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adopted, and I know you do not want one, do you think it should be based on metropolitan areas rather than State boundaries?

Mr. SILBERGELD. I think that is an absolute must if this provision is to have a substantial meaning. In fact, not to do that would be a form of discrimination. The people in East St. Louis frequently shop, prefer to shop in St. Louis, and go across the State line to shop in downtown St. Louis, could not use the available defenses, while the people of St. Paul who go across the city line to shop in Minneapolis, because there is no State line there, and because they are close metropolitan areas, could avail themselves of defenses.

This convenience of going anywhere in the metropolitan area is one of the major attractions of holding a credit card, especially one that is issued by somebody other than an individual retailer, which will permit you to go anywhere in the metropolitan area, and shop at a very substantial number of vendors. To draw the line according to State lines rather than in the natural metropolitan shopping area would be very

difficult. I think that the standard metropolitan statistical areas would in most cases be a fairly complete list to start with.

Senator PROXMIRE. I just have one other question.

I am not sure I follow your suggestion to go further than the undelivered merchandise provisions of S. 914. Could you amplify that recommendation?

Mr. SILBERGELD. Yes. I want to correct that. I confused the disparity of language between the first and last clauses of that provision. The first clause talks about a situation where the customer alleges that the merchandise was not delivered in accordance with the agreement at the time of the transaction.

The second part of the clause talks about the creditor's responsibility to determine whether the goods were delivered at all.

Senator PROXMIRE. So, you support the language as it is?

Mr. SILBERGELD. Yes, I do. It takes care of the flower shop problem we were talking about.

Senator PROXMIRE. Thank you, very much; Mr. Silbergeld.

The committee will stand in recess until tomorrow morning at 10 o'clock and will reconvene in this room.

[Whereupon, at 11:45 a.m., the hearing was adjourned, to reconvene at 10 a.m., on Wednesday, May 23, 1973.]

[The complete statement of Mr. Silbergeld follows:] STATEMENT OF MARK SILBERGELD, ATTORNEY, CONSUMERS UNION, WASHINGTON

OFFICE Mr. Chairman and members of the Subcommittee, Consumers Union is indeed pleased that you have called upon us to present our views on this important consumer legislation. Credit billing has been an irritating issue for many consumers. It is an issue which is reported on frequently in Consumer Reports, either through editorial comment or in the form of readers' letters. It just one more area where there is a need for government regulation because the business community has not voluntarily come to grips with the problem in a satisfactory manner. Before I present the information and views which are directly relevant to your consideration of these bills, let me provide briefly the background of Consumers Union,

Consumers Union of U.S., Inc., is a nonprofit membership organization chartered in 1936 under the laws of the State of New York to provide information and counsel to consumers about the management of family expenditures. The organization's financial support comes from the more than 2 million subscribers and newsstand readers of our magazine, Consumer Reports. We accept no support from any commercial organization. The magazine carries no advertising. Besides testing and reporting test results on products, Consumer Reports publishes general information for consumers on health, medicine, product safety, the economics of the marketplace, and the legislative, judicial and regulatory activities of the government affecting consumer welfare.

I should mention also that I am one of four attorneys in Consumers Union's Washington Office. I served at the Federal Trade Commission for five years, and during part of that time I was in the Division of Consumer Credit, administering the Truth-in-Lending and Fair Credit Reporting acts. Subsequent to that, and just prior to joining Consumers Union, I worked with Ralph Vader for fifteen months, during which time I testified before this Subcommittee on S. 652, the predecessor bill to S. 914.

Essential provisions of S. 914 and S. 1630 govern the responsibility of creditors to acknowledge, investigate and respond promptly to customer complaints which allege billing errors. When I testified on S. 652 some nineteen months ago, I related a personal experience regarding the difficulties of adjusting a billing problem with Central Charge. I have since found that experiencing the problem once does not much improve one's chances of avoiding further billing problems. Since then, I have encountered at least two instances of difficulty in getting creditors to respond to written complaints regaining billing errors.

In one instance, it took several months for Raleighs, of Washington, D.C.. to cease billing me for defective merchandise which I had returned, although I transmitted several notes and requested that my account be closed. In the other, Cities Service Oil Co. ("Citgo"), working unwittingly with the Postal Service, which failed to forward my bills from an old address, managed to overlook a change of address notice and then threatened to send representatives to collect my credit cards—at the old address. A much embarrassed company credit representative straightened out the matter very promptly—after I sent copies of my complaint about their handling of the matter to “Senator Proxmire, a member of the Senate Banking Committee who has insatiable fascination with the foibles of creditors who cannot manage their computer systems.” Only the threat of Congressional exposure took my letters to the company out of the computerized system and into human hards.

Consumers Union receives numerous complaints describing the failures of creditors to handle billing errors satisfactorily. These include failure to acknowledge or correct erroneous billings, failure to enter credits for accumulated finance charges imposed on erroneous billings, billings for goods not purchased or received, an increasing number of billings based on sales tickets which customers allege to be forged or altered, rude dunning letters, and cancellation of credit privileges for failure to pay amounts already pointed out to the creditor as having been erroneously billed. The customers in many cases were physicians, architects, business executives or others whose educational levels would seem to indicate adequate ability to cope with the normal situation, yet their efforts were not frequently successful. Less sophisticated credit customers would seem to have an even smaller chance of prompt, satisfactory adjustment of their accounts.

The Vice President of a New York computer software firm was erroneously charged for a television set. While trying to remove the charge for this item, he was also charged for $180 worth of airline tickets he had purchased and then cancelled. Charges for both items were eventually removed from his Diners Club bill, but twenty-nine months after the first error, he was still unsuccessful in seeking to have the accumulated finance charges on these items credited. The company, in the meanwhile, was threatening his credit standing for failure to pay the unowed finance charges.

The experience of a physician in Tennessee went a step further. His Humble Oil (now Exxon) credit privileges were cancelled over a disputed $2.78. He was an infrequent user of his card, and when he received a bill for a single purchase of $2.78 he wrote to the company to ask why it was not set off against a credit balance for the same amount which was still pending in his account. Despite his inquiries, the doctor explains to Consumers Union, he received five billings for the purchase, plus finance charges and :

"... three letters of increasingly severe tone, the last one reroking my credit cards and cancelling my account, while an earlier [letter) implied damage to

my credit rating if I did not pay immediately ..." Five months after the first billing, he still had no explanation.

A midwestern university professor refused to pay $15.00 in renewal of his American Express cards because the renewal card had not arrived, although a

form letter indicated that it would do so. The card arrived after he had paid the amount due on his account-less the renewal fee—and sent off an inquiry about the card. The next bill showed the new charges, as well as the $15.00, to be due. It also contained a notice that the account was overdue. The professor paid the account in full this time, the card having since arrived. He also sent a form letter to the ostensible signer of the form "overdue notice," protesting the receipt of a form notice, since he had written to inform the company that the renewal card had not been received at the time of the previous payment. At this point, it would be reasonable to assume that the matter had been straightened out with payment of the full balance due. Not so. The customer next received another overdue notice, stating that the next statement would carry a "SERIOUSLY PASTDUE” status, which the now irate gentleman considered to be a threat to his credit status. He wrote to American Express President William H. Morton :

we have here a classical example of the inability of the human individual to deal with a computer. This whole situation has the elements of comedy in it, the hapless citizen coping with a computer that refuses to listen to reason. Added to this, however, is the very real failure of American Express to respond to repeated written inquiries and explanations. None of my letters

has elicited any reaction.” Consumers may be driven to drastic measures in getting their accounts clarified—one method is simply closing the account. A couple in San Vicente, California found this necessary when Diners Club continued to bill them for flowers from a florist and gasoline from an oil company, with whom they had never dealt. Their genuine efforts and substantial expenditure of time and patience in attempting to correct the error went unrewarded. A letter to Diners Club brought forth only the identification of the florist, but no supporting sales documents for either transaction. When the wife attempted to call the person who had signed the explanatory letter and cards, she was informed that Diners Club credit correspondents do not take telephone calls. She was permitted to explain the situation to another employee who was not responsible for handling her file. This brought forth further postcards informing her that the charges were made at another florist in another city than originally stated. Continued "fill in the form” correspondence from the company failed to clarify the matter or to document the transactions, so that when this couple was billed for their annual renewal fee, they declined to renew their Diners Club account. As they wrote to Diners Club President R. Newell Lusby :

Diners Club has caused me great inconvenience in attempting to pay my bills on time. Also, I do not have the time for the many phone calls and correspondence involved with trying to keep the accounting straight. Diners

Club cannot repay me for my time and effort in this matter. Under $ 161 (a) (3(B) (ii) of S. 914, and § 161 (d) the creditor would have been unable to collect the amount in dispute which might have been a disincentive for its having handled the account in the manner which it did. It should be noted also that handling accounts in a manner so unsatisfactory that customers cancel them—or simply do not use them unless necessary—is detrimental not only to the customer, but also to the card issuer's stockholders.

In short, Mr. Chairman, we believe that the billing error provisions of S. 914 will do much to alleviate a most unsatisfactory situation. We offer only one comment on the differences between the “billing error" provisions of S. 914 and S. 1630. The former bill-S. 914-specifically deals with the situation where "the obligor alleges that the creditor's billing statement reflects goods not delivered to the obligor or his designee in accordance with the agreement made at the time of the transaction." This provision-in $ 161(a) (3) (B) (ii)-states that the creditor may not construe the amount questioned by the customer to be correctly billed unless “he determines that such goods were actually delivered, mailed, or otherwise sent to the obligor and provides the obligor with copies of documentary evidence thereof." S. 1630 does not contain this language. We believe that the additional language is appropriate and fair, and we support it.

This provision should, however, go further. It should require that the creditor “not construe such amount to be correctly shown unless he determines that such goods were actually delivered" at all. This would cover the instance of the unordered and undelivered flowers in the last situation, Mr. Chairman. And this situation seems to becoming more common, according to the mail we receive at Consumer Union. Let us provide a few examples :

A consumer made a gasoline purchase and, in his next Master Charge billing received a billing for a purchase from the same station-but the "hard copy” receipt number enclosed in the bill was three numbers higher than the customer's tissue copy he had retained. He was billed $8.00 instead of the $6.43 shown on the tissue copy. The purchase was itemized as 17.3 gallons of gas, but his auto tank only holds 16.0 gallons.

96-687-73-12

A Mobil Oil Corporation cardholder was billed for a gasoline purchase, and the evidence of the transaction bore an incorrect address, city, and dealer number for the dealer whose name appeared on the bill. The ticket was unsigned and the dealer had no record of the purchase. The customer was billed for $6.35.

Another Mobil Oil customer was billed for 20.2 gallons of gasoline; her Dodge Dart does not hold that much gasoline. Comparison of the tissue copy with the hard copy suggests that “10.2” was changed to "20.2" gallons, and

that "$3.45” was changed to "$8.45." Some of these matters may have been promptly resolved. The charge for undelivered flowers certainly was not. We recommend that $ 161 be amended to cover this situation.

REGULATION OF CREDIT REPORTS

We believe that $ 162 in both S. 914 and S. 1630 is necessary to protect consumers from being subjected to adverse credit reports for non-payment of amounts validly disputed as billing errors. Consumer Union's reader correspondence includes letters from cardholders who have been the subject of adverse reports in just such situations. One CU reader even took the precaution of informing the local credit reporting agency simultaneously with his notice to a card issuer that he was withholding payment of an erroneously billed charge pending clarification.

LENGTH OF BILLING PERIOD

When I was at the Federal Trade Commission's Division of Consumer Credit, enforcing the Truth-in-Lending Act, the so-called "shrinking billing period" problem was the subject of more consumer complaints than any other credit subject-save one, the “previous balance" method of computing finance charge. Since that time, I have had little opportunity to measure first hand the degree to which that problem still persists to so great a degree. The problem involves, in some instances, mailing of the cardholder's bill so late that it was impossible for the bill to have been paid by the payment deadline, even had the mailman been met at the door and sent away with the customer's payment. More commonly, the customer had more time than that, but still so little time that if she or he had to wait a week to deposit the next paycheck before writing a check to the creditor, timely payment could still not be made. As I previously indicated in testimony on S. 652, the problem for many people is simply a matter of coordinating bills received with periodic income receipts. Viewing the problem realistically, this becomes more possible and reasonable to expect if the creditor "splits” the billing period approximately in half.—The first half permits the creditor to process payments received by the deadline, to generate a bill, and to process and mail that bill. The second half remains for transmission of the bill to and from the customer and to permit the customer to coordinate income receipts with debt payment. This does not, of course, assure that a cardholder who receives a bill immediately after a paycheck has been received and probably completely depleted to await the next paycheck and still make the payment on time. It does mean that a person who is paid on a bi-weekly basis can coordinate income received and bills paid, assuming reasonable planning of the family budget. The fourteen days permitted in this legislation for the creditor to process and mail should also be sufficient. The equal division of the billing periods is both equitable and feasible.

PROHIBITION OF RETROACTIVE FINANCE CIIARGES

The largest volume of mail received by the Federal Trade Commission staff during the initial effective period of the Truth-in-Lending Act concerned, as I have indicated, the use of the “previous balance method” of computing finance charges. The problem was of such great consumer concern that the FTC issued a "Consumer Credit Policy Statement”, informing the public about the additional costs which could result from use of this method of computing finance charges.

A basis principle of fairness in the computation of finance charges dictates that consumers not be required to pay finance charges on any portion of an obligation after that portion has been repaid. This principle is recognized in the Congressional prescription for use of the actuarial method of computing the annual percentage rate in closed end transactions, and an adaption of that method for open end credit.

Among arguments which may be advanced in opposition to this provison may be that the loss of revenues due to lessened finance charges generated under other methods of computation will cause retailers' credit operations not to pay for themselve. That is, credit department revenues will no longer equal the costs of operating the credit department. The implication is that the credit operations will no longer be profitable to these creditors. This is simply a matter of corporate bookkeeping. The reason for the extension of credit by retailers is to increase sales volume. The normal accounting system, however, gives the credit department any credit on the "black ink” side of the ledger for volume generated. Thus, this argument against prohibiting use of the “previous balance method" really boils down to an argument that a basically unfair computerized method should be retained to preserve a method of corporate bookkeeping.

We strongly urge adoption of § 167, as set forth in S. 914.

RIGHTS OF CREDIT CARD CUSTOMERS

Section 172 of $. 914 would preserve, in specified categories of transactions, those same rights of credit card customers against third parties honoring the issuer's card. (We recommend adoption of language identical to that used in Section 169, to clarify the applicability of § 172 to third party transactions. We support this provision, because it is basically unfair for a creditor to promote the use of its card on the basis of its broad acceptance by vendors of goods and services, and then to insist on payment for transactions where one of those vendors conducts a transaction in such a manner as to create legal defense against payment of debt. The card issuer who seeks to avoid such defenses wants the benefits of such wide acceptance of its card without any of the risks. The card issuer should be at least as careful in authorizing parties to accept its card as it would be in extending substantial amounts of credit. Beyond that, the authorized third party acceptor of the issuer's card is implicitly represented to be considered responsible and reliable by the issuer, and consumers should be entitled to rely on that implicit representation.

We are concerned, however, about the limitations of $ 172 to transactions exceeding $50 and taking place in a state where the card issuer maintains a place of business. First, if a third party in some state where the issuer does not maintain a place of business is authorized to accept the issuer's card, the issuer should bear risk as well as accept benefit. A major inducement to become the holder of the issuer's card is the wide acceptance of that card. At least one major national card issuer presently advertises the wide acceptance of its card as an advantage over a competing card. Implicit in this claim is the wide geographic, as well as vendor category, acceptance of the card. The total message, whether or not made explicitly, in many card promotions, is that they are usable in in a broad range of establishments all over the nation. Card issuers should stand behind those whom they authorize to accept their cards.

Likewise, the $50 requirement does not seem to be justified on the basis of the manner in which many persons use credit cards. While more expensive items may be charged on such cards, it would not be unusual for a cardholder on a single shopping or business trip to make a variety of purchases totaling several times the $50 requirement, but for none of the purchases to equal that required amount. If a required amount is necessary to prevent card issuers from being constantly involved in disputes over trivial sums, $10 would seem much more reasonable and fair.

LIMITATION ON CLASS ACTIONS

Section 208 vrould limit creditors' liability in Truth-In-Lending civil penalty class actions to $50,000 or one per centum of the net worth of the creditor, whichever is greater. This provision is, needless to say, problematic to consumers. On the one hand, a potential recovery of less than about $100 per plaintiff is not enough to induce most consumers to enforce their legal rights in the courts. On the other, the large amounts of liability resulting from Truth-in-Lending violations which do not represent actual damages have discouraged at least one court from finding that a class action is an appropriate means of redress, and may also substantially exceed the amounts necessary to discourage creditors from engaging in negligent violations. For example, in Rutner v. Chemical Bank

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