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We point out in our statement the testimony offered in the case of Messenger v. Sandy Motors, Inc., 195 A. 2d. 402 (N.J. Super. Ct., chanc., 1972) in New Jersey, where the defendant had numerous expert witnesses testifying to the economics of installment buying of automobiles, and the plaintiff, represented by Consumer Legal Services, was not able to afford any. We point out there is the economic appendix written by Dr. Robert Johnson in the brief on appeal in Adams v. Egley (338 F. Supp. 614 (S.D. Cal. 1972), appeal docketed No. 721484, 9th Cir. Mar. 1972), which is a study on installment finance, where Dr. Johnson stops when he reaches the figure of $16 million extra cost. He does not bring that down to the fact that it is only about 27 cents a month on the number of autos being financed in the whole State of California.

I think the consumers, if they are going to have to be individual plaintiffs, need some reimbursement for economic experts. And for the fees of any other expert witnesses, testifying on opinion testimony, and a reasonable attorney's fee based upon the hours reasonably expended.

I would like, if I may, sir, to put a little footnote in on what I mean by reasonable hourly rates. It has been my experience that most consumer or public interest attorneys have to work on a contingent basis. They only get a fee if they win and if they get it from the other side. The average consumer who has been bilked out of at most $10 or $15 of finance charges and often far less is certainly not going to undertake to pay the attorney if he loses, so the hourly rate should not be the ordinary and customary bar association hourly rate for someone who is paid (win, lose, or draw) but has to have a contingent factor in it, or, again, with the refusal to certify class actions because of the potential enormous liability, we are just going to dry up the suits altogether. Most of the ones that have been brought as individuals have been brought because of the fact that it was felt they might have a chance at a class action. The class action concept does, however, need some tinkering with.

Let us take the case you were just talking about where there were 10 million customers for one particular card issuer or retail creditor, and assume that S. 1630 was law, if you will, and had $100,000 as its top liability. I think my mathematics is correct to say that that comes to 1 cent per member of the class as the total recovery, and under the rules of Eisen No. 3 the case just decided by the Second Circuit [Gisen v. Carlisle & Jacquelin, 41 U.S.L.W. 2586 (2d Cir. May 1, 1973)], the plaintiff would have to notify every member of the class by mail, which comes out to 8 cents postage, let alone the cost of preparing the envelope and preparing the letter and stuffing them and mailing them. So that I think class actions with a limitation may not be the answer.

I understand that several other innovative suggestions are going to be made at these hearings and I am making a request today, after I get copies of those, that I might be permitted to comment on them as to whether they reach a viable solution.

Senator PROX MIRE. Yes, we would be happy to have you comment. Mr. LEARY. That about summarizes, except for the technical points that are in the statement, what we were prepared to say.

Senator PROXMIRE. I was interested in your discussion of the new check credit plans which are being marketed by many banks. As I

understand these plans, they are operated in conjunction with a regular checking account, together with an overdraft privilege. If the consumer overdraws his account, he is given a loan in some minimum increment of $25, $50, or $100. Even if he does not need that much. In your opinion, does a bank have any legitimate reason for requiring the consumer to take out a loan in increments of $25 or $50 or $100? Mr. LEARY. There could be two reasons, sir, that they would advance. There is no mechanical reason that they have to do it in those kinds of increments in our present computer technology and the way banks operate.

However, the Federal Reserve Board has published some studies of "Break Éven Points in Consumer Installment Loans in Banks," in which it appears that the smaller the loans, the higher proportionately is the unit cost of actually doing the paperwork and setting up the money for the repayment.

Senator PROXMIRE. That would be true even if the borrower took out a $510 loan.

Mr. LEARY. Yes, there is this unit cost and I imagine they make a minimum to be sure they get some unit cost.

Senator PROXMIRE. I was not talking about the minimum, but about the increments, the fact that $25, $50, $100, and so on.

Mr. LEARY. Yes, as I say, it seems to me it is only the minimum that makes a great deal of sense.

Senator PROXMIRE. So, if the borrower wanted to borrow $508 or $510 or $535, that should not be a problem?

Mr. LEARY. It seems to me mechanically, the computer can handle the interest on that and the last repayment could be $28 instead of $20. Senator PROXMIRE. Do you want to comment, Ms. Segrè?

MS. SEGRE. I only wanted to say that the banks are also offering a kind of checking account credit called the revolving cash account, and in most accounts, in Philadelphia at any rate, those are for the exact amount that you want. So they seem to be able to handle it in this alternative account.

Senator PROXMIRE. Very good.
That is helpful.

Mr. LEARY. They set that up by giving you a separate checkbook to use for it, so they know you are depositing and withdrawing on that account separately.

Senator PROXMIRE. You also indicated separate deposit slips are required if the customer wishes to repay more than the minimum repayment on his overdraft loan. Are those deposit slips concealed from the customer's knowledge, and how difficult is it to get them?

Mr. LEARY. You have to ask for them. I do not believe they are concealed, they are not available unless you ask for them. They do not have them at the counter. I understand that a very high ABA official took advantage of such a plan and got caught on this same thing for 2 months before he found out his deposits were not repaying his loan. Senator PROXMIRE. Can you amplify on the legislative remedies for these abuses?

Mr. LEARY. It would seem to me, sir, that they could be worked into the retroactive finance charge by coming down with some formula that simply says you charge only on the amount as loaned in these accounts, rather than charging on the basis of the standard increment if it is

the first type of account we talked about, that is where automatically your check overdrawing the account triggers the loan.

The other one sets it up in a separate account.

Senator PROXMIRE. I am not sure I follow the logic of your argument with which you started off your presentation for consumable goods exclusion on holder in due course in lieu of the $50 exclusion. I do not fully accept the reason for $50 exclusion but it goes something like this:

Credit cards and particularly bank credit cards are an innovative development, they are new. They will eventually pave the way toward an electronic fund transfer system which is supposed to be more efficient than the present cash-check system. Credit cards are a substitute for cash transactions as well as credit transactions.

However, if the merchants are subjected to charge backs from the banks on small transactions which were formerly cash transactions, they will insist upon cash or checks for these transactions.

Therefore, the development of bank credit cards and all the benefits they are supposed to bring will be impeded.

If we accept this rationale, it is difficult to see how your proposal is better. Maybe we need to examine the underlying rationale for the exclusion rather than tinkering with the method.

Mr. LEARY. It seems to me, sir, first of all, that I would not accept the premise. We have found, actually, that it is harder to pay by check than it is to pay by credit card with the merchants today. Senator PROXMIRE. What about the exclusion, then?

Mr. LEARY. The $50.

Senator PROXMIRE. Yes.

Mr. LEARY. That is what we suggested. We have a redraft of section 72 of S. 914 where we throw the exclusion out of the $50 but do exclude those things which tie in, it seems to us, with the travelers check concept of the credit cards as a substitute for the travelers check and that is travel, entertainment, food and drink consumed on the premises.

Senator PROXMIRE. Would that be a substitute for the geographic limitation?

Mr. LEARY. Yes; it would be and I would think it might well be something that some of the principal credit card companies could buy. Particularly, you have to bear in mind that the last report of the American Bankers Association's analysis of credit cards showed an average ticket of only about $18.30 per check, per sales slip, rather. So that the $50 limitation excludes a goodly number of the total of items handled.

Senator PROXMIRE. It would exclude the overwhelming majority of items.

Mr. LEARY. Yes. It would make another consumer statute which is something in the nature of a put-on.

Senator PROXMIRE. How about the vacuum cleaner that does not work for $49 is just as bad as one that does not work for $51?

Mr. LEARY. That is why I would like to get rid of the dollar limit. Senator PROXMIRE. We agree on that. Thank you very, very much, Mr. Leary, and Ms. Segrè, for an excellent presentation. It has been most useful.

[Complete statement follows:]

STATEMENT OF FAIRFAX LEARY, JR., ACCOMPANIED BY NINA SEGRE

Mr. Chairman and distinguished members of the Subcommittee, we are pleased to respond to your invitation to present a few personal views concerning this important proposed legislation. I am accompanied today by Ms. Nina Segrè who has assisted me in the preparation of our views.

As the record will show I presented views on S-652 on Thursday, October 28, 1971, while I was acting as counsel to Ralph Nader's Public Interest Research Group. Since then I have served for the present year as the Visiting William A. Schnader Professor of Commercial Law on the Faculty of the Law School of the University of Pennsylvania, teaching courses in Consumer Law, Creditors' Rights and Secured Transactions. My previous testimony, I believe, sets forth my qualifications. It is, I believe, not necessary to repeat or summarize here what was previously said. Nor need I repeat what has been well said elsewhere about ours now being a credit oriented society, with Consumer Credit outstanding at about $2,460 per household and housing mortgage debt at about $7,700 dollars per family. This total is, therefore, over $10,000 per household.

To keep the availability of credit in phase with geographic demands, it is important, it seems to us, to have nationwide minimum limits upon the ground rules for the granting of credit, the reporting of credit, the billing in credit situations, and the use of certain legal practices in credit operations.

The Congress has responded to this need with the Truth in Lending Act, the Fair Credit Reporting Act, and now has under consideration the proposed Fair Credit Billing Act as well as a Fair Warranty Act. With the passage of these statutes a uniform federal floor will be relatively complete. Our mobile population will, as it moves from place to place, everywhere encounter the same basic ground rules throughout the country as a minimum protection.

CREDIT CARDS AND CONSUMER DEFENSES

In the field of credit cards, the distinction between the types of cards continues to blur, as the competition for the consumer's dollar increases, and the pressure to generate profits, notwithstanding cost increases, mounts. A so-called oil company credit card is no longer just a card to use at that company's service station for gas, oil, tires, batteries and other automotive accessories.

Gulf calls its credit card a "Travel Card," and it is usable for bills incurred at Holiday Inns and other places. Other gas cards have similar acceptance for other purposes. Exxon is now a salesman for Revere Ware as the photocopies we have attached to our statement show.

It is significant, in view of the industry's desire to limit the operation of any proscription of waiver of defense clauses to cases where the amount of the transaction exceeds $50.00, how often these transactions are just under the $50.00 limit. The Exxon Revere Ware offer, for example has a cash price of $49.98. Sunoco offers a 16-page shopping catalogue of 24 items, of which 14 are priced below $50.00 with 5 of these at $49.92. The catalogue is Copyrighted for 1973 by "America Direct." Installment terms run from 3 payments to 12 payments. The monthly payments run from a low of $4.99 to a high of $16.66. The merchandise runs the gamut from a "22 piece monogrammed towel and bath rug set" or a "quilted bed spread; pair of draperies," through a Duncan Hines 14-piece stainless steel cookware set (perhaps to compete with Exxon?), a credit balance adding machine, a digit-master electronic calculator, to a complete family camping outfit, or an "entertainment system" consisting of an 8 track stereo tape player and recorder with am/fm stereo radio. Shipping charges are extra.

A recent billing from American Express offered a series of diary-calendars at prices ranging from $20.95 to $27.85.

This discussion is preface to a suggestion as to Section 172 of S-914 which has no counterpart in S-1630. This is the Section which is, I suppose, designed to prevent credit card-issuers from isolating themselves by contract clauses, from refusals to pay for goods that do not perform or live up to the consumers justified expectations. There are four limitations, however, on the prohibition of this isolation, and we shall comment on them in order

First, the obligor must have "made a good faith attempt to obtain satisfactory resolution of a disagreement or problem relative to the transaction from the person honoring the credit card."

It is suggested that the language would be clarified by changing the word "obtain" in line 15, page 13 to "negotiate a direct and" to make it clear that the initiation of litigation is not required. Where, the consumer can obtain warranty work or other corrective action without withholding payments from a card issuer, it is perhaps, fair that he do so. But, if the seller is not in business at the same location, the consumer should not be required to trace his departed seller, or locate a house-to-house seller who has received authorization to honor a credit card.

Next, if we consider the warranty legislation in S-356, we will find that Section 110 (a) provides that where a vendor has established a private dispute settling procedure, the consumer must "initially" make use of that procedure. If both bills are enacted into law, we will need to resolve the conflict, as to whether the private dispute settling procedure need be exhausted before the consumer is entitled to assert a defense against the credit card issuer. To avoid this construction, our suggestion uses the words "negotiate a direct and satisfactory" solution, to make it clear that resort to arbitration or to M.A.C.A.P. or other private dispute settling procedures is not a pre-requisite.

Since the consumer's prime weapon is the refusal to pay while negotiating, the bill should make it clear that a consumer may withhold payments during the attempted resolution of the dispute without being subjected to an acceleration of the debt. Since a creditor should not be without legal collection means for too long a period, we suggest that consideration be given to limiting the period for the negotiation with the seller to one billing cycle period. After this period the credit card holder should be free to assert his claim or make his defense against the card issuer. To implement this suggestion we would add a further clause in line 17 just before the "(2)" reading "and has not been successful before the end of one billing cycle;."

Second, the amount of the transaction exceeds $50.00.

This limitation would exclude a large number of transactions. It would exclude 18 out of the 28 examples of offerings we've mentioned previously. A negative implication from the section as presently drawn would exclude claims and defenses arising out of sales of items under $50.00 made or solicited by the card issuer itself, or made by franchised dealers of the card issuer, or by separately incorporated "merchandise centers" of the card issuer.

This should never be permitted.

If we may suggest, it is a mistake to attempt to deal too simplistically with what are essentially complex and sophisticated matters. Credit card transactions can be classified into at least 11 categories, as follows;

1. Transactions directly between card holder and card issuer involving goods or services provided by the card issuer itself;

2. Transactions between the card holder and a provider of goods or services who is affiliated with the card issuer;

3. Transactions between the card holder and a provider of goods or services who is an independent but authorized dealer of the card issuer;

4. Transactions between the card holder and a provider of goods or services who is an independent but authorized dealer of a supplier who is affiliated with the card issuer;

5. Transactions between the card holder and an independent provider of goods or services where the transaction was solicited by mail in mailings purportedly from the card issuer;

6. Transactions between the card holder and an independent supplier of goods or services where the transaction was solicited by mail by the independent provider of goods or services suggested the use of a particular credit card; 7. Transactions identical to No. 6 except that the advertising is placed in a newspaper, or magazine or similar medium;

8. Transactions in which the card holder is solicited personally, in his home, by an independent provider of goods or services authorized to honor the credit card;

9. Transactions identical with No. 6 except that two or more or "any major credit card" is indicated as being acceptable:

10. Transactions identical to No. 7 except that two or more or "any major credit card" is indicated as being acceptable; and

11. Transactions in which a card holder enters a place of business, purchases goods or services therein and charges them on the card-holders credit card.

Whatever the justification for the $50.00 limit below which the card issuer is not to be subject to claims or defenses in some cases, there can be no justifica

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