State and Federal legislators, and to creditors. Because of this consumer awareness, the previous balance method has been prohibited in several jurisdictions, two of which are the District of Columbia and Maryland, as of January 1, 1972. The method most often employed by creditors in place of the previous balance method has been the average daily balance method-and so often as not this method is just as disadvantageous, although this fact is not readily understood by consumers. When the creditor includes current purchases in computing the average daily balance outstanding, as a general rule the amount of the finance charge assessed on the account can be as high and often will be higher than when computed under the previous balance method.

The practical effect of Section 167 is to prescribe the adjusted balance method of computing finance charges in those instances in which the creditor's plan provides the consumer the option of avoiding the imposition of a finance charge by paying the outstanding balance in full within a specified period of time. The Commission commented upon this proposal when it was introduced as Section 164 of S. 652. At that time, the Commission stated that it strongly supported the abolition of the previous balance method in favor of an adjusted balance approach. However, we voiced our concern at that time that the language of the proposal was such that creditors might avoid its imposition by doing away with the so-called "free ride" for current purchases. That is, the effect might be to induce creditors not to offer an option to avoid payment of a finance charge. The Commission continues to support the abolition of the previous balance method. However, we are concerned that the imposition of the adjusted balance method could conceivably work a hardship on certain kinds of creditors whose accounts do not yield finance charges sufficient to make their credit accounts self-supporting.

The Commission recommends that the committee consider an additional alternative to the adjusted balance approach—that is, to permit the average daily balance method so long as it is clear that any such plan could be operative only if purchases made during the current billing cycle were to be excluded from the computation of the average daily balance. The resulting average daily balance would, in such instance, always be less than the previous balance, although it would also be more than the adjusted balance. Under this approach, those creditors that are not automated would still use the adjusted balance method. However, those creditors that contend that the yield involved in using the adjusted balance method is inadequate to make their credit accounts pay for themselves, would be permitted to use the average daily balance method, so long as it excluded, or provided a "free ride," for current purchases.

The Commission continues to support the general prohibition of minimum finance charges as proposed in Section 168. The Commission also supports Section 169, which encourages the use of cash discounts and provides that such discounts not in excess of 5% shall not constitute a finance charge as determined under the Truth in Lending Act. Similarly, the Commission supports Section 170, prohibiting tie-in agreements by creditors and Section 171, prohibiting offsets by credit card issuers.

One of the most important and controversial provisions of the Fair Credit Billing Act concerns the holder-in-due-course doctrine. Section 172 provides that a card issuer shall be subject to all claims (other than tort claims) and defenses arising out of any transaction in which the credit card is used, if certain conditions are met. Those conditions are: the consumer must make a good faith attempt to obtain satisfactory resolution of his disagreement or problem; the amount of the initial transaction must be more than $50; the place where the initial transaction occurred must be in the same state in which the card issuer maintains a place of business; and the amount of the claim or defense asserted may not be more than the initial amount of credit extended in connection with the initial transaction. Basically then, Section 172 abolishes the holder-in-duecourse doctrine for intrastate credit card transactions that exceed $50.

The Commission has for some time recognized the imbalance in the creditordebtor relationship because of the holder-in-due-course doctrine. Therefore, we support the objectives to which this provision of the Fair Credit Billing Act is addressed.

The National Commission on Consumer Finance discussed the holder-in-duecourse doctrine at some length in its final report (at pages 34-38) and concluded that the doctrine should be abolished. This conclusion bears repeating here:

The abolition of cutoff devices should also be extended to credit card transactions. Where the lender is the issuer of a credit card which may be

used by the consumer in a sale, lease, or service transaction with the seller, lessor, or supplier of services, the lender-issuer should be subject to the customer's claims and defenses, except in those transactions where the credit card is merely a substitute for cash (e.g., transactions up to $50).

Any attempt to deal with third party cutoff devices such as HIDC and waiver of defense clauses involves a question of balance. The needs of small businessmen to obtain capital to enter and remain in the market serving marginal risk consumers must be weighed against the protection of all consumers. The balance is sometimes a delicate one. In this case it is not. The Commission firmly believes that consumers have an absolute right to receive fair value in the purchase of goods and services. One way to help achieve this goal is to abolish the HIDC doctrine and waiver of defense clauses. The inevitable reduction in availability of consumer credit in some markets will be more than offset by increased consumer confidence in the market as a whole.

Viewing these Fair Credit Billing provisions as a unit, we believe that these new safeguards will alleviate many consumer problems concerning revolving credit. The Commission particularly endorses the aproach of S. 914 because we believe that the stronger enforcement provisions concerning Sections 161 and 162, the prohibition of certain retroactive finance charges, and elimination of the holder-in-due-course doctrine with regard to certain credit card transactions are important for a sound legislative approach to these consumer credit problems.

AMENDMENTS TO THE TRUTH-IN-LENDING ACT

I would now like to turn to the amendments to the Truth in Lending Act proposed in S. 914 and S. 1630, which, if enacted, will have a material effect upon the future course of consumer credit cost disclosures.

The Commission strongly endorses Sections 201 through 207 of S. 914 as important clarification of the application of the Truth in Lending Act. Section 201, of course, may no longer be necessary because of the Supreme Court's recent decision in Mourning v. Family Publications, (4 CCH Cons. Credit Guide 99,034, decided April 24, 1973), and it may be argued that Section 204 is rendered unnecessary by two recent court of appeals decisions, both of which have applied the Truth in Lending Act to liens arising by operation of state law. Those two decisions are N. C. Freed v. Federal Reserve Board and the Federal Trade Commission, (2nd Cir. 73, 4 CCH Cons. Credit Guide 99079, decided Feb. 1, 1973), and Gardner and North Roofing v. Federal Reserve Board and Federal Trade Commission, (464 F. 2d 838 (D.C. Cir. 1972)). Both courts took the position that in home improvement transactions where there is no specific recorded lien, the Federal Reserve Board's application of security interest to liens by operation of law was a valid exercise of that agency's regulatory authority. In spite of the Mourning, Freed and Gardner and North cases, the Commission endorses Sections 201 and 204 is important clarifications of the Truth in Lending Act.

I will turn now to one of the most important proposals contained in this legislation-the extent of civil liability in the event of noncompliance. Section 208 of S. 914 proposes to amend Section 130 of the Truth in Lending Act. Liability in the case of individual actions would remain unchanged, at twice the amount of finance charge but not less than $100 nor more than $1000. In the case of a class action, however, this section provides that there shall be no minimum recovery applicable and total recovery in such actions may not exceed the greater of $50,000 or 1% of the creditor's net worth. The similar provision in S. 1630 would provide for a limit in the amount of recovery of $100,000 for class actions. The Commission recognizes that the proposed 1% of net worth ceiling will expose a number of major creditors to a maximum liability of millions of dollars. Our experience in enforcing the Truth in Lending Act persuades us that only a high level of civil liability can provide the necessary deterrent effect essential to encourage compliance with these provisions. Precisely what the maximum limit should be to assure the necessary deterrence is difficult to predict. However, on balance, we join the Federal Reserve Board in advocating the 1% ceiling in S. 914, recognizing that it is a maximum and that the courts will have discretion in determining damages. We are persuaded that the recitation in Section 208(b) of the factors which the court must consider in determining an award of damages is adequate to relieve the concern about an excessive award.

In view of the fact that the majority of the additional provisions are found in S. 1630, I would like to turn to that statute for the balance of my remarks. The Commission strongly endorses Sections 203, 204 and 206 of S. 1630.

Section 203 makes it clear that points or discounts are presumed to be passed on to the buyer even though such additional charges are paid by the seller.

We also support the proposal in Section 204 providing for the repeal of the current exclusion of charges for appraisals and credit reports from the finance charge. In our view, these charges are clearly an incident to an extension of credit and there is no valid justification for excluding them from the finance charge and annual percentage rate.

Section 206 should be of benefit to those involved in consumer education efforts. The Commission applauds the concept behind this section, which would require the Federal Reserve Board to publish quarterly reports setting forth the average and the distribution of annual percentage rates applicable to at least three major types of closed-end credit: new automobile loans, mobile home loans, and personal loans. The Commission believes that by making such information available to consumers and others who might publish this data, shoppers will be better able to compare the cost of credit offered by competing creditors and make more informed judgments about how and whether to use credit.

S. 1630 contains an important proposal which has been advocated by the Commission since the inception of the Truth in Lending Act. Section 207 of S. 1630 proposes to extend liability for a Truth in Lending violation to any subsequent assignee of the original creditor, where the violation from which the liability arose is apparent on the face of the instrument assigned. The Commission is convinced that extending liability to assignees in this way will greatly increase the extent to which compliance is achieved. Certainly when financial institutions and major consumer finance companies are subjected to liability under these circumstances they will be prompted to take appropriate steps to assure that the consumer installment paper they are buying is in full compliance with the Truth in Lending Act.

The Commission also endorses Section 208 in S. 1630, which requires that a full statement of closing costs to be incurred by the consumer will be furnished in a timely fashion. This Section proposes to correct the problem which has been highlighted recently in a District of Columbia case, Bissette v. Colonial Mortgage, decided April 12, 1973. The timing of credit disclosures in real estate has been a recurring problem for consumers. As you know, Mr. Chairman, in the Bissette case the District of Columbia Circuit Court reversed the District Court's finding of a violation and held that disclosure at the time of closing in a real estate transaction constitutes compliance.

In view of the fact that disclosing Truth in Lending information for the first time on the day of settlement makes shopping for more favorable terms a practical impossibility, we strongly endorse Section 208, which provides that in the case of a consumer credit transaction involving real property, disclosure must be made at the time the creditor makes a commitment with respect to the transaction.

The Commission also has considered and supports the proposal in S. 1630 relating to credit card fraud found in Section 214 of that Act.

Section 216 of S. 1630 merits brief discussion because it deals with a problem with which the Commission has been greatly concerned in administering the Truth in Lending Act-disclosure or creditor insurance. It is a matter which also has been highlighted by the National Commission on Consumer Finance in its final report. Section 216 would add a new section to the Truth in Lending Act requiring disclosure of the cost of credit insurance both as a dollar amount and as an annual percentage rate. It would further require disclosure at the same time and in the same manner as the finance charge is required to be disclosed under Chapter 2 and the regulations of the Board. The Commission, in view of its experience with practices in connection with the sale of credit insurance, has some concerns with this proposal as drafted.

As you know, Mr. Chairman, the original approach to charges for creditor insurance was to exclude them from the finance charge if the choice was voluntary and the coverage was separately selected. Our experience to date indicates that this decision served to open a major loophole, which many creditors utilize with regularity. The penetration rates (i.e., the proportion of customers voluntarily "selecting" credit life and accident and health insurance) of many creditors approaches 100 percent, in spite of the disclosure required by the Truth in Lending Act that such insurance is optional. To the extent that Section 216 will require disclosure of a separate annual percentage rate, different from that which is currently disclosed, we believe that consumers will be confused by the introduction of another annual percentage rate. We prefer and urge the Committee to consider removing the present exclusion from the finance charge for

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creditor insurance found in § 106 of the Truth in Lending Act. There is no justification for treating this charge differently from other costs of credit. If included in the finance charge, the one resultant annual percentage rate will afford consumers a realistic basis for comparing the cost of credit with and without creditor insurance. We, urge this proposal as essential to eliminate current practices by some to exclude this charge from the true cost of credit.

Finally, turning to recommendations for correcting the advertising provisions of the Truth in Lending Act, the Commission is in favor of the change proposed in Section 217 of S. 1630. The Commission has stated on several occasions that the current extensive requirements imposed upon open-end creditors in their advertising has served to inhibit such advertising. While the proposal in Section 217 would amend Section 143 of the Truth in Lending Act to liberalize the disclosures, the important elements of disclosing the periodic and annual percentage rate, the method of determining the balance upon which a finance charge may be imposed, and the minimum periodic payment, would be retained.

In conclusion, I will repeat that the Commission unanimously endorses enactment of the Fair Credit Billing Act and the amendments to the Truth in Lending Act, as modified by those changes which the Commission has suggested. We believe that this legislation is essential if the promise of the original Truth in Lending Act to improve the consumer credit marketplace is to be fulfilled.

Senator PROXMIRE. Our next witness is Ms. Gladys Kessler of the Consumer Federation of America. We are very happy to have you here this morning. You might identify the gentleman who is with you. STATEMENT OF GLADYS KESSLER, CONSUMER FEDERATION OF AMERICA, ACCOMPANIED BY STUART BLUESTONE

MS. KESSLER. Mr. Chairman, I have with me Mr. Stuart Bluestone, for the record.

Senator PROXMIRE. I would appreciate it if you could abbreviate your statement for the record. It is a fine statement. It is 20 pages in length and I think it would be better if we would be able to use some of the time we have available for questioning.

MS. KESSLER. Fine. (See p. 127.)

For the record, I am Gladys Kessler with the firm of Berlin, Roisman & Kessler.

As you probably know, Mr. Chairman, CFA is the largest consumer organization in the country with about 190 organizational members.

Stuart Bluestone, of our firm, is with me. I would just like very briefly to say that we want to commend you, Mr. Chairman, again, for getting so deeply involved in the amendments to Truth-in-Lending and continuing the work that you did on the original bill that passed the House and Senate many years ago.

We think the followup legislation that you introduced last year and then, of course, your work on it right now, is absolutely essential if the original promise of Truth-in-Lending is to be fulfilled for the

consumer.

In particular, I would like to comment on the limitation of liability on the class action section of the two bills that you are considering this morning. We are opposed to that limitation on liability. Consumer Federation of America has taken a very strong position over the years in favor of class action legislation and, indeed, the board of directors of CFA has each year passed a resolution strongly supporting that kind of legislation.

We do not see any evidence that there is a need to limit liability in class actions. Indeed, I think that the history under Truth-inLending is that the courts have almost uniformly refused to cer

tify class actions under Truth-in-Lending. To my knowledge, with all the Truth-in-Lending suits that have been brought, I think only two or three have received certification from the courts, even though the courts have again almost uniformly held that the plaintiffs were correct on the merits.

Senator PROXMIRE. Out of how many suits?

Ms. KESSLER. I cannot give you a precise number. But at a minimum, 25 to 30 suits, and I may be very, very conservative on that number. So that I think what that evidence indicates is that rule 23, as the courts interpret it, is more than adequate to handle any kind of problem of frivolous lawsuits which is, I think, what you are essentially getting at when you talk about limitations on liability. We would be very concerned about establishing that precedent. Senator PROXMIRE. Would not that be only a 10-percent success rate?

MS. KESSLER. I am sorry. Let me explain. I said that only about three cases have been certified for class action but in terms of the court finding on the merits for the plaintiff, the percentage of success is much higher than that. What the courts have done in many of the Truth-in-Lending cases is say, "Yes, you, as an individual plaintiff, are right; you are allowed to recover your individual damages and attorneys' fees, but we will not certify this as a class action because of many of the problems that arise under rule 23."

So that where there have been frivolous lawsuits, the courts have applied rule 23 in that situation.

We feel very strongly the courts can take care of any of the frivolous suits or harassment suits that retailers always claim are going to be filed under rule 23-but very rarely are.

In addition, I do not think there has been any showing under Truthin-Lending that we need that kind of limitation of liability.

Finally, there is a provision in Senator Sparkman's bill on the limitation on attorneys' fees in Truth-in-Lending suits.

Again, we think that creates a bad precedent in an area where the courts are getting increasingly active, and have been very, very able to take care of the question of attorneys' fees.

I noticed just this morning in the papers that the Supreme Court has come out with a very broad decision granting attorneys' fees in consumer or public interest suits and reemphasizing the need for the courts to set those attorneys' fees if those kinds of public interest suits are going to be brought.

As you know, the courts have a standard for granting attorneys' fees which take into account a number of factors: The time the attorney works, the novelty of the suit, and, finally, the size of the recovery. Size of recovery is only one of the factors which the courts consider. I must say, in public interest litigation, attorneys' fees have ranged all over the lot. So the courts have been very sensitive in judging on a case-by-case basis when an attorney was really entitled to a fee in a particular case, rather than giving 25 percent of the total recovery.

I would like to turn the mike over to Mr. Bluestone. He will concentrate his testimony on two or three areas.

Mr. BLUESTONE. I do not intend to discuss each and every point written in our testimony today, but I would like to address myself initially to a few general points.