Credit Advertising

We welcome the change of disclosure requirements for credit advertising contained in S. 1630. From the inception of the federal Truth in Lending law, this Association has been keenly interested in credit advertising developments.

With

in the first year of the law's effective date, the Association voiced its concern in a letter to the Federal Reserve Board to the effect that:

the credit advertising disclosure requirements of Regulation Z are
so detailed and so cumbersome that credit advertising has virtually
been driven out of newspaper advertisements and off of radio and TV
commercials. As a result, instead of being able to "shop" for credit
in advertising, the customer gets no information from which significant
comparisons can be made of Annual Percentage Rates, Finance Charges, or
Downpayment Requirements.

What is especially noteworthy of the recommended changes in credit advertising is the clear effort by the sponsors to treat uniformly, to the extent possible, revolving and installment credit plans. This even-handed approach is one that NHFA has always supported.

The present law and implementing Regulation Z have helped to eradicate substantially misleading rates and other deceptive credit advertising. It is important that the legislation and the legislative history of the Fair Credit Billing Act of 1973 clearly demonstrate to the Federal Reserve Board that the present proposed simplification of credit advertising disclosure requirements is a part of a design to restore the "shopping function" to credit, a crucial ingredient of Truth in Lending.

Additional Disclsoure for Credit Insurance

S. 1630 includes in Section 216 a recommendation contained in the Report of the National Commission on Consumer Finance that would require disclosure of credit life and accident and health insurance charges both in dollar amount and as an annual percentage rate in the same manner as finance charges and annual percentage rates of finance charges are requireed to be disclosed under the Truth in Lending law and

Regulation Z. The Commission concluded that such disclosure, particularly in

credit advertising, would help to provide a competitive market for credit insurance. The new disclosure burdens on retailing in terms of printing new sales contracts and monthly statements, would not be accompanied by corresponding benefit to the consumer. It is always important that we weigh the costs of recommended changes and this is an example in which there are excessive costs compared to the consumer benefits. Presently, our credit customers may choose to have credit inand the absolute dollar cost is disclosed at the time of the transaction. The cost is relatively little and the translation of this cost to an APR (Annual Percentage Rate) would be more confusing than it would be helpful. In short, the re is abundant disclosure under the present law, and NHFA opposes the inclusion of additional requirements concerning credit insurance.

surance,

Recommendations of NHFA

The National Home Furnishings Association agrees with the disclosure concept of the Truth in Lending law that permits credit customers to make an informed decision regarding the use and the cost of credit. NHFA, however, opposes provisions that would create undue hardships for independent home furnishings retailers and call for drastic changes in operational procedures presently permitted by the Truth

in Lending law without accompanying benefit to consumers. Therefore,

---NHFA supports the prompt resolution of credit billing errors,

---NHFA opposes the provision that would prohibit the use of the previous balance method, or any other method of calculating finance charges,

---NHFA supports provisions of the Truth in Lending law that permit 50¢ monthly minimum charges, and opposes provisions that would severly limit the use of minimum finance charges,

---NHFA supports liberalizing all credit advertising disclosure requirements to insure the "shopping function" for credit,

---NHFA opposes the additional disclosure of the Annual Percentage Rate requirements for credit life and accident and health insurance.

Mr. Chairman, we appreciate the opportunity to appear before you and your

committee.

Senator PROXMIRE. Thank you, Mr. Gay.

Mr. KEENEY. We have next, Senator Proxmire, Mr. Michael Zoroya, vice president of the May Department Stores, and representing the National Retail Merchants Association.

Mr. ZOROYA. Mr. Chairman, my summary, on the original paper that we have presented, is about 38 pages, my summary is about 9 minutes that we have summarized.

Would you like to have me cut it down beyond that?

Senator PROXMIRE. Cut it down beyond that if you can. We would appreciate it.

Mr. ZOROYA. I am here appearing today representing the National Retail Merchants Association, a nonprofit voluntary trade association, comprised of some 2,600 corporate members operating more than 26,000 retail outlets and with me is Stuart M. Rosen, of counsel to NRMA.

NRMA is appearing today to express the serious concerns of its members with certain aspects of both S. 914 and S. 1630.

We believe that specified provisions of both bills would be contrary to the interests of retailers and, at the same time, detrimental to consumers. Of significant impact, S. 914 would force retailers either to adopt the closing balance on pure average daily balance method of finance charge computation, or alternately, the adjusted balance method. If the closing or pure average daily balance method were adopted, sufficient credit revenues might be produced to offset credit operation costs. However, such an approach would eliminate an important cost saving option enjoyed and demanded by consumers-the option to make full payment and avoid finance charges.

If the adjusted balance method were adopted, while preserving the option to avoid finance charges, creditors would be forced to reduce credit revenues substantially below the level necessary to offset credit costs.

Moreover, S. 914 would force retailers to forego minimum finance charges necessary to defray the costs of extending credit and encourage prompt payment of smaller balances unless they are imposed in the month of purchase.

Additionally, certain provisions of both S. 914 and S. 1630 would increase the costs of operating a credit program without producing any corresponding benefits to the consumers.

Whether finance charge revenue is reduced below the costs of operating a credit program, and most retail programs are presently operating at a loss, or costs are increased beyond the finance charge revenue produced, the results are the same.

First, reduced credit availability, particularly through the elimination of marginal credit risks, to lessen bad debt losses.

Second, increased credit costs for some consumers who, unable to obtain retail credit, are constrained to seek credit from costlier

sources.

Third, increased cash prices and charges for goods and services, to offset losses in credit operations.

Fourth, increased market concentration, and decreased availability of credit sources, by forcing smaller retailers to surrender their credit operations to banks and third party credit grantors.

In speaking of the option feature, an option feature is not discriminatory, simply because an option is available to all, but may not

be exercised in all cases. This is shown by section 169 of S. 914, which would encourage retailers to offer a cash discount option. The cash discount option and the no finance charge option operate identically, only at different times.

Customers who avail themselves of either of these options by full payment at one time, either at the time of sale under the cash discount option, or within the period provided under methods having a no finance charge option, benefit by paying a lower total price for merchandise.

While not everyone avails himself of the option each and every time, the fact that everyone has the identical opportunity to benefit from either option belies the claim that such a cash discount option, or no finance charge option under revolving credit, is discriminatory.

As to minimum finance charges, the same reasoning holds. These charges do not discriminate. They are uniformly applied. The balances to which they relate are modest and within reach of virtually all customers. Forcing creditors to impose finance charges in the month of purchase would deprive customers of the benefits of a no finance charge option.

Both versions of the Fair Credit Billing Act provide that failure to comply with its provisions works a forfeiture in the amount in dispute.

As to the credit billing requirements of the bills, we believe that penalties are hardly appropriate, especially where the failure to comply was not willful, and resulted from a bona fide error, or where the creditor after discovering a mistake promptly corrects it.

With respect to the proposed truth in lending amendment lumping class action penalties, truth in lending class actions have proved extremely troublesome and disruptive. The possible windfall recovery in the absence of actual damage from a class action has led to many frivolous claims. We believe that the limitation on aggregate recovery might help deter further claims, but we would suggest that recovery up to 1 percent of our creditor's net worth as proposed in S. 914 should be modified. This limitation can be just as disastrous as the existing magnitude of disclosure. The aggregate recovery should not exceed the lesser of $50,000 or 1 percent of the creditor's net worth, a sum which is more than adequate to deter operations. [Statement of Mr. Zoroya follows:]

STATEMENT OF MICHAEL ZOROYA, VICE PRESIDENT AND GENERAL CREDIT MANAGER, MAY DEPARTMENT STORES COMPANY, ON BEHALF OF NATIONAL RETAIL MERCHANDISE ASSOCIATION

INTRODUCTION

Mr. Chairman and Members of this Committee: My name is Michael Zoroya. I am Vice President and General Credit Manager of The May Department Stores Company. I am appearing today to present the position of the National Retail Merchants Association ("NRMA") on S. 914 and S. 1630. In addition to amending certain provisions of the Truth in Lending Act, including the extent of civil liability in class actions, these bills would add a new title to that Act, to be known as the "Fair Credit Billing Act," which would regulate various creditor billing practices.

The National Retail Merchants Association is a non-profit voluntary trade association comprised of some 2,600 corporate members operating more than 26,000 retail outlets. These stores account for approximately 50 billions of dollars in annual sales and range in size from small speciality shops to large department store chains. In the course of selling general merchandise at retail, and as a con

venience to their customers, many NRMA members offer to their customers the opportunity to purchase merchandise on credit.

SUMMARY OF NRMA'S POSITION

NRMA is appearing today to express the serious concern of its members with certain aspects of both S. 914 and S. 1630 which we believe would be contrary to the interests of retailers and, at the same time, detrimental to consumers.

THE OBJECTIONABLE FEATURES OF THE BILLS

As will be discussed, S. 914 would force retailers:

(i) to adopt methods of finance charge computation which, while preserving sufficient credit revenues to offset the costs of extending credit, would eliminate an important cost-saving option enjoyed and demanded by consumers (namely, the option to make full payment and thereby avoid finance charges); or

(ii) to adopt a method of finance charge computation ("the adjusted balance method") which, while preserving the option to avoid finance charges, would reduce credit revenues substantially below the level necessary to offset credit operating costs; and

(iii) to forego minimum finance charges, necessary to help defray credit costs, unless they are charged to all customers-even in the month of purchase.

Further, certain provisions of both S. 914 and S. 1630 would, through unnecessarily cumbersome and rigid specifications regarding billing practices and disclosures, increase the costs of operating a credit program without producing any corresponding benefits to consumers.

THE ADVERSE CONSEQUENCES OF FORCED REDUCTIONS IN CREDIT REVENUES Whether finance charge revenue is reduced below the costs of operating a credit program or costs are increased beyond the finance charge revenue produced, the results are the same. Such deficiencies would lead to reduced credit availability, increased credit costs for some consumers, increased cash prices, and greater concentration in the credit market.

I shall explain why these adverse consequences would occur and how they can be avoided.

Retailers endeavor to cover the costs of their credit operations through charges to those who use credit-not the cash customer.

Unfortunately, as retailers know and studies make clear, revenues derived from finance charges to revolving credit customers are insufficient to cover revolving credit costs. A study commissioned by NRMA in 1968 and conducted by the national accounting firm of Touche, Ross, Bailey & Smart indicates that among merchants examined, most of whom were charging 12 percent per month applied to the previous balance, revolving credit costs exceeded revolving credit revenues by approximately 2.3% of credit sales. These findings are further confirmed by other recent studies.1

The Report of the National Commission on Consumer Finance (pp. 145-147) indicates that, because of an insufficient assessment of costs of capital, the NRMA study actually understated the deficiency.

Numerous studies, and actual experience, show that when retail credit costs exceed revenues, this leads to:

1. reduced credit availability—particularly through the elimination of marginal credit risks, to lessen bad debt losses;

2. increased credit costs for some consumers, who, unable to obtain retail credit, are constrained to seek credit from costlier sources;

3. increased cash prices and charges for goods and services, to offset losses in credit operations;

1 I.e.. Arthur Anderson & Co., Study of Finance Charges and Related Expenses of Revolving Credit Accounts of Four Connecticut Retailers, Connecticut Retail Merchants Association (1972); Ernst & Ernst, Retail Credit Operations Study (1971); Peat, Marwick & Mitchell, Determination of Credit Revenue and Related Costs (1971); Dr. Roland Stucki, Utah Consumer Credit Report (1970).

2 See, e.g., Kawaja, The Economics of Statutory Ceilings of Consumer Credit Charges, 5 Western Economic Journal 147 (March 1967); Lynch. Consumer Credit at Ten Per Cent: The Arkansas Case, 168 University of Illinois Law Forum, 592: An Empirical Study of the Arkansas Usury Law: "With Friends Like That " 1968 University of Illinois Law Forum, 544: The Impact of a Consumer Credit Interest Limitation, Washington State: Initiative 245, Graduate School of Business Administration of the University of Washington (1970).