COMPARISON OF CREDIT SERVICE CHARGES AND COSTS OF EIGHT PARTICIPANTS

Exhibit III

Personnel costs:

(3.12) % (4.80)% (3.61)% (.42)% (2.21)% (.92)%

Senator PROXMIRE. Isn't there a danger that, if Congress lets creditors choose between the adjusted balance method and the average daily balance method, excluding current purchases, that the large computerized creditors would choose the average daily balance method, while the smaller creditors will have to use the adjusted balance methods; and if this happens, would not smaller retailers be placed at a competitive disadvantage?

Mr. ENGMAN. I think that this is a possible result which the subcommittee must take into consideration. However, I have not seen any evidence indicating that this would be the case.

Senator PROXMIRE. Why would it not make more sense to have everybody use the adjusted-balance system, not only here, but you also have the argument made by Ms. Furness yesterday when she pointed out that the whole point of much of the consumer credit legislation we passed, especially Truth-in-Lending, was to enable the consumer to make a comparison that was meaningful; and that when you have these different methods of billing, it is hard to make that comparison. If you had an adjusted-balance system uniformly applied, then the consumer would be able to make a meaningful, intelligent choice rather simply.

Mr. ENGMAN. Mr. Chairman, that is a very potent and powerful argument. The Commission, as we indicated in the statement, is only raising the question whether or not, by requiring the adjusted balance approach, we might be making it impossible for some retailers to afford certain kinds of credit arrangements at all. Thereby reducing the amount of credit available to the consumer. I do not personally presume to answer that question, but think it ought to be considered. I think that there are very good arguments for the approach which is taken in S. 914.

Senator PROXMIRE. As you know, the Commerce Committee has reported legislation which would place financial institutions under the jurisdiction of the Federal Trade Commission with respect to unfair or deceptive credit practices against consumers.

The Federal Reserve Board has argued that this function should be in one of the banking committees. What is your view on that?

Mr. ENGMAN. I suppose, as any public servant, I would support expanded jurisdiction of the agency to which I give my allegiance. In all honesty, I think that giving the FTC such authority would not necessarily create an irreconcilable problem between the banking regulators and the FTC. I think it makes sense to centralize authority over a problem in one agency. In those situations in which there is a potential overlap with other agencies we attempt to establish a close relationship, as we have with the Justice Department, and sit down and work out any problems which develon.

I do not think the proposed legislation would present a problem for the Trade Commission.

Senator PROXMIRE. I think that makes a lot of sense. As far as I am concerned, I do not think there is any tendency on your part or the part of the other agencies to try to move out and sav they should have jurisdiction. The Federal Reserve Board has a consistent record of saying they do not want to be required to supervise these things that they have an enormously big and responsible job managing the money supply and handling credit is very complicated, and they resisted to the

end any jurisdiction over Truth-in-Lending, although we finally gave it to them.

Your fundamental argument, as I understand it, is that one way to avoid conflicts and contradictions and inequities between regulated businesses is to see that you have one agency making the rules for everybody.

Mr. ENGMAN. Yes, and this permits one staff to develop the necessary expertise.

Senator PROXMIRE. The bankers make some sense, too.

They argue that they are already regulated, and that the Federal Reserve Board has a good record in this area, and the Federal Reserve Board Governor, Governor Bucher, made a fine appearance before this committee and indicated there is a good deal of training of the examiners in these areas. They feel you have duplication if you have the FTC controlling it one way and the Federal Reserve Board regulating it in another.

I want to thank you very much for a most helpful statement, and once again, I want to assert that having the Federal Trade Commission unanimously, without exception, supporting this legislation is very helpful and goes a long way toward its enactment.

Mr. ENGMAN. Thank you very much, Mr. Chairman. It has been a pleasure to be here.

[The complete statement of Mr. Engman follows:]

STATEMENT OF LEWIS A. ENGMAN, CHAIRMAN, FEDERAL TRADE COMMISSION

Mr. Chairman, members of the Subcommittee, I am pleased to have this opportunity to express the views of the Federal Trade Commission on Fair Credit Billing legislation, S. 914 and S. 1630, Title I of which is the Fair Credit Billing Act and Title II of which proposes amendments to the Truth in Lending Act.

My purpose is to present the Commission's position on the general subjects to which these two legislative proposals are addressed. In discussing this legislation, I will not endeavor to distinguish these bills except in those situations where the approach is significantly different. My discussion this morning will be divided into two parts, the first dealing with the proposals to correct billing disputes and related revolving credit matters and the second dealing with the amendments to the Truth in Lending Act, most of which are found in S. 1630.

FAIR CREDIT BILLING ACT

As its title indicates, the Fair Credit Billing Act is designed to protect the consumer against negligent and irresponsible credit billing practices as well as any other unfair credit practices. Basically, the bill is designed to insure that creditors will be more responsive to consumers in connection with billing disputes and that a code of conduct will be established for dealing with related matters such as offsets and the prompt crediting of payments.

Recognizing the need for improving consumer protection in this area, the Commission, on October 8, 1970, initiated a proceeding for the promulgation of a trade regulation rule. The proposed rule was primarily designed to correct allegedly abusive billing practices, and public hearings on the matter were scheduled for January 25 and 26, 1971. However, these hearings were postponed at your request, Mr. Chairman, so that a legislative solution to the problem could be more effectively pursued.

The Commission has maintained its interest in the area of credit billing problems, however, and has kept open the public record on the proposed trade regulation rule. In view of the seven full volumes of written data and views, the overwhelming majority of which have come from consumers, the concern of the Commission and Congress is entirely warranted. During the last three years, the Commission has received a steady stream of complaints that relate primarily to consumers' frustrations at their inability to communicate effectively with businesses about billing disputes.

It is by now common knowledge that a major factor causing these frustrations is the advent of the age of cybernetics. There are few of us who have not experienced the dissatisfaction of attempting to communicate effectively with a computer. While a boon to creditor and customer alike, in terms of improving speed and possibly even accuracy, automated billing systems have often proven to be totally inadequate when there is a need for focusing attention on an individual billing dispute. The kinds of situations in which these problems arise run the gamut from the effort to remove unauthorized charges when a credit card is lost or stolen to resolving disputes about the failure to properly credit returned merchandise. Unfortunately, the latter situation is too common an occurrence. Often one makes a purchase and promptly returns the same merchandise for credit, only to find, upon receipt of next month's bill, that it reflects the charge but not the credit. Of course, the ensuing frustration and irritation is compounded when finance charges are imposed upon that erroneous outstanding balance.

Before turning to the specific provisions of the Fair Credit Billing Act, I wish to state at the outset that the Commission enthusiastically endorses the objec tives and overall provisions of S. 914 and S. 1630 and strongly urges enactment of legislation along these lines. The comments that follow are primarily intended to highlight certain aspects of this proposed legislation which the Commission believes merit particular attention.

Section 161 of the Act is aimed at eliminating the most pervasive problem confronting the revolving credit customer-the failure on the part of some creditors to respond promptly and effectively to inquiries concerning an amount shown on a bill which the consumer believes to be in error. Specifically, this Section would require the creditor to acknowledge receipt of written inquiries within 30 days and, if not explained or corrected within that 30-day period, the creditor is given two complete billing cycles (but in no event more than 90 days) during which to make appropriate corrections or to send a written explanation to the customer.

Section 162 prohibits a creditor or his agent from reporting adversely about the billing dispute until the creditor has met the correction or explanation requirements of Section 161. Further, this Section requires that when an amount is still in dispute, a creditor may not report the disputed amount as delinquent unless the creditor also reports that the amount is in dispute and at the same time notifies the consumer of the identity of the party to whom this information is being reported. S. 914 provides that a failure to comply with Section 161 or Section 162 results in the forfeiture of the right to collect the disputed amount, and any finance charge thereon, with the maximum forfeiture limited to $100. The approach of S. 1630 is to limit any forfeiture under Section 161 to $50 while eliminating any civil liability for a violation of this section and to provide for no forfeiture for non-compliance with Section 162 (although civil liability would be retained).

As a result of the Commission's experience administering the Fair Credit Reporting Act, we are aware of the extent to which the reporting of disputed information has the tendency to set in motion a series of consequences which are difficult to reverse. Therefore, we view Section 162 as an essential companion requirement to Section 161, and we believe that both a forfeiture remedy and civil liability are necessary to encourage compliance with these provisions.

Sections 163 through 166, concerning the length of the period of time the consumer shall be afforded within which to pay his bill before he will incur a finance charge on an outstanding balance, the prompt crediting of payments, the crediting of excess payments, and the prompt notification of returns, are endorsed by the Commission as reflecting important protection in connection with the billing of consumer accounts.

Section 167 of S. 914 merits special mention because of its broad impact upon revolving credit accounts. There is no parallel provision in S. 1630. Section 167 would abolish the use of the previous balance method of assessing finance charges, as well as the average daily balance method which has been increasing in popularity.

As you well know, Mr. Chairman, one of the important benefits of Truth in Lending has been to highlight the existence of certain creditors' practices so that the informed consumer can better protect himself. One consequence of this disclosure, required on a national basis for the first time by the Truth in Lending Act, was to reveal to the consumer the existence and the nature of a method of assessing finance charges which fails to take the consumer's payment into account. Consumers voiced their dissatisfaction to government regulators, to