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indirect common control with the card issuer or who is a franchised dealer in the card issuer's products or services or who through the mails or by other advertising solicits the card holder to enter into the transaction and use the particular credit card or one issued by an affiliated card issuer ;

(2) in any sales, lease or service transaction in which the seller, lessor or person rendering the service is not subject to the provisions of sub-paragraph (1) provided

(i) the transaction does not involve food or drink consumed on the vendors premises, or travel, lodging, or tickets for entertainment; and

(ii) all liability for any one transaction shall not exceed the amount initially financed in that transaction; and

(iii) at the time the card holder gives the card issuer notice of his intention to assert the claim or defense, the card holder has not paid for

the transaction if full. (b) After receipt of a notice of intention to assert a claim or defense, the card issuer shall take no action to collect the amount of the disputed transaction or any part thereof until the card holder has had one full billing cycle in which to negotiate a direct and satisfactory resolution of the dispute or problem relative to the transaction with the person honoring the credit card.

(c) A card holder who does not give notice to the card issuer within a reasonable time after discovery of the facts giving rise to the dispute or problem and make a good faith attempt to promptly negotiate a direct and satisfactory settlement during the billing cycle following his notice of intention to assert a claim or defense shall, unless he has previously made such an effort and reached an impasse, be deemed to have waived the claim or defense.

(d) For the purpose of determining whether a transaction has been paid for in full, the amount originally financed shall be reduced at each billing cycle

(i) by the amount of and agreed monthly or other periodic installments;

or

(ii) if there has been no such agreement by the application to the amount originally financed of the minimum monthly payment required by the card issuer, as if the disputed transaction were the only item in the account, plus any greater reduction occasioned when the total unpaid balance in the account at any intermediate time falls below the remaining computed balance on the disputed transaction by reason of remittances from the

card holder. (e) The provisions of this section shall not apply to credit and transactions in which the account to which the charge is made is opened with the card issuer by, and is billed to, a business or professional organization without regard to the nature of the transaction.

APPENDIX C AUTOMOBILE PAPER HELD BY COMMERCIAL BANKS (RELATIONSHIP BETWEEN PURCHASED PAPER AND

DIRECT LOANS)

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Source: Federal Reserve Board Statistical Release G-18 and statistical appendix of monthly bulletin for yearend figures. Percentages are our own calculations.

Senator PROXMIRE. Our final witness this morning is Mr. Mark Silbergeld, Consumers Union.

You, too, have a very substantial statement, and the statement will be printed in full in the record.

You can abbreviate it in any way you you wish, and we will get into questions (see p. 169).

STATEMENT OF MARK SILBERGELD, ATTORNEY, CONSUMERS

UNION, WASHINGTON OFFICE

Mr. SILBERGELD. Thank you, Mr. Chairman.

As always, Consumers Union appreciates the invitation that has been extended to present our views on this very important consumer legislation.

I will summarize five areas, and then I will be happy to respond to your questions, and if there are any areas which we did not touch upon in detail, I will be glad to make short additional statements. We did not cover all the technical details.

We will be pleased to submit for the record, along with the correction of comments, any more substantial technical comments you might wish.

When I testified on S. 652, I had a tale to relate to you about a personal experience with billing, and what I have found since is that having one is no indication that you have already played your odds and you aren't likely to have more.

Once again, my prepared testimony describes, in addition to the many letters that Consumers Union has received regarding billing errors, another personal experience. I would summarize that by saying that in the company involved, Citgo in this case, I found the human employees to be very sensitive-once I managed to get in touch with them. The computer employee was not terribly sensitive, and insisted on staying in touch with me in lieu of personal contact.

We feel that the billing error section is really a must for consumers. At present there is no incentive for the credit operations of card issuers to have people who are particularly competent at dealing with their computers in the more complex situations, and that has been my experience.

There may be a limitation on an employee or there may be a limitation on the program, but—we find from our letters—once you get in touch with somebody, there is an inability to correct the data. In one case, a person was told the correction couldn't be made, that the program and the machine, or programer, or whoever, simply was not competent to enter the correction, which the company agreed should have been made.

This bill will provide the incentive for creditors to provide themselves with the ability to make those corrections properly. I only need to make one point with regard to this, and that is about the actual delivery provision contained in S. 914, but not in S. 1630, in which, if the consumer complains the goods were not delivered in accordance with the agreement at the time of the transactions, the creditor is required to determine that the goods actually were delivered.

We have had an increasing number of consumer complaints over the past few years about at least allegedly--and from the facts described to us quite apparently-falsified credit slips, in which the employee accepting the consumer's credit card may make a double impression or use the card to make a second impression upon a second slip, one or several serial numbers higher than the slip. Something appearing to be the consumer's signature appears on the billing copy that the consumer sees that does not compare with the tissue copy which the consumer retained.

The credit card issuer may not be directly responsible. But we are extremely concerned.

The result is that

Senator PROXMIRE. That wouldn't be an employee, that would be an independent agent that would get benefit?

Mr. SILBERGELD. Most have been franchised gas stations. There have been others. There was a charge for a completely nonexistent purchase of flowers, which was described by the credit card issuer as being in one city and the customer said she never made that purchase.

The second response described a second florist in a second city as being the source of the purchase, and despite the customer's indication

Senator PROXMIRE. Was that a married couple involved in that one? Mr. SILBERGELD. That is right.

Senator PROXMIRE. Are you sure it wasn't a fellow who was giving flowers to somebody else, not his wife?

Mr. SILBERGELD. That is a possibility. But I think if that were the case he might have been somewhat hesitant to raise a fuss and pass letters around to a variety of consumer organizations about it, however.

Senator PROXMIRE. Maybe he wanted it to be known that he was a lothario.

Mr. SILBERGELD. That is a possibility.

Senator PROXMIRE. When you reach a certain age, up until you reach a certain age, you are concerned about that.

Mr. SILBERGELD. I see your point.
There are four areas I want to touch on very briefly.

Retroactive finance charges. Use of the previous balance method is contrary to the notion, as expressed in the congressional determination for the actuarial method, that consumers only pay for as much of the credit as they have had outstanding at the time the finance charge is computed.

We strongly support the prohibition on the previous balance method.

I am aware of the discussion that has taken place this morning previously on the question of whether the adjusted balance or the daily balance should be acceptable.

Arguments have been advanced that the adjusted balance may be necessary for stores which do not have the electronic facilities for computing an average daily balance and must post by hand, and arguments have been made counter to that, that a single method of computation should be required.

Frankly. I am somewhat concerned about the possibility that was alluded to by, and I think more fully explained in the full statement of, the Chairman of the Federal Trade Commission this morning, that smaller merchants do not have the electronic facilities to compute average daily balances, and they may either have to contract their billing out at somewhat higher expense, or may have to acquire such, if they can afford to.

I am not impressed, however, with the suggestion that requiring this will drive smaller business out of business.

One of the reasons one of the primary reasons—for shopping at a smaller concern is that they frequently provide greater convenience or greater specialization, and consumers are willing to pay a few cents inore for it.

I am concerned, however, that, as far as I know, there have been no studies of what it would cost if these stores were required to ship their billing out, and I would hesitate to flatly endorse the requirement of an average daily balance method unless I had some indication of whether the costs were going to be nominal or very significant.

But, again, the essential point, as far as we are concerned, is that the retroactive finance charge based upon the previous balance is not only unfair, but is contrary to public policy as expressed in the finance charge computation requirements of the present Truth-In-Lending Act.

Senator PROXMIRE. Were you here when the Consumer Federation testified ?

Mr. SILBERGELD. Yes.

Senator PROXMIRE. What do you think of their argument that you should have a single method adjusted balance which would be uniform for purposes of comparison so that the consumer would know where he can get the best credit opportunities?

Mr. SILBERGELD. I am somewhat hesitant to suggest that the adjusted balance method be required partly because it would go beyond the requirements of fairness as reflected in the actuarial description, and in effect mandate some additional costs, regardless of how that is passed along, some additional costs for the purpose of having absolutely comparative figures among various creditors.

Again, I am not sure what those costs would be, or how they would be passed along

I am somewhat concerned with mandating these additional costs. I think that on the other hand, as has been pointed out in numerous studies, that in open-end credit, unlike closed-end credit, the variety of methods of computing finance charges and the variety of factors that affect the true rate of interest result in

Senator PROXMIRE. Would you favor the single adjusted balance system, the uniform system, if we could determine that the costs were not excessive?

Mr. SILBERGELD. If the costs were not excessive I would have to say that I would not object to it. I don't know that we would have any particular grounds for insisting upon it, but I would not find it objectionable.

Senator ProxMIRE. Except the uniformity would be desirable.
Mr. SILBERGELD. Yes; it would be.

Length of billing period—I have no measure of the present size of this problem I mention, and I will skip over it. I think it must continue to some degree, and should be dealt with in S. 914.

Obligor's rights, credit card holders' rights are an essential provision of this legislation, and we would find it very difficult to support legislation despite our feeling of the need for the billing error provision, if obligor's rights are not protected in some acceptable fashion. Now, I realize from last year's experience that in effect this is a bill that is successor to a bill which was unacceptable, first to those others than the sponsors and, eventually, the sponsors; but we do have perhaps somewhat critical comments with regard to S. 914 as now drafted.

One is the geographic limitation. Our position is that so long as a credit card issuer seeks to take the benefits of having somebody authorized to accept his card, the responsibilities should go along with that. A limitation based upon unauthorized acceptors would be all right, and there are some plans now, I think, still in operation that would accept any recognized credit card and bill you directly without dealing with the card issuer--on the basis of that card as being acceptable identification.

That, perhaps, is not important; but I think as far as geographical limitation, the attempt to profit by authorizing somebody to accept the cards must be accompanied by the acceptance of the responsibility regardless of where that authorized franchised card acceptor is located.

As to a $50 limitation, I would simply incorporate Professor Leary's comments with regard to the number of transactions. I think any $5 or $10 limitation might possibly not render this section unobjectionable, but we would be very hesitant for a provision that in effect excluded most transactions from the protection of this section, I would point out to those who criticize the inclusion of an obligator's rights provision at all, that is not contained in S. 1930 and S. 914 clearly provides that this cannot be taken advantage of by simply a lazy consumer. There is a requirement for a good faith attempt for the card holder to adjust the matter with the merchant first. That is a requirement, in the exercise of the defense.

We think that with that kind of provision in it that this provision of S. 914 is necessary. We would hope that restrictions would be dealt with in the manner suggested.

The other provision which we feel is extremely important is class actions.

Consumers are faced with a Hobson's choice at this point. If no limitations are placed upon the amount to be recovered in a class action, we find at present, at least from my reading of the express language of Judge Frankel in that decision, is that the court will not certify a class action.

On the other hand, if the limitation is such that the consumer recovery is not about $100 a consumer, consumers simply will not bring class actions, because they do not want to get tied up in terms of time and expense and the difficulties involved in exchange for just the few dollars to be realized. And without that, of course, there is a greatly lowered deterrent force to—not necessarily intentional violations, because intentional violations are criminal but to what I might call negligent violations of the Truth-in-Lending Act, that the credit card user is not taking the care necessary and appropriate to be in compliance.

While I realize that some of these cases have been brought on technical questions in which even the Federal Trade Commission itself has not easily come up with clearance—I say that because I was in the division of consumer credit—in providing that kind of advice

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