Senator PROXMIRE. Would you pull the microphone closer to you? Mr. BLUESTONE. Surely.

First of all, we do not hesitate to support the two bills today insofar as their stated purpose is to protect consumers from inaccurate and unfair billing practices; but, at the same time, I think there are some disagreements as to precisely the best way to achieve this stated end, and with this in mind, Consumer Federation of America is taking the position that S. 914, as introduced by yourself, is an acceptable piece of consumer legislation.

However, at the present time, we are opposed to S. 1630 as introduced by Senators Sparkman and Brock for two main reasons.

One, in particular, is that it fails to recognize the right of consumer credit card customers to assert the claims and defenses they have against the credit card issuer when the merchant has delivered shoddy merchandise.

In addition, we think that the adjusted balance method of computation is the most fair method upon which finance charges can be assessed to consumers, and that the retroactive billing system tolerated by S. 1630 are patently unfair, unjust and inimical to consumer interests.

I would like now to discuss some of these points in more detail, but initially, I would like to draw attention to the Annual Report of the Federal Reserve Board on the Truth-in-Lending Act, where footnote 13 of that report discusses specifically what you were just talking about with Ms. Kessler regarding class actions.

There are a number of reported decisions there indicating where class actions have been certified and where they have not been certified and it appears that about 60 percent of these cases were not certified. but a significant number-I would say approximately 35 or 40 percent were in fact certified.

The first main problem with legislation aimed toward securing fairness in credit card sales is that of how to statutorily assert the rights of credit card customers vis-a-vis the credit card issuer when the goods purchased in a credit-card transaction were delivered in a defective condition.

We believe the merchant should not be given the carte blanche authority to determine when it has not performed its part of the sale. This is what is provided for in S. 1630 as now written. We think that the times have changed since the holder-in-due-course doctrine was first devised back in 1783, I think originally in the case of Miller v. Race, so that the emphasis on creating negotiability of the instruments in a sale is no longer an issue. The issue today is seeing that merchants deal with consumers in fair terms, so that where the credit card issuer is taking profits on a credit card transaction it should willingly assume some of the responsibilities. Besides the relatively minor disagreements outlined in our statement, we believe S. 914 is absolutely correct in recognizing the rights of consumers to assert their claims and defenses against card issuers.

I would like to move just right now to the question of the prohibition of retroactive finance charges. In line with the position stated by FTC Chairman Engman earlier this morning, CFA believes the disclosure provisions of the Truth-in-Lending Act attempt to see that the consumer is given a meaningful choice. He has to make a decision,

based on the knowledge of the facts of the situation presented to him. If the consumer is given the option of a great variety of billing practices, it can only result in the confusion to the consumer as to what exactly is the cost of the credit that he is going to purchase.

For that compelling reason alone we think that one particular system should be utilized and as we stated before in the testimony today, we think that should be the adjusted balance system of computation.

Turning very briefly to other matters, we would also emphasize that the disclosure of rates to consumers should be mailed in each monthly billing statement that the consumer is sent, and not only twice a year as both S. 914 and S. 1630 would provide.

We would also advocate that billing errors be corrected in sections 161 and 162 of both these bills as rapidly as possible. The Consumer Federation of America believes Congress should prod the creditor industry to respond to and resolve consumer complaints as soon as possible and therefore we advocate the time span that was originally introduced in your S. 652 in the last Congress. That would be providing the creditor 10 days in which to acknowledge a consumer's dispute of a bill and 30 days in which to send an explanation or rebuttal of the charge.

Insofar as the forfeiture and civil penalties are concerned, the position of the Consumer Federation of America is that there should be no limitation on the amount forfeited. We fail to see why the creditor should be able to collect moneys when it has not even attempted to justify the validity of the charges it has imposed. It seems the creditor could thus derive benefits from his own intentional wrongdoing.

In short, we would not like to see the incorrect billing practices be built in as a mere mechanical cost of doing business for the creditor. That would conclude my summary of the particular points that are in the testimony submitted to the record today.

We shall be happy to try to answer any questions you may have. Senator PROXMIRE. Thank you both for very, very fine statements. I know you are under pressure to abbreviate them, and I think you did a fine job in doing so.

Your statement will be printed, as I say, in full in the record. [The statement follows:]

STATEMENT OF CONSUMER FEDERATION OF AMERICA

Prepared By Berlin, Roisman, and Kessler, General Counsel

Mr. Chairman: As representatives of the law firm of Berlin, Roisman and Kessler, we are here today as counsel to Consumer Federation of America to comment upon fair credit billing legislation presently pending before this Subcommittee. Composed of more than 190 individual organizations, CFA is the largest consumer representative in the country, with a profound concern, in particular, for matters pertaining to consumer credit.

The Consumer Federation of America does not hesitate to join the sponsors and supporters of the two bills currently under consideration (S. 914, introduced by Senator Proxmire, and S. 1630, introduced by Senators Sparkman and Brock) in efforts genuinely designed to achieve the primary stated purpose of this legislation—namely, protecting consumers from inaccurate and unfair billing practices. Furthermore, CFA is keenly aware of the interest in avoiding the unwarranted diminishing in the availability of credit or the unjustified increase in the cost of credit. However, in striking the appropriate balance between consumer and creditor interests, we urge this Subcommittee to be ever mindful of the threshold question to address in legislating in the area of consumer credit;

simply put, this issue is whether or not the consumer is to have the right to receive fair value in the purchase of goods and services.

Generally speaking, because we have steadfastly maintained that the consumer does have the right to receive precisely that which is purported to be sold, the Consumer Federation of America is unable to support S. 1630 as presently proposed. In particular, it is the failure of S. 1630 to recognize the right of credit card customers to assert claims and defenses against the credit card issuer, coupled with its more than tacit approval of finance charge computational methods which impose retroactive charges upon consumers, which compel us to conclude that S. 1630 is plainly inimical to minimum standards affording equitable protection for the consumer. CFA does not express such objections to S. 914 as introduced and is willing-albeit with some reservation-to endorse it as an acceptable form of consumer-oriented legislation. However, the Consumer Federation of America respectfully submits that, on balance, S. 652, as first introduced by Senator Proxmire in the last Congress, remains the most just piece of fair credit billing legislation which, to date, the Subcommittee has considered.

The remainder of our testimony will first address the two major areas of the rights of credit card customers and retroactive finance charges, and then proceed to comment, in seriatum, upon those sections of the two sets of proposed amendments to the Truth in Lending Act (15 U.S.C. § 1601 et seq.) which either are in conflict with each other, or, while these two bills are in agreement, do not appear to CFA to sufficiently safeguard the consumer.

1. RIGHTS OF CREDIT CARD CUSTOMERS

The general problem to confront here is how to statutorily assert the rights of credit card customers vis-a-vis the credit card issuer where the goods originally purchased from the merchant in a credit card transaction either were not delivered or were delivered in a defective condition. S. 1630 provides only that when the merchant on his own accord accepts or allows a return of the goods or "forgiveness of a debit for services which were the subject of such sale," is the merchant then obligated to transmit the nature of the settlement of the transaction to the credit card issuer. This section, § 170 of S. 1630, is, so far as CFA is concerned, completely devoid of any alleviation whatsoever from the very real frustrations suffered daily by the consumers in this country.

This provision, in essence, grants the merchant the carte blanche authority to determine when he, the merchant, has not performed his part of the sale. It cannot be disputed that the objectivity of the merchant in arriving at this determination is, to say the least, highly suspect. Moreover, by this section, S. 1630 manages to completely evade the crucial question in three party credit sales of how to insure that the merchant deals with the consumer in fair and square terms. Rather, it seems that S. 1630 as evidenced in its Sec. 170, is directing its inquiry toward determining how best to insulate the card issuer from liability while protecting the retailer who does not deliver or sells shoddy merchandise. CFA maintains that the burden of attaining an open and honest free marketplace economy should not be left with the individual consumer to be pursued, as is presently the situation, on a fragmented case-by-case basis. Therefore, because S. 1630 calls for sustaining the present woefully inadequate system, CFA finds S. 1630 unacceptable.

It is the position of CFA that the credit card issuing corporations, with their collective resources, should assume responsibility for restricting the practices of the shady retail operator. S. 914 goes some way toward recognizing the inherently fair principle that the credit card issuing entities which reap profits from the credit card economy should accept some of the burden for the misconduct of the merchants with which the card-issuing concern has contracted. To realize this goal, waiver of defense clauses, as well as the moribund holder in due course doctrine, should no longer be tolerated. And Sec. 172 in S. 914 expressly guarantees that the credit card customer will have the right to withhold payment for defective merchandise purchased with a bank credit card and to assert the same legal defenses against the card issuer that the consumer would have to assert against the merchant who sold the goods. CFA believes passage of this section of S. 914 is vitally important if minimum consumer rights are to be effectively secured by legislation.

However, S. 914 also places certain limitations on the circumstances in which the consumer may assert these rights which CFA submits are irrational restrictions on the assertion of consumer claims and defenses. Sec. 172 (3) pro

vides the consumer can only assert rights where "the place where the initial transaction occurred was in the same State as the State in which the card issuer maintained a place of business." But if the card issuer has arranged for its cardholders to purchase goods out of State, then the issuer must be subject to liability for the activity of the out-of-state merchant with which the card system contracted. First of all, credit card companies are without doubt more capable than consumers of screening the merchants who participate in a credit card scheme for credit standing and business reputation, and the fact that a merchant is out of state is irrelevant to the responsibility of the issuing authority. If the credit card issuer is willing to cross state lines to obtain the benefits of credit card use then it must be willing to accept the responsibilities. The point to be made here is simply that the "interchange" system which enabled the out of state credit card sale to occur in the first place has the mechanism readily available within it to charge any losses to the issuer in the system which actually first contracted with the merchant in question. Only if this reality of the interchange system is directly addressed will the merchant be the one ultimately held responsible for the defective goods it introduces to the marketplace. The geographical occurrence of the initial transaction is irrelevant to the principle at issue, and as CFA has stated before, the assertion of this basic concept of responsibility is long overdue.

In addition, the limitation in S. 914 that the initial transaction must exceed $50 strikes us as missing a key point of all consumer credit legislation. That point is that the consumer ought to get what was expected. Whether the consumer spends $49 or $51 on the goods in question is immaterial. The consumer expects the value of the good or service being rendered just as much with small amounts as with large amounts. While it is argued that the arbitrary $50 limit is imposed in order to distinguish between "true credit" sales and those transactions where the credit card is used as a cash substitute, it is submitted that the consumer should get the moneysworth of the good or service irregardless of the cash value of the sale. Indeed, it is suggested that if cash sales were susceptible to securing such fairness that the fair value standard should be achieved. In short, the fact that cash sales are not readily subject to guaranteeing fairness in sales is no valid reason for denying such fairness to credit card sales where the mechanism for arriving at a just result is available.

2. PROHIBITION OF RETROACTIVE FINANCE CHARGES

S. 914 seeks to prohibit retroactive finance charges while S. 1630 does not. Though this issue is confusing and has been bantered about for some time, CFA remains convinced that a retroactively assessed finance charge is a usurious device inconsistent with the spirit and the substance of the Truth in Lending Act. However, while CFA supports the ban in Sec. 167 of S. 914 on retroactive finance charges, we believe the disclosure provisions of the Truth in Lending Act will only enable the general consuming public to make a meaningful choice of credit plan options if all plans employ the same computational billing system, i.e., the socalled Adjusted Balance System.

It is unnecessary at this point to review the subtle nuances contained in the various computational billing systems. Senator Proxmire has clearly and concisely outlined in his introduction to S. 914 the differences yielded by the four methods generally practiced-previous balance system, average daily balance system no. 1, average daily balance system no. 2 (Sears system), and the adjusted balance system. What is necessary to emphasize is that where only a partial payment, rather than payment in full, is made before the due date on the bill, then under the first three systems the customer is retroactively charged for balances due prior to the due date. CFA contends that even putting aside the possible misleading advertising of the use of the grace period these methods can result in the charging and exaction of usury from consumers, particularly where the previous balance system is employed. More specifically, the creditor ought not to be able to offer the 30-day grace period on the one hand and then turn around and include the 30-days in the computation of interest charges. Interest is the charge for the use or forbearance of a sum of money over a stated period of time, and in computing the finance charge, CFA submits it is patently unjust to permit the creditor to retroactively alter the stated period of time during which the use of money is being charged.

Senator Proxmire has persuasively posed these and other arguments against tolerating the practice of retroactive finance charges. However, S. 914 does not provide, as did S. 652, that the adjusted-balance method should be the sole per

missible form in which to compute finance charges. While the Senator's express desire not to stifle "experimentation and innovation in the development of future billing systems" is admirable, we at CFA conclude that the need for full disclosure of lending programs warrants the standardization of the adjusted-balance billing method.

Different finance charges from different billing methods can only lead to further confusing the consumer about the actual cost of credit. As stated in Section 102 of the Truth in Lending Act:

The informed use of credit results from an awareness of the cost thereof by consumers. It is the purpose of this title to assure a meaningful disclosure of credit terms so that the consumer will be able to compare more readily the various credit terms available to him . . . (15 U.S.C. § 1602) Such comparison is frustrated significantly by the utilization of different billing techniques. Thus, it appears to CFA that the annual percentage rate should serve as the measuring stick of any particular creditor's loan scheme, and that to comport with the avowed purpose of the Truth in Lending Act in promoting a truly "meaningful disclosure of credit terms" the adjusted-balance billing technique should be the computational method mandated by this legislation.

3. IDENTIFICATION OF TRANSACTION

In Sec. 104, S. 1630 proposes to amend Sec. 127(b) (2) of the Truth in Lending Act to provide that in its billing statement the creditor need not identify the goods or services purchased upon which a finance charge is imposd if a brief identification of the goods or services was somehow "previously furnished." CFA believes this section should not rely on identification "previously furnished" because the fact of the matter may be that the consumer was not a party to the transaction in question and that a "previously furnished" receipt may have been given, by way of a stolen credit card or otherwise, to a person other than the consumer being charged for the goods. Therefore, it seems reasonable that a voucher or some form of identification of the goods or services purchased should be sent along with the billing statement.

4. DISCLOSURE OF FAIR CREDIT BILLING RIGHTS

Both S. 914 (Sec. 104) and S. 1630 (Sec. 105) provide for a minimum semiannual disclosure of rights to the consumer in the billing statements regularly mailed. However, as S. 652 first provided, such a disclosure of rights should be included in each monthly statement. The consumer needs to be informed of his rights at a time when they can be effectively exercised, and not six months prior or subsequent to that time.

5. CORRECTION OF BILLING ERRORS

In Sec. 161 of both S. 914 and S. 1630 creditors are given thirty (30) days to acknowledge a consumer's dispute of a bill and up to ninety (90) days to correct the mistake or send a written explanation of why the creditor believes there is no mistake in the bill. S. 652 as originally introduced provided the creditor with ten (10) days in which to acknowledge a consumer's dispute of a bill and thirty (30) days in which to send an explanation or rebuttal of the consumer's charge. CFA firmly believes Congress should prod the creditor industry to respond to and resolve consumer complaints as efficiently as possible, and therefore advocates the time span contained in the original S. 652. Creditors have no difficulty in moving quickly against a consumer when a balance is unpaid. They should move as swiftly in correcting their own errors.

In any event, though, CFA fails to understand why the creditor should be given a longer period of time in which to respond to the consumer's inquiry than the consumer is provided in Sec. 163 in which to pay his bill. CFA submits that the time period in Sec. 161 should be the equivalent of Sec. 163, and that, as explained below, that time period should be at least twenty-one (21) days.

6. FORFEITURE AND CIVIL PENALTIES

S. 914 and S. 1630, in Sec. 161 (d), provide that a creditor who fails to comply with these amendments (i.e.. Sections 161 and 162 on the correction of billing errors and the regulation of credit reports) forfeits any right to collect from the consumer the amount "disputed" by the consumer, and any finance charges