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 tractual balancing of loss and risk-sharing ability should be disturbed by this legislation. For if this committee were to approve, and the Congress were 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 control 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. The business users such as the UATP subscriber companies, are able to protect and even insure against negligent acts of their personnel or risks of theft or loss that might result in an unauthorized use of credit cards. There is no justification for transferring this risk of loss from the company or organization that determines who may use its cards and is in a position to monitor and control such use to the UATP Contractor airlines, as would occur under the proposed amendment to the Truth in Lending Act contained in Section 210 of S. 914. Consequently, we respectfully submit to this Subcommittee that the Truth in Lending Act does not require "clarification". The Congressional purpose and intent of the Act is manifestly clear and well stated. There is no reasonable rationale for extending to the business or commercial community the protection with respect to credit cards that is necessary for the individual consumer. We, therefore, oppose the inclusion of the provision entitled "Section 210. Business Use of Credit Cards". UNIVERSAL AIR TRAVEL PLAN, BOARD OF GOVERNORS, GENTLEMEN: This letter constitutes the comments of the Universal Air Travel Plan (UATP) to the Board's proposal with respect to Part 226 of the Regulations (Regulation Z) to amend Section 226.13 to make clear that all credit cards, regardless of use, are covered by the $50 maximum liability limit for unauthorized use, and may be issued only upon the request of the prospective card holder. The UATP is the standardized, world-wide credit plan of the air transportation industry, and functions under a Civil Aeronautics Board approved inter-carrier agreement. One-hundred sixty (160) airlines presently participate in the UATP, including all U. S. international, trunk and local service carriers, as well as intra-Hawaii and intra-Alaska airlines, air taxi operators, foreign flag airlines serving the U. S. and foreign flag carriers which do not serve the U. S. Forty-two (42) of the above airlines are UATP "Contractors", which individually enter into contracts with subscribing accounts in accordance with a standardized agreement. Over 115.000 of these subscriber contracts are presently in effect. With very few exceptions, these subscribers are business organizations rather than individuals. These organizations, in turn, authorize certain of their employees or other individuals to charge air transportation over the lines of any air carrier which participates in the Plan against individual credit cards which are issued by the Contractor airline. The subscriber account receives its billings directly from the airline with which it has concluded the UATP contract. Presently, there are approximately 1.7 million Air Travel Cards outstanding. The above-mentioned facts, which were noted in our initial comments to the Board respecting the implementation of P.L. 91-508 by adding Section 226.13 to Regulation Z, are reiterated to illustrate the clear and distinct method of operation that separates the UATP Contract accounts from customary con sumer credit card practices intended to be governed by the Truth-In-Lending Act and the regulations of the Board pursuant thereto. Accordingly, we offer the following detailed comments regarding the proposed amendment to Part 226 (Regulation Z): 1. Section 133 of the Truth-In-Lending Act (15 USC § 1643) provides the statutory authority for imposition of liability upon a credit card holder for unauthorized use of the card. This section was proposed as an amendment to the Truth-In-Lending Act by a Senate addition to a House bill on banking and was enacted into law in P.L. 91-508. In the legislative history of this amendment to the Act, it is shown that it was the manifest intent of the Congress that it apply solely to consumer credit card transactions, and not to business or commercial accounts such as UATP. In the Senate consideration and agreement to the Conference Report of this legislation, (H. Rept. No. 91-1587), Senator Proximire recites, in adopting the language of the Senate bill to amend the Truth-In-Lending Act to regulate the liability and issuance of credit cards, that: "The Senate-House Conference Committee has executed a triple play for the American consumer.... "The Senate provisions on credit cards agreed to by the House conferees will stop the unsolicited distribution of credit cards and limit a consumer's liability for a lost or stolen card to $50". S. 17632, Congressional Record, October 9, 1970. (Emphasis supplied) In the same Senate consideration and agreement on this legislation, it is further pointed out that in enacting Section 133 of the Act, it would parallel certain Federal Trade Commission (FTC) legislation respecting the unsolicited distribution of credit cards, but would clarify the doubtful application of the latter to a common carrier. The Senate consideration thus notes that it is intended to apply to all issuers of credit cards, including airlines, in order to give complete protection to the consumer interests to which the Truth-In-Lending Act applies. (See S. 17634 supra) And, the House agreement to the Conference Report notes specifically that it is the intent of the legislation to "protect consumers from the worrisome and often expensive consequences of being sent credit cards they do not want and which they have no intention of using." H. 10049, Congressional Record, October 13, 1970. (Emphasis supplied) It is clear from these statements of the drafters of Section 133 of the TruthIn-Lending Act that the limitation of liability provided the holder of a credit card and the provision relating to issuance were enacted for the benefit and protection of consumer credit card transactions, and were not designed to apply to credit cards issued and used for business or commercial purposes. 2. However, resort to the history behind Section 133 of the Act is not required as the statutory language makes it clear that this Section is not applicable to business or commercial credit card transactions. The Truth-In-Lending Act is in actuality the short title to Title I of the Consumer Credit Protection Act. See P.L. 90-321 (90th Cong., 2nd Sess., 1968; 82 Stat. 146). Section 104 of Title I (Truth-In-Lending Act) provides inter alia that: "This Title does not apply to the following: "(1) Credit transactions involving extensions of credit for business or commercial purposes, or to Government or Governmental agencies or instrumentalities, or to organizations." (Emphasis supplied.) When the Congress enacted P.L. 91-508, a Bill to amend the Federal Deposit Insurance Act in 1970, it included in a separate provision an amendment to Title I of the Consumer Credit Protection Act (Truth-In-Lending Act) to regulate the issuance of credit cards and provide for liability for unauthorized use. P.L. 91-508 was simply the vehicle for providing further regulation of the consumer finance industry by adding Section 133 to existing Title I of the Consumer Protection Act. Thus, it is clear that the Title I exemption for business and commercial purposes provided in Section 104 of the Truth-In-Lending Act governs the interpretation of Section 133 of the same Act as it relates to credit card issuance and liability. A contrary conclusion is untenable in that Congress at the time of this amendment did nothing to restrict the application of the Title I exemption to the Act as amended by Section 133. In the face of such direct and abundantly clear language respecting the business or commercial purpose exemption, it would appear that the Board is attempting to interpret the Act as allowing for different treatment regarding the extension of consumer credit as opposed to the issuance and utilization of credit cards. This inference is suggested by the Board's statement that the proposed amendments would not alter the application of the business exemption to the disclosure, rescission and advertising requirements of Title I. However, it would torture not only the English language, but the very nature of business and commercial transactions, to assert that the issuance of credit cards, and resultant imposition of conditions of usage (including liability for unauthorized use), is not an integral part of a credit transaction involving an extension of credit. The above-cited activity engaged in by the UATP relating to issuance of cards by contractor airlines is clearly a credit transaction as contemplated under the Act; however due to the fact that it involves extensions of credit for business or commercial purposes, the provisions of the Act have been expressly stated to be inapplicable. Therefore, we respectfully submit that the proposal of the Board to amend Section 226.13 to define a card holder to include a person or organization to whom a credit card has been issued for a business or commercial purpose goes far beyond the intent and scope of the Truth-In-Lending Act as demonstrated in its legislative history, and is further a breach of the express statutory exemption relating to such business or commercial purposes. Apart from the dictates of statutory construction of the Act, there are also very serious practical restraints and inequities that argue against the extension of the limitation of liability to activities such as the UATP. It has previously been noted that the Contractor airlines extend credit to various corporations, partnerships, organizations and other business entities which in turn distribute, at their discretion, the UATP cards for use by their employees. Charges for air transportation are then registered against the subscriber company or organization UATP account. And in this situation it would be extremely impracticable and grossly inequitable to say by regulation of the Board that the company or organization is only liable for $50, when as an entity it may expose the contracting UATP airline to the risk of unauthorized use by literally hundreds or thousands of cards issued to it. In point of fact, it is not unusual for thousands of cards to be issued to one Subscriber and at least one large Subscriber has been issued over 4,000 cards. The proposed amendment would make these large accounts liable for only $50 and would in effect remove any incentive for the company or card holder to practice or implement sound security measures. Additionally, it must be recognized that there is a sound rationale behind the Congressional concern over the liability exposure to an individual consumer in the situation where such a consumer has been sent unsolicited credit cards which might be intercepted and fraudulently used, quite unknown to the individual. Some manner of protection is required to eliminate the practice of sending unsolicited cards and to reduce the risk to consumers, who are generally not in a position to protect or insure against such private losses. However, as you may well know, UATP does not engage in, and has never engaged in, the practice of sending unsolicited cards. Quite to the contrary we require, as a prerequisite to opening a UATP account, that each Subscriber must provide a $425 security deposit. And it may also be observed that the UATP Subscriber is in a far better position to protect himself against either his own negligent acts or those of his employees, or the risk of theft or loss that might result in an unauthorized use of the cards. Such Subscriber companies or organizations are not in the same situation as the individual consumer, and can be expected to be able to insure against or assume such risks of loss. Moreover, there would be no justification for transferring this risk of loss from the company or organization, which has the sole authority and discretion to determine who may use its cards and is in a position to monitor and control such use, thereby protecting itself, to the UATP contracting airlines. In view of the above, we respectfully urge the Board to delete the reference to "business or commercial purposes" as it appears in Section 226.13(a) (4) and 226.13(b) of the proposed amendment. Sincerely, Senator PROXMIRE. Thank you, sir. GEORGE A. BUCHANAN, Secretary. Mr. Robert Norris of the National Consumer Finance Association is our next witness. STATEMENT OF ROBERT B. NORRIS, GENERAL COUNSEL, ACCOMPANIED BY S. LEES BOOTH, SENIOR VICE PRESIDENT, NATIONAL CONSUMER FINANCE ASSOCIATION Senator PROXMIRE. You have a much more detailed statement here. You have a 19-page statement, 18 or 19 pages. I would appreciate it if you could abbreviate that statement, give it to us in about 10 minutes, and the entire statement will be printed in full in the record (see p. 194). Mr. NORRIS. Thank you, Mr. Chairman. I am general counsel of the National Consumer Finance Association. I would like to introduce Dr. S. Lees Booth who is senior vice president of the association. The National Consumer Finance Association, Mr. Chairman, was organized in 1916 and is the national trade association of companies engaged in the consumer credit business. We are indeed grateful, Mr. Chairman, for this oportunity to appear before this subcommittee to present our views on S. 914 and S. 1630. However, the scope of our presentation is limited to a few general remarks and observations pertaining to title I, the Fair Credit Billing Act, and on three proposed amendments to the Truth in Lending Act, namely, "Good faith compliance," "Limitation on class action liability," and "Credit life insurance and accident and health insurance." Many of our objections to the provisions of title I of S. 652 (92d Cong.) have apparently been resolved by the provisions of title I of S. 914 and S. 1630, although we would prefer the provisions of title I of S. 1630. See hearings on S. 652 (92d Cong.), pp. 448-51. Our basis for this position is predicated on the observation that sections 167, 168, and 172 of S. 914 pertain to matter traditionally within the province of the various States and will conflict with a multitude of State statutes and court rulings. However, because the provisions of title I of both bills at best indirectly affect the consumer finance industry we do not believe we should attempt to comment at length on the technical provisions contained therein. Inasmuch as the provisions of sections 161 (d) and 163 of both bills provide for penalties or forfeitures for certain failures within a specific period of time, we believe that the provisions of the Fair Credit Billing Act should provide some relief for conscientious creditors who find themselves the victims of circumstances beyond their control, such as equipment failure, strikes, computer breakdown, blackouts, brownouts, et cetera. To accomplish this we respectfully direct the subcommittee's attention to the provisions of 15 U.S.C.A. section 1640 (c) and would suggest language similar to the following: A creditor may not be held liable for any penalty or forfeiture provided under this chapter if the creditor shows by a preponderance of evidence that the failure to comply with any provision herein was not intentional and resulted from a bona fide effort to comply notwithstanding the maintenance of procedures reasonably adapted to avoid any such failure. It is respectfully submitted that such an amendment as suggested above would provide some relief for the creditor who might be de 96-687-73--13 prived of substantial sums of income for failure to meet a time limitation when such failure was occasioned by circumstances beyond his control. Turning now to title II and in particular the limitation on class action liability. NCFA is unalterably opposed to any amendment to the Truth in Lending Act which would directly or implicitly authorize, sanction, or approve class actions for punitive monetary damages under Truth in Lending. On the other hand, we do not oppose consumer class actions for actual damages or which seek equitable relief such as a declaratory judgment or a preliminary or permanent injunction. In its Annual Report to Congress for 1972, the Federal Reserve Board stated that it believed that potential class action liability is an important encouragement to voluntary compliance with the Truth in Lending Act. How the threat of economic disaster makes compliance voluntary is beyond my powers of comprehension. However, as I understand this somewhat extraordinary and inconsistent statement, it was the Board's position that the threat of class action exposure has a prophylactic effect. The specific recommendation of the Board with respect to a limitation on class action liability is contained in section 208 of S. 914. This proposal, like the proposal set forth in section 213 of S. 1630, simply puts a lid on what has been termed legalized blackmail not an end to it. As a matter of fact, enactment of either of these proposals would tend to constitute a concession and a sanction by Congress that the class action device is appropriate for technical violations of the Truth in Lending Act in the absence of actual damages. Recently, Judge Medina, in the latest chapter of the famous case of Eisen v. Carlisle & Jacquelin, which was decided on May 1 of this year, had some cogent and compelling observations on the so-called. prophylactic effect of the consumer class action device: "The 'prophylactic' effect of making the wrongdoer suffer the pains of retribution and generally about providing a remedy for the ills of mankind, do little to solve specific legal problems. The result of this approach is almost always confusion of thought and irrational, emotional, and unsound decisions." In describing the class action device, Judge Medina concluded by pointing out that its use tended to disregard, nullify, or water down procedural safeguards established by the Constitution, by congressional mandate, or by the Federal Rules of Civil Procedure, including amended rule 23. It is a historical fact that procedural safeguards for the benefit of all litigants constitute some of the most important and salutary protections against oppressions, including oppressions by those whose intentions may be above reproach. Because of the threat of class action exposure. Judge Medina also concluded that such pressure on defendants may induce settlements in large amounts as the alternative to complete ruin and disaster, irrespective of the merits of the claim. Judge Medina also gave judicial recognition to Professor Milton Handler's observation that the class action device is but legalized blackmail. As Professor Handler put it, and I quote: Any device which is workable only because it utilitizes the threat of unmanageable and expensive litigation to compel settlement is not a rule of procedureit is a form of legalized blackmail. If defendants who maintain their innocence have no practical alternative but to settle, they have been de facto deprived of their constitutional right to a trial on the merits. The distinctions between inno |