testimony for additional information. We would appreciate your making this letter part of the record of the hearings. Our notes indicate that you asked for information as to (1) the extent of usage, among the banks which are members and affiiliates of Interbank Card Association, of the various methods of computing finance charges, (2) the extent of chargebacks to merchants, and (3) the percentage of card transactions over $100. We find ourselves unable to provide complete responses on these matters. I would like to explain that Interbank Card Association is essentially an interchange system that was formed by a number of banks which had already developed their own local bank cards and which wished to increase the utility of those cards by having them accepted by the other banks and their merchants. In large part because of these origins, Interbank provides only those services, and makes only those rules, which are the bare minimum necessary and appropriate to make interchange bank card transactions feasible, and the individual members of Interbank have very substantial autonomy, discretion, and responsibility with respect to their own operations. Accordingly, Interbank has limited its requests for information to those areas where the information is essential in order to provide interchange services, and the matters about which you have asked for information are generally outside of those minimal areas. With respect to the various methods of computing finance charges in use by Interbank's banks, I would like to note that two years ago at your request we did circulate a questionnaire among our members on a number of matters of interest to you. We received less than a complete response, but we provided you with an analysis of the information we then obtained under a cover letter to you of March 16, 1971, from then Interbank President Harold B. Hassinger. Pages 19 and 20 of that response, entitled "Open-End Credit Volume and Revenue”, contain some information concerning usage of various billing systems. On the subject of billing systems and methods of computing finance charges, we noted your comments, on page 213 of the draft transcript, which were as follows: "[W]hen you have different kinds of billing systems, I can't compare a rate which means one thing on the adjusted balance system, and might mean something else on the previous balance system. "If you have a single billing system, then a consumer, as was the whole purpose of the Truth in Lending, and I say this as an author of Truth in Lending, it was to allow the consumer to have a single, simple comparison basis when he shops." We share your view that the consumer should have a reasonable basis for comparing the cost of credit when he shops. We suggest, however, that the difficulty that the consumer presently has is not due to use of different methods of calculating finance charges but is instead due to a failure of the APR—which was adopted for the purpose of providing the consumer with a clear and simple indication of the true cost of credit-to inform the consumer adequately. For example, if an open-end lender and a closed-end lender offer a loan at an APR of 18%, calculated by the same method, the consumer will not pay the same finance charge over a given period since the consumer will have a free period of at least 25 days, and perhaps even over 55 days, on his open-end account, but will have to pay interest from the first day, with no free period, on his closed-end account. By way of further example, as you commented, the previous balance and the ending balance methods of calculation, using the same APR, can result in a modest difference in the amount of finance charge paid by the consumer. We suggest that the method of determining the APR should be modified in order to permit the consumer to be aware of these factors, so that the APR truly indicates what an extension of credit will cost the average consumer. On the subject of chargebacks to merchants, Interbank recently conducted a survey of interchange chargebacks, i.e., chargebacks between the members, for the period from March 12, 1973. to March 23, 1973. Attached is a chart which indicates the total number of chargebacks in the various categories. It is my opinion, based on my experience in a bank, that most of these chargebacks, with the exceptions of missorts, duplicate processing, processing errors and delinquent settlement, would have been returned by the merchant bank to the merchant involved. However, because the banks are service businesses which depend upon good relationships with their customers, many chargebacks would be instead, and unfairly, absorbed by the banks. All too often, if a slip is charged back to a merchant, even if it is because the merchant did not properly perform some routine operation, such as imprinting a slip with the cardholder's card, the merchant feels aggrieved and put upon, blaming his acceptance of a bank card for the loss instead of his own failure to act reasonably and properly. This is human nature, and this helps to explain why many banks, for the sake of their business relationships with their merchants and their cardholders, try to work out a settlement of a dispute between a merchant and a cardholder, and unfairly bear the cost of this effort. We would like to note, however, that we do not believe that the chargeback record to date is a reliable guide to what might happen if cardholders had absolute rights under a Federal statute to present complaints to the card-issuing banks and to refuse payment until complaints were satisfactorily resolved. The cost of thoroughly investigating and adequately resolving all consumer-merchant disputes, and we note that there are many disputes in which the cardholder has no valid legal rights against the merchants, would generally be prohibitive. We are concerned that merchant dissatisfaction with chargebacks, which are often viewed as unwarranted, would lead to a decrease in the appeal of bank cards to merchants and would as a consequence reduce the value of bank cards to consumers and harm the development of an electronic payments system. We are also concerned that the interchange system which we have developed might prove to be inadequate to the task of resolving thousands of disputes and that many injustices and inequities might arise. We do not have statistics as to the number of bank card transactions that exceed $100, but we believe that Mr. Larkin's assessment of 2% for the Bank of America would probably be the right order of magnitude for members of Interbank Card Association. We do know that the average size of an Interbank sales transaction is somewhat under $20, and we also understand that the cards are generally used as a substitute for cash, for small purchases. Thus, although we do oppose any Federal abrogation of state commercial law in the areas of holder-in-due-course or waiver of defenses, we would like to state that if nevertheless Congress should act in this area, the $100 criterion we have recommended would be quite reasonable overall and would limit the scope of the change to those transactions which are more likely to have been entered into with the intent of engaging in a credit transaction. It follows that if each bill is paid in full when presented, then the proposed abrogation of holder-in-due-course or waiver of defenses should not apply since it is clear that the intent was to engage in cash transactions. Given the credit worthiness generally required for an individual to obtain a bank card, it would only be transactions well in excess of $100 where the receipt of faulty goods or services would be of significant consequence to the cardholder. We also note in this respect that such goods or services would in each case have been selected by the cardholder from a very large number of merchants to whom bank card financing was available. In addition, it would clearly be unreasonable for a bank to conduct an investigation and to advise the respective parties concerning a dispute between a cardholder and a merchant when the transaction was for an amount less than the cost of even the most casual investigation and advice. I would like to respond further to your question about why we believe that if any Federal legislation is enacted in the area of cardholder disputes, it should be pre-emptive. As was pointed out at the hearings, we think it would be appropriate that any Federal legislation in this area be regarded as striking an appropriate balance among the rights of cardholders, banks, and merchants. If that balance is indeed appropriate, and necessary as a matter of Federl statute, it would seem inappropriate to allow such Federal law to be deliberately or inadvertently modified in any way. If there is Federal and state legislation, our counsel feel that there will quite likely be lengthy litigation, particularly under Truth in Lending as it now stands, as to whether the Federal statute or the state statute governs. Thus the principal value of pre-emption in this area would be to preclude the aggravations, expenses, and delays incident to such litigation. We would also like to emphasize that the pre-emption that we suggest would be of quite limited extent and would not be significantly disruptive of state law; indeed, our request for pre-emption presupposes that the Congress has, contrary to our primary desire, itself decided to intrude into an area historically left to the states. Because the pre-emption would be narrowly limited to the extent of Federal intrusion in a specified area of state commercial law, we think its benefits outweigh any possible objections. Indeed, such pre-emptive effect might generate useful experience to judge the desirability of perhaps broader Federal preemption of state commercial law in the Truth in Lending area generally. On the subject of civil enforcement of the Truth in Lending Act, our statements pointed out the unsuitability of class actions as vehicles to obtain penal monetary damages under the Truth in Lending Act, and the fact that the great majority of the court decisions in recent years had decided against allowing suits there has come to my attention a decision of the United States Court of Appeals for the Third Circuit in Katz v. Carte Blanche, No. 72-1054, May 22, 1973, and I feel that for completeness of the record I should call this decision to your attention. The suit arises under the Truth in Lending Act, and the Court of Appeals noted the potential of class actions for conservation of judicial resources and the utility of class actions in establishing, by declaratory resolution or otherwise, the legality of a defendant's conduct. While recognizing these potential benefits of class action treatment, the Court specifically noted that whether class action treatment would be appropriate for recovery of monetary damages, particularly minimum penalty damages under the Truth in Lending Act, was another matter. The Court noted the defendant's claim that astronomical liabilities could be involved if class action treatment were appropriate for such monetary amounts. The Court expressly reserved decision on whether such class actions were permissible in any circumstances under the Truth in Lending Act and on whether such a class action might be appropriate in the particular circumstances that might be developed upon trial of the case before it. The decision thus appears to express the same concerns that were expressed in our testimony concerning the inappropriateness of class actions for minimum statutory damages under the Truth in Lending Act. Also since my testimony, it has been pointed out that § 169 of S. 914 may have some entirely unanticipated effects. As that section now reads, an affluent buyer who has a third-party credit card could receive a five percent discount for using cash, but a disadvantaged buyer who lacks the standing to obtain a credit card would not. Thus the rich who have the most credit cards would pay less than the poor-we cannot believe that this consequence was intended. In addition, § 169 does not take into account the effect of state usury statutes, for while any discount would not, by the terms of § 169, be considered as finance charges for Federal Truth in Lending purposes, no provision is made for pre-empting state usury laws. We feel that § 169 has indeed pinpointed a real problem which is ripe for Congressional action; however, we suggest that the consumer information purposes of Truth in Lending and protection of the less advantaged consumer require a law to compel merchants to offer a single cash price to all, rich or poor, credit or cash, without any discount for cash or the equivalent credit add-on. The merchant has adequate protection since he is still free to offer credit, either through his own credit plan or through a third party, or none at all: he will merely have to deal fairly with all consumers and with consumer creditors. In closing, I very much want to say that I deeply appreciate the interest you have consistently demonstrated in the welfare of our cardholders and in the effective and fair operation of open-end credit plans, and in the courtesy you extended to all of us at the hearings last week. We look forward to working with you so that the best potential of bank card systems will be realized for every cardholder. Sincerely, JOHN J. REYNOLDS, President and Chief Executive Officer. INACCURATE AND UNFAIR BILLING PRACTICES THURSDAY, MAY 24, 1973 U.S. SENATE, COMMITTEE ON BANKING, HOUSING AND URBAN AFFAIRS, SUBCOMMITTEE ON CONSUMER CREDIT, Washington, D.C. The subcommittee convened at 10:15 a.m. in room 5302, New Senate Office Building, Senator William Proxmire presiding. Present: Senators Proxmire, Bennett, and Hathaway. Senator PROXMIRE. The committee will come to order. I apologize for being late, but we had a hearing at 9 o'clock, and we had 21 mayors present. Our first witnesses this morning are Mr. William C. Dunkelberg and Mr. Ray McAlister. Is that right? Mr. MCALISTER. What did you say? You say "Southwest?" Mr. MCALISTER. I thought you said "Southwest," I'm sorry. Mr. MCALISTER. We are sort of touchy about those things. Senator PROXMIRE. I know what you mean. You are from north Texas. Mr. MCALISTER. Southwest Texas; I think that's where L. B. J. was from. [Discussion off the record.] Senator PROXMIRE. Well, we better start off with Mr. Dunkelberg. STATEMENTS OF WILLIAM C. DUNKELBERG, STANFORD UNIVERSITY, AND RAY MCALISTER, NORTH TEXAS STATE UNIVERSITY Mr. DUNKELBERG. I certainly appreciate the opportunity Senator PROXMIRE. Let me interrupt to say we do have a number of witnesses this morning. As you may know, we have eight, I think, and we would appreciate if you could confine your remarks to 10 minutes or so, and we would have time for some questions. Mr. DUNKELBERG. OK. I'll keep my watch ready and steady. I certainly appreciate the opportunity to be here today and to report a little bit about the work I have been doing on and off for the past 6 or 7 years in the credit area. What I would like to report on specifically is the work that I've done recently for the National Commission on Consumer Finance, using some data that I collected in a California study and also some national cross section sample data from the Survey Research Center |