New York Trust Co., (S. Dist. N.Y., 1972), reported at 551 ATTR El, Judge Frankel stated as one specific reason for disallowing the class action:

the allowance of thousands of minimum recoveries like plaintiff's would carry to an absurd and stiltifying extreme the specific and essentially inconsistent remedy Congress prescribed as the means of private enforcement. Defendant's potential liability in Ratner would have been $1.3 million, had a class action been successfully litigated.

The choice is truly a Hobson's choice for consumers. We suggest that, at the very least, any limitation on amount of liability in class actions include a provision that the courts not disallow the finding of a class on the basis of the amount of defendant's potential liability.

The limitation of $100,000, as proposed in § 213 of S. 1630, without a one percentum provision to discourage negligent violations by large creditors, is simply unworkable. There is simply no reason to believe that this amount would be any deterrent to a creditor with billions of dollars in assets. If a limit on recovery is to be set, the one per centum provision is absolutely necessary.

Mr. Chairman, the bills under consideration are extensive. I have touched on the issues which I consider to be of greatest concern. If Consumers Union can provide views on other sections which you feel would be of assistance to the Committee, we will be pleased to submit them for the record. Your invitation to present our views before this distinguished committee is appreciated. Thank you.

INACCURATE AND UNFAIR BILLING PRACTICES

WEDNESDAY, MAY 23, 1973

U.S. SENATE,

COMMITTEE ON BANKING, HOUSING AND URBAN AFFAIRS,
SUBCOMMITTEE ON CONSUMER CREDIT,

Washington, D.C.

The subcommittee convened at 10:05 a.m. in room 5302, Dirksen Senate Office Building, Senator Proxmire, presiding. Senator PROXMIRE. The subcommittee will come to order.

Our first witness this morning is Mr. George Buchanan, representing the Air Transport Association.

STATEMENT OF GEORGE A. BUCHANAN, AIR TRANSPORT ASSOCIATION OF AMERICA, REPRESENTING THE UNIVERSAL AIR TRAVEL PLAN, ACCOMPANIED BY JEROME F. HUISENTRUIT, ASSISTANT GENERAL COUNSEL OF ATA AND COUNSEL FOR THE UNIVERSAL AIR TRAVEL PLAN

Senator PROXMIRE. Mr. Buchanan, we are happy to have you. You have an eight-page statement. We have a number of witnesses this morning, as you may know. We have six. You do have, I am happy to say, a concise statement. I imagine it will take you about 10 minutes; is that right?

Mr. BUCHANAN. I believe so, Mr. Chairman.

Senator PROXMIRE. Go ahead.

Mr. BUCHANAN. I appreciate the opportunity to appear here to offer the comments of the member airlines of the Universal Air Travel Plan. I do have a short statement that I have submitted, and I would appreciate it if it could be included in the record. I will try to summarize the high points of that statement.

For purposes of identification, my name is George Buchanan. I am vice president-traffic of the Air Transport Association of America and secretary of the Universal Air Travel Plan. With me today is Mr. Jerome F. Huisentruit, assistant general counsel of ATA and counsel for the Universal Air Travel Plan.

The Air Transport Association of America is the trade association of the U.S.-scheduled airlines. The Universal Air Travel Plan is a joint credit card program of U.S. and foreign scheduled airlines. Administrative services are provided by members of the ATA staff for the plan, which I am representing today.

We appreciate this opportunity to testify on the two bills that are being considered by this subcommittee, S. 914 and S. 1630. We will concentrate our comments on section 210 of S. 914 which would remove

the application of the business purpose exemption contained in section 104(1) of the Truth in Lending Act from its present application to sections 132, 133, and 134 of the act, which deal with liability of credit cardholders, the unsolicited issuance of such cards, and the theft of credit cards.

Incidentally, our concern with section 210, and our opposition to it, is based on the provision which would remove the business purpose exemptions from section 133 of the act dealing with cardholder liability. I have been advised by counsel that the business purpose exemption is inapplicable to section 134, concerning criminal penalties for fraudulent use, since such fraudulent use would not constitute a "credit transaction involving extensions of credit for business or commercial purposes" under any circumstances.

We note that a companion bill, S. 1630, would significantly strengthen the criminal provisions for fraudulent use. UATP strongly supports this strengthening of the criminal law and urges adoption of section 214 of S. 1630.

The UATP is the standardized credit card plan of the scheduled airlines of the world. It is a Civil Aeronautics Board-approved intercarrier agreement in which some 160 United States and foreign airlines participate. The plan operates to extend airline credit to "subscriber" accounts, which are, almost without exception, businesses and commercial concerns, both small and large, including such organizations as International Telephone & Telegraph, General Electric, Gencral Motors, American Telephone & Telegraph.

The subscribers enter into a contract with one of the airlines, pay a one-time $425 deposit and then may request that any number of air travel cards be issued to their personnel, and in some cases there are several thousand cards issued under one contract. The cards are then issued to named individuals by the contractor airline. All charges against such cards, including charges on airlines other than the "contractor," are consolidated by the contractor airline and are billed to and paid by the subscriber account as opposed to the individual cardholder.

The UATP card, unlike the vast number of bank-type and generalpurpose credit cards, offers the feature of monthly centralized and single billing of the subscriber company for all charges on outstanding cards of that account. There are presently 115,000 subscriber companies under the plan with some 1.7 million air travel cards issued to personnel of these organizations. The point that I wish to emphasize here is that the Universal Air Travel plan is designed to be used, and is in fact used, primarily for business or commercial purposes.

The present UATP subscriber's contract provides that, in the event of a lost or stolen card, the subscriber will be responsible for the value of the tickets and other documents so purchased until that loss. or theft is reported to the contractor airline. As a result of this provision, the UATP contractor airlines have a contractual right to recover from the subscribers all charges which have been incurred prior to notification by the subscriber of loss or theft of a card. After such notification the carriers assume all risks of unauthorized usage.

Title I of the Consumer Protection Act provides in section 104 that certain transactions are exempt from coverage, among these are credit transactions involving extensions of credit for business or commercial

purposes, or to government or governmental agencies or instrumentalities, or to organizations. The exempt transactions all involve an extension of credit to those individuals or entities who are not "consumers" as that term is commonly used and as defined in section 103 of the Truth in Lending Act.

Pursuant to the provisions of section 104 of the act, the Federal Reserve Board on July 1, 1969, adopted certain regulations, known as regulation Z, implementing these provisions of the act. The exemption for business credit, provided by law, was included in section 226.3 of the Board's regulations.

On October 26, 1970, Congress enacted Public Law 91-508 which, among other things, amended the Truth in Lending Act by adding new definitions and substantive provisions. These provisions prohibited the unsolicited mailing of credit cards (sec. 132), limited liability in the event of unauthorized use to $50 (sec. 133), and provided for criminal prosecution for those who steal credit cards (sec. 134).

This law, however, did not amend the exempt transactions provision of the act as originally adopted. Moreover, the legislative history of Public Law 91-508 demonstrates that Congress intended to include the credit card provision in an act which contained a businesspurpose exemption. The inclusion in other acts which did not contain such an exemption was considered but rejected.

After the enactment of Public Law 91-508, the Board amended regulation Z by adding provisions to implement the new credit card amendments. Again, no amendments were made dealing with the exempted transactions.

On February 5, 1971, UATP informed the Federal Reserve Board that in its view, the business exemption of section 104 would apply to virtually all UATP subscriber accounts. On February 24, 1971, in response to that notification to the Federal Reserve Board, the Board in essence agreed with the views of the Universal Air Travel plan and replied as follows:

This is in response to your letter of February 5, 1971, concerning the limitation of liability contained in section 226.13 (c) of regulation Z for the unauthorized use of credit cards.

Most subscribers to the Universal Air Travel plan are commercial or business accounts. However, occasionally there are some accounts existing for consumer purposes. Since these accounts are somewhat difficult to identify, you propose to place on the notice of limitation of liability a statement to the effect that the limitation does not apply to business, commercial, governmental, or organizational cardholders where the cards is being used for a business or commercial purpose. In our view, this would be an acceptable way to deal with the problem. This opinion of the Board was followed by two informal staff opinion letters written by the Board's Chief, Truth in Lending section. On June 3, 1971, in response to an inquiry regarding the applicability of regulation Z to another card issuing company he wrote, as reported in volume 4 of the Commerce Clearing House Consumer Credit Guide that:

As we understand it, these cards are issued exclusively to operators of commercial motor vehicles for use in paying tolls on the thruway. In the staff's view, this amendment to the act is subject to the exemption in section 104 for credit transactions involving extensions of credit for business or commercial purposes, and is therefore not applicable to the charge card issued.

And in the second of these letters, on July 15, 1971, as stated in the same publication, the Board's staff stated:

It has been the staff's view that it was the congressional intent that the credit card amendment be subject to the Truth in Lending Act's exclusion for extension of credit for business or commercial purposes.

Subsequent to the above comments, an informal staff opinion letter of the Federal Trade Commission, dated September 2, 1971, stated that it was the staff's view that section 104 indicates a clear congressional intent to provide protection only in situations in which consumer credit is being extended.

Notwithstanding these opinions and staff comments, approximately 1 year later, on August 4, 1972, the Federal Reserve Board issued a notice of proposed rulemaking amending regulation Z, citing as its purpose the intent to "make it clear" that the business exemption is not to be applied to the credit card liability amendments of Public Law 91-508. On November 6, 1972, these proposed amendments were incorporated into regulation Z and became effective on December 16, 1972. At the time that the Federal Reserve Board proposed its credit card liability amendments to regulation Z, the UATP filed comments asserting, among other things, that the adoption of these amendments would exceed the Board's authority and that the amendments were not authorized by the original provisions of the Truth-in-Lending Act or by the subsequent amended provisions relating to credit card usage. With your permission, I will submit a copy of the UATP comments for the record.

Senator PROXMIRE. We will be happy to accept them (see p. 184). Mr. BUCHANAN. Following the implementation of these amendments to regulation Z, UATP applied to the Federal courts for a declaratory judgment that such regulations are invalid as a matter of law, and to request that the Federal Reserve Board be permanently enjoined from taking any action to enforce or otherwise give effect to such regulations. A decision has not yet been rendered.

In view of the foregoing, we feel it is clear that the Truth-in-Lending Act is intended to benefit the individual consumer and is not intended to protect or insulate the commercial or business users of credit cards and other credit financing arrangements. We suggest that there is no valid reason why a contractual balancing of loss and risksharing ability between commercial enterprises should be disturbed by this consumer-oriented legislation.

If this committee were to approve, and the Congress to enact, the amended provisions in question, in the case of UATP there would be no deterrent to prevent subscribers from relaxing their controls over the distribution and use of air travel cards. Absent this deterrent, it is reasonable to assume that unauthorized use of air travel cards would greatly increase, and that there would be significant losses to the airlines.

Practically speaking, a limitation of $50 maximum liability for commercial or business use of UATP credit cards would be tantamount to removal of all liability. It would destroy any realistic incentive for a company to strictly monitor and control the distribution and use of air travel cards. It would also eliminate the impetus to immediately notify the carriers of lost or stolen cards. The carriers would thus have no means of protecting themselves against unauthorized usage until, through their collection efforts, they learn of such loss or theft of air travel cards.