chairman, I would like to express my regret that Senator Proxmire is not here to respond to remarks I'm about to make which are in response to his observations on Monday to the effect that perhaps consumer finance industry was receiving a smaller proportion of the consumer finance business and he quoted certain figures which I do not have but I understand they are intended to show that there was a decline overall presumably because of truth in lending in the business being done by our industry. I would like to say that the reports of our industry's demise are premature. I would say we do not even qualify for an endangered species list. Contrary to the Senator's impression, our outstandings have grown since truth in lending came into being from $27.5 billion to $40 billion. Nonautomobile credit has grown from $18.6 billion to $26.5 billion, and the number of offices in our industry has remained relative intact at about 23,000. Recession caused some shakeout. Our average contracted rate has remained about the same, slightly over 20 percent. The average collection rate is somewhat lower than that, approximately 19.5 percent. Senator RIEGLE. What was the 20-percent figure? Mr. EVANS. That is the averaged contracted APR as disclosed in the Federal Reserve figures. Senator RIEGLE. It's about 20 percent? Mr. EVANS. 20.5 percent. It ranges between 20.5 and 21.25. It has done this for approximately the last 7 years. It has remained relatively stable. The number of companies has declined. That is true. But where has this decline taken place? It has been essentially in the area of the very smallest of our members. In 1960 we had 6,424 companies engaged in the consumer finance business. Today there are 3,376. Almost all of the attrition has come from the small businesses whose outstandings are under $1 million. So, as Senator Tower just pointed out, perhaps the real effect of truth in lending has been to place such a burden on the small businessman that he's found it difficult to compete in today's marketplace. Overall, however, let me repeat, the industry has prospered and is prospering. We greatly appreciate this opportunity to come here today and talk about truth in lending. Four years ago I testified before Senator Proxmire on the Fair Credit Reporting Act regarding the substantial adverse effect the truth in lending penalties were having on our business. The waste, uncertainty and erosion of legal footings in the Truth in Lending Act was evident there and continues to day. We think that this perhaps is one of the areas which deserves the greatest attention from this committee. It seems to us that despite the laudable goal and seemingly bipartisan support for truth in lending simplification the interest of no one group can be completely satisfied. One fact, however, is certain. Any change in disclosure requirements is going to involve a very substantial cost in terms of production of new forms, new computer programs, new instruction manuals, new regulations and, unfortunately, new theories of litigation testing the adequacy of compliance in all the above areas. The creation of one additional sheet of paper or even the rearrangement of presently permissible disclosure formats may generate conversion expenses for our members of over $20 million the first year and up to $10 million per annum after that. Let's take a look for a moment at civil penalties. I doubt that anybody that's testified as to the full effect these penalties have on the profits of consumer creditors. The penalty is unfair in its effect. The higher the APR or the longer the term of the transaction, the greater the penalty. This bears no relationship to the offense committed and if it were a tax, which in a sense it is, it would be terms regressive and therefore undesirable. To illustrate, the $1,000 loan repayable in 12 installments and having an APR of 8 percent would have a finance charge of about $44 and therefore a penalty of $88. The same loan for 2 years at 18 percent would carry a finance charge of $200 and a penalty of $400. Thus, the second loan for the same principal would carry a penalty about 450 percent greater than the first. Since less affluent borrowers pay higher rates and generally seek longer repayment terms, recoupment of a greater award of penalty may seem to be to some equitable, but I would suggest, Mr. Chairman, that there's no such thing as a free penalty. Other consumers of the same class will have to make it up. Add to the $400 penalty $200 in attorney fees, which is quite modest, and the creditor is out of pocket $800 on a $1,000 loan. Based on the average rate of profit after tax of our industry, 2 percent of average investment, it will take nearly 40 other loans by consumers paying the loans on time and in full to make up the loss. We fail to see the social utility of such a harsh, punitive penalty, especially in view of the technical nature of the typical violation and the virtual impossibility of defending against this. Why do we make this point? It is in support of the suggestions of both S. 1312 and Senator Garn's bill to limit the penalty and the number of violations to which a penalty could attach. We consistently have supported this and endorse it in full. The larger problem, however, seems to us-and we have documented this in our prepared statement-is not a matter of simplification. It is consistency of the application of the act. This is best illustrated by tracking the events in some of the courts in this country, particularly those in the fifth circuit. The horrible example that we used in 1973 in our testimony was that relating to the Georgia "prepaid finance charge." It is unfortunate, but that very case still persists today. The issue most recently was-the review of the issue was declined by the U.S. Supreme Court and we are left in the position of asking the Congress to do something about it almost 5 years after the original case was decided. What else can we do? Maybe we can get an interpretation. But as one recent observer wryly remarked, since the Jones case which is the subject of this holding, cannot be limited to the Georgia facts, it is impossible "to avoid polluting the law of the rest of the Nation with its deceptive disclosure requirements." Professor Landers, who's been advising this committee and who has been advising the Federal Reserve Board, stated that "It would have been much better for the court of appeals to have confessed the meaninglessness of the concept and to have directed it toward the truth in lending junk heap.” More recently, in the case of Pollock v. General Finance Corp., the same circuit court found that the board's regulation either conflicted with or did not adequately implement the requirements of the truth in lending section dealing with itemization of loan proceeds. The court rejected not only the board's construction but what the board considered was its authority to resolve an apparent conflict in the act. The point is this: The Supreme Court has served notice that it will not entertain truth in lending appeals. This leaves 10 U.S. Circuit Courts of Appeals and 50 State supreme courts, together with a number of Federal agencies, as the rulemakers for truth in lending. In NCFA's view, this is intolerable. The Pollack decision alone will cost our members approximately $1,000 per office in forms revision and replacement expense. For the 6,000 offices involved in the fifth circuit, this will cost the industry from $3 million to $6 million. Ultimately, the fifth circuit decision will be felt in other jurisdictions and by other creditors. Mr. Chairman, I would end with this particular thought. It is clear that the authority of the Federal Reserve Board to write regulations and interpret them needs to be reaffirmed and strengthened by new expression of the Congress. Somebody has to have the final say on a day-to-day basis. In our view, the Congress should reassert clearly and firmly its intent to vest in the board the fullest possible authority not only to effect the broad purposes of the act but to deal with inconsistencies in the act which are defining interpretations thereof and to resolve conflicts raised in the courts all in the interest of uniform administration and consistent application of a technical and complex law. We can live with whatever Truth in Lending Act is promulgated. It is consistency that we need. We submit that this can be achieved and that the accompanying committee report make it clear that the purpose of Congress in reaffirming the board's authority is to do so. The judicial mutation of truth in lending will largely cease; the law will stablize and benefit consumers and creditors alike. I would like to respond to your questions, Mr. Chairman. I don't want to take any more of your time but we have some very definite views on separate disclosure and the creation of new forms which we believe from the consumer standpoint perhaps are the most meaningful contribution we can make, but I will leave that for the questioning. Senator RIEGLE. Fine. I do want to get to that. I appreciate, too, the attempt by each of you to try to summarize as much as possible because I want to make sure that everybody gets a chance to be heard and heard fully and we have a full exchange of questions. [Complete statement follows:] NATIONAL CONSUMER FINANCE ASSOCIATION 1000 SIXTEENTH STREET, N.W., WASHINGTON, D.C. 20036-202 638-1340 INCFA My name is Robert B. Evans. I am Vice President and General Counsel for the National Consumer Finance Association (hereinafter referred to as NCFA)*. Organized in 1916, NCFA is a national trade association of companies engaged in the consumer credit business. In 1976, these companies made over 30 million extensions of credit exceeding $36 Billion. NCFA greatly appreciates this opportunity to present its views on truth in lending simplification. It is especially gratifying for me to testify on this subject today, inasmuch as four years ago, in hearings held by the Committee on proposed amendments to the Fair Credit Reporting Act (S. 2360), we offered substantial evidence at that time in opposition to the extension of the concept of civil penalties of the adverse impact which truth in lending ambiguities were having on creditor compliance. The waste, uncertainty, and erosion of the legal footings of the Truth in Lending Act evident then continues today; we are hopeful, therefore, that out of these hearings and the combined efforts of Congress, the Federal Reserve Board, consumers, and creditors, a more workable, more understandable, and more fairly balanced Truth in Lending Act will emerge. We actively support this endeavor and have already contributed substantially to some of the amendments being considered here today. We would, however, like to observe from the outset that in our view truth in lending simplification, in the sense that *NCFA represents approximately 900 member companies operating more than 17,000 loan and finance offices throughout the United States. The membership of NCFA is diversified, ranging from single small loan offices to substantial nationwide chain organizations engaged in both the business of direct lending and the purchase of sales finance paper on consumer goods. |