AVERAGE TRUE ACTUARIAL ANNUAL PERCENTAGE RATE, 6 BILLING METHODS, 865 ACCOUNTS

1 These figures for this billing method are not very meaningful since imposition of a 50 cent minimum charge once or twice during a year on accounts with very small average monthly balances ($10 or less) produces extremely high average rates of charge (over 200 percent in some instances) even though the dollar cost for the year may not be more than $0.50 to $1 or so.

Source: Study of 865 Sears SRC accounts in Texas by Ray McAlister, NTSU, Denton, Tex.

NUMBER OF ACCOUNTS EXCEEDING TRUE ACTUARIAL AVERAGE DAILY BALANCE BY BILLING METHOD-865

Note: It is possible that other accounts could have exceeded an annual rate of 18 percent under any of the billing methods, including adjusted-but if this were true, it would be a result of the 50 cent minimum charge-not the billing method used.

Mr. MCALISTER. I'll be glad to answer whatever questions you might have.

Senator PROXMIRE. Thank you, both of you gentlemen, very much. You've obviously done a whale of a lot of work, and good work, and helpful work, and it is most useful to the committee to have this kind of as you say, Mr. McAlister-empirical work done. You're not relying on theories or impressions or sentiments.

Mr. Dunkelberg, I'm not at all sure your conclusions coincide with your data.

For example, you say the results of your data, and I quote, suggest that the heaviest users of the revolving option have incomes between $10.000 and $20,000. However, your data does not seem to suggest this.

Table 1 shows that the heaviest users of the revolving option are in the $7,500 to $10,000 income bracket. Over 80 percent of the sales of this group were revolving, whereas only 64 percent of the sales to $10.000 to $20,000 income group were revolving.

How do you explain this apparent discrepancy between your statement and your data?

Mr. DUNKELBERG. First, let me recall that during my oral testimony, I said that that break wasn't quite as clean as the $10,000 to $20,000 that I wrote here, that indeed we probably should include some lower income families in there too. What I really need is more detailed income breaks to get the sort out a little cleaner.

But let's take a look at the data you point to. It is true that in table 1, row 3, we find that the groups that have the highest percent of revolving sales are indeed the 75 to 10 with 80 percent, the 10 to 15 with 64, and the 15 to 20 with 64. And that is very different from the under $7,500 and over $20,000. OK.

Now, there are some other measures that you ought to take a look at. Those are the shares of finance charge revenues compared to the distribution of consumers in column 1, row 1. These people (the $10,000 to $20,000 income) do tend to pay a larger share of finance charges, taken together, than the $7,500 to $10,000 group, compared to their sales shares. If we really cut it fine, the major group paying a disproportionate share is the $15,000 to $20,000.

So it is true that the $7,500 to $10,000 income consumers behave pretty much the same as the $10,000 to $20,000, except for the shares of finance charge revenue. I don't really see that that changes the conclusion too much except that we now have even the much lower income people behaving much more like the very high-income people, still receiving the subsidy from a "free ride," as the under 75 group is even much more like the $20,000-plus income consumers, in that they essentially have the same number of revolving months, and so forth.

If you average those numbers out, they essentially have similar relative shares of revenues, and they are disproportionately low in their shares of finance charge revenues, and also disproportionately low in terms of the percent of sales that were revolving.

So I really don't see that it changes the conclusion very much. The low income and the higher income people do indeed behave very much the same, and other things equal, they receive a subsidy as they certainly are the free riders.

Senator PROXMIRE. I'm not so sure that your data indicates that the low-income people are subsidized at the expense of the higher income people.

Let me go on and get your comment.

You argued the highest proportion of free riders is in both the very low-income groups and the very high-income groups in between paying a higher proportion in the share of finance charges. The implication is left that the subsidy element is just about washed out, that with lowincome groups and low-however, low-income groups in your sample, those were incomes below $7,500, only account for 4 percent of net sales. They tend to be free riders because their purchases are smaller. Middle income account for 58 percent of net sales, but paid 71 percent, 71 percent of all finance charges, by way of contrast.

Upper income groups, with incomes over 20,000, accounted for 33.5 percent, about a third of sales, but paid only 23 percent, less than one-fourth of all finance charges.

In terms of a rate, middle income consumers paid finance charges of about 11 percent, whereas the comparable charges of upper income consumers, is only about 8 percent.

Don't these figures taken from your own data confirm the notion that upper income consumers enjoy a special benefit from revolving credit plans?

Mr. DUNKELBERG. It may well suggest that they enjoy a slightly higher benefit, but nonetheless, I think the case is still clear, that people who are in this middle income category, in terms of the generation of revenues to cover these costs, are subsidizing the low- and high-income credit users.

The unfortunate thing here is that these are averages for the month, and that is one of the problems we hope to correct in the New York study.

Looking at the averages, we may well argue that we have to rank them, that is the highest income groups come off best. The very lowest income groups come off second best. Still, the middle groups are the ones that are footing the bill.

But the other thing I would like to point out is that I don't think that either of these are the major source of the subsidy probably lies with the collection cost.

Senator PROXMIRE. Lies in what?

Mr. DUNKELBERG. The collection costs. If we recall the McAlister testimony, the free riding is not really that big an issue anyway.

Senator PROXMIRE. Dr. McAlister, under the previous balance system, can you tell us what percentage of the accounts are paid in excess of 18 percent?

Mr. MCALISTER. Under the previous balance?

Senator PROXMIRE. Yes.

Mr. MCALISTER. Not exactly.

I can tell you how much more paid more than they would have under true actuarial. But that is not the same thing. We were talking about a 50-cent minimum being imposed. When you impose that, you might

run over.

But 93 accounts, I think the 93 is a pretty good example, 93 out of 865 paid more, under previous than they would have under true actuarial, so I think that is a pretty good indication that they would have paid more than 18, even without the 50-cent minimum.

if

Now, I would like to make a comment about that.

This is for the 12 months that we studied, and you understand that you had the full life of the account, that may not be so.

Senator PROXMIRE. What was the rate under true actuarial?

Mr. MCALISTER. I don't understand the question.

Senator PROXMIRE. The effective yield.

Mr. MCALISTER. To the average customer? It was 11.64 percent.
Senator BENNETT. True actuarial?

Mr. MCALISTER. Yes, sir. That was the average. That is shown in table 1.

Now that includes some customers that didn't pay a finance charge. If you restrict it to those that only paid charges, it amounted to 15.65 percent true actuarial average.

Senator PROXMIRE. I am confused because table 8, page 26, you have true actuarial average daily balance, 18.9 percent.

Mr. MCALISTER. What page are you on?

Senator PROXMIRE. Page 26.

Mr. MCALISTER. That was the yield under the true actuarial average daily balance method.

Of course, it is greater than 18 percent because that assumes a 50cent minimum being imposed. But that is the yield to the store, you understand, not the actuarial percentage rate paid by the customer. That is not the same thing.

The average annual percentage rate paid by the customer is not the same as the yield to the store.

These are yields to the store.

Senator PROXMIRE. I understand the yield to the store. That is right. There is a difference. It is helpful to spell it out.

But in how many cases was it greater in terms of yield to the store than 18.8 to 6 percent, under the previous balance?

Mr. MCALISTER. It would be approximately the 93 customers previous cost more than true actuarial daily balance.

Senator PROXMIRE. That would be about 12 percent.

Mr. MCALISTER. About 10.8 percent.

Senator PROXMIRE. About 10.8 percent.

Mr. MCALISTER. But if I may, again, that is a 12-month period, and over the life of the account, it may not be that way. I would like to make one more point here if I may.

It is possible for people to pay more than 18 percent under previous balance, but it is not possible for people to pay more than 18 percent under previous balance if they take the full time to make their payment.

İn other words, if they wait the full 30 days to make their payment, they will not pay more than 18 percent. It is only paying early, and they pay about halfway through, that would cause it to result in more than 18 percent, even when it does.

Senator PROXMIRE. I yield to Senator Bennett for a minute. I do want to ask you some more questions.

Well, just for the record, don't bother to give this orally now, but give us comparable figures for the other billing systems described in

your paper.

Can you do that?

Mr. MCALISTER. What type of comparable figures?

Senator PROXMIRE. Well, you gave us for the previous balance.

For the adjusted balance and daily balance, the number of people who paid more than 18 percent. You told us in this case that you had 93, but give us that for the record.

Mr. MCALISTER. I haven't worked that out yet.

It is available, but I don't know when I can get it worked out. Senator PROXMIRE. If you can work it out for the record, we would appreciate it.

Mr. MCALISTER. I can tell you under adjusted, there would be none. There would have been with the 50-cent minimum. The 50-cent minimum would cause even the adjusted to be more. I could find it here if you want.

Senator PROXMIRE. NO.

We have a lot of other witnesses, and I have a number of questions I would like to ask.

On page 18 of your statement, you say that loan and revenue to a store for the use of adjusted balance rather than previous balance— beg your pardon.

I misquoted you.

You say that loss of revenue to a store, use of adjusted balance, rather than previous balance, accounts for about 12 percent annually. Mr. MCALISTER. Yes.

Senator PROXMIRE. Now, you don't really mean to suggest that total revenue would decline 12 percent, do you?

Mr. MCALISTER. Yes, sir, I do.

Senator PROXMIRE. You mean that finance charge revenue would decline 12 percent.

Mr. MCALISTER. I mean finance charge revenue.

Senator PROXMIRE. Accepting this correction, how much would total Sears revenue decline, converting from the previous balance to the adjusted balance method?

Mr. MCALISTER. I don't know what their total revenue is.

Senator PROXMIRE. Well, Sears finance charge revenue is only about 2.2 percent of total revenue, hence a 12-percent decline in finance charge revenue would produce a decline in total revenue between three-tenths and two-tenths of 1 percent.

Mr. MCALISTER. I am not qualified to comment on that.
Senator PROXMIRE. That is in their annual report.

Mr. MCALISTER. I haven't read that.

What I am saying is that the total revenue

Senator PROXMIRE. On the assumption that the annual report is accurate, would my calculations be correct?

Mr. MCALISTER. I do not know.

What did you say?

How much was it?

Senator PROXMIRE. I said that the Sears annual report indicates the finance charge revenue is only about 2.2 percent of the total revenue, hence a 12-percent decline in finance charge revenue would——

Mr. MCALISTER. What was their total revenue?

Senator PROXMIRE. About $11 billion, I understand.

Mr. MCALISTER. What was their finance charge revenue?
Senator PROXMIRE. $246 million.

Mr. MCALISTER. Is that from easy pay or revolving only?
Senator PROXMIRE. Revolving.

Mr. MCALISTER. $246 million?

Senator PROXMIRE. Right.

Mr. MCALISTER. $246 million.

Let's see. Eleven percent.

That would be a loss of about $27 million.

Senator PROXMIRE. What is that as a percentage of $11 billion?
Mr. MCALISTER. Let's see; 27.

Just a second.

As a percentage of how much?

Senator PROXMIRE. $11 billion.

You've got a computer that can put $11 billion right in the palm of your hand.

Mr. MCALISTER. About 2.4, I guess.

Senator PROXMIRE. Or is it .2?

Mr. MCALISTER. It's 246, wherever the decimal belongs.

It's probably .2, but the figures are 246. So it would be .0246.

Senator PROXMIRE. Now, your table

Mr. MCALISTER. I would like for the record to show, though, that those were your figures and not mine.

Senator PROXMIRE. The record will so show.

The record will also show that it was your computation, not mine. Mr. MCALISTER. Fair enough.

Senator PROXMIRE. So the decimal point is mine and the computation is yours.

Your table is very revealing. It shows that the effective yield under one variety of the average daily balance plan is actually higher than the previous balance plan.

Now, there are about seven or eight States which have abolished the previous balance method in favor of either the average daily balance method or the adjusted balance method. However, none of these States