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the application of the business purpose exemption contained in section 104(1) of the Truth in Lending Act from its present application to sections 132, 133, and 134 of the act, which deal with liability of credit cardholders, the unsolicited issuance of such cards, and the theft of credit cards.
Incidentally, our concern with section 210, and our opposition to it, is based on the provision which would remove the business purpose exemptions from section 133 of the act dealing with cardholder liability. I have been advised by counsel that the business purpose exemption is inapplicable to section 134, concerning criminal penalties for fraudulent use, since such fraudulent use would not constitute a "credit transaction involving extensions of credit for business or commercial purposes" under any circumstances.
We note that a companion bill, S. 1630, would significantly strengthen the criminal provisions for fraudulent use. UATP strongly supports this strengthening of the criminal law and urges adoption of section 214 of S. 1630.
The UATP is the standardized credit card plan of the scheduled airlines of the world. It is a Civil Aeronautics Board-approved intercarrier agreement in which some 160 United States and foreign airlines participate. The plan operates to extend airline credit to “subscriber” accounts, which are, almost without exception, businesses and commercial concerns, both small and large, including such organizations as International Telephone & Telegraph, General Electric, Gencral Motors, American Telephone & Telegraph.
The subscribers enter into a contract with one of the airlines, pay a one-time $125 deposit and then may request that any number of air travel cards be issued to their personnel, and in some cases there are several thousand cards issued under one contract. The cards are then issued to named individuals by the contractor airline. All charges against such cards, including charges on airlines other than the "contractor,” are consolidated by the contractor airline and are billed to and paid by the subscriber account as opposed to the individual cardholder.
The UATP card, unlike the vast number of bank-type and generalpurpose credit cards, offers the feature of monthly centralized and single billing of the subscriber company for all charges on outstanding cards of that account. There are presently 115,000 subscriber companies under the plan with some 1.7 million air travel cards issued to personnel of these organizations. The point that I wish to emphasize here is that the Universal Air Travel plan is designed to be used, and is in fact used, primarily for business or commercial purposes.
The present UATP subscriber's contract provides that, in the event of a lost or stolen card, the subscriber will be responsible for the value of the tickets and other documents so purchased until that loss or theft is reported to the contractor airline. As a result of this provision, the UATP contractor airlines have a contractual right to recover from the subscribers all charges which have been incurred prior to notification by the subscriber of loss or theft of a card. After such notification the carriers assume all risks of unauthorized usage.
Title I of the Consumer Protection Act provides in section 104 that certain transactions are exempt from coverage, among these are credit transactions involving extensions of credit for business or commercial purposes, or to government or governmental agencies or instrumentalities, or to organizations. The exempt transactions all involve an extension of credit to those individuals or entities who are not "consumers" as that term is commonly used and as defined in section 103 of the Truth in Lending Act.
Pursuant to the provisions of section 104 of the act, the Federal Reserve Board on July 1, 1969, adopted certain regulations, known as regulation Z, implementing these provisions of the act. The exemption for business credit, provided by law, was included in section 226.3 of the Board's regulations.
On October 26, 1970, Congress enacted Public Law 91-508 which, among other things, amended the Truth in Lending Act by adding new definitions and substantive provisions. These provisions prohibited the unsolicited mailing of credit cards (sec. 132), limited liability in the event of unauthorized use to $50 (sec. 133), and provided for criminal prosecution for those who steal credit cards (sec. 134).
This law, however, did not amend the exempt transactions provision of the act as originally adopted. Moreover, the legislative history of Public Law 91-508 demonstrates that Congress intended to include the credit card provision in an act which contained a businesspurpose exemption. The inclusion in other acts which did not contain such an exemption was considered but rejected.
After the enactment of Public Law 91-508, the Board amended regulation Z by adding provisions to implement the new credit card amendments. Again, no amendments were made dealing with the exempted transactions.
On February 5, 1971, UATP informed the Federal Reserve Board that in its view, the business exemption of section 104 would apply to virtually all UATP subscriber accounts. On February 24, 1971, in response to that notification to the Federal Reserve Board, the Board in essence agreed with the views of the Universal Air Travel plan and replied as follows:
This is in response to your letter of February 5, 1971, concerning the limitation of liability contained in section 226.13(c) of regulation Z for the unauthorized use of credit cards.
Most subscribers to the Universal Air Travel plan are commercial or business accounts. However, occasionally there are some accounts existing for consumer purposes. Since these accounts are somewhat difficult to identify, you propose to place on the notice of limitation of liability a statement to the effect that the limitation does not apply to business, commercial, governmental, or organizational cardholders where the cards is being used for a business or commercial purpose. In our view, this would be an acceptable way to deal with the problem.
This opinion of the Board was followed by two informal staff opinion letters written by the Board's Chief, Truth in Lending section. On June 3, 1971, in response to an inquiry regarding the applicability of regulation Z to another card issuing company he wrote, as reported in volume 4 of the Commerce Clearing House Consumer Credit Guide that:
As we understand it, these cards are issued exclusively to operators of commercial motor vehicles for use in paying tolls on the thruway. In the staff's view, this amendment to the act is subject to the exemption in section 104 for credit transactions involving extensions of credit for business or commercial purposes, and is therefore not applicable to the charge card issued.
And in the second of these letters, on July 15, 1971, as stated in the same publication, the Board's staff stated :
It has been the staff's view that it was the congressional intent that the credit card amendment be subject to the Truth in Lending Act's exclusion for extension of credit for business or commercial purposes.
Subsequent to the above comments, an informal staff opinion letter of the Federal Trade Commission, dated September 2, 1971, stated that it was the staff's view that section 104 indicates a clear congressional intent to provide protection only in situations in which consumer credit is being extended.
Notwithstanding these opinions and staff comments, approximately 1 year later, on August 4, 1972, the Federal Reserve Board issued å notice of proposed rulemaking amending regulation Z, citing as its purpose the intent to "make it clear” that the business exemption is not to be applied to the credit card liability amendments of Public Law 91–508. On November 6, 1972, these proposed amendments were incorporated into regulation Z and became effective on December 16, 1972. At the time that the Federal Reserve Board proposed its credit card liability amendments to regulation Z, the UATP filed comments asserting, among other things, that the adoption of these amendments would exceed the Board's authority and that the amendments were not authorized by the original provisions of the Truth-in-Lending Act or by the subsequent amended provisions relating to credit card usage.
With your permission, I will submit a copy of the UATP comments for the record.
Senator ProxMIRE. We will be happy to accept them (see p; 184).
Mr. BUCHANAN. Following the implementation of these amendments to regulation Z, UATP applied to the Federal courts for a declaratory judgment that such regulations are invalid as a matter of law, and to request that the Federal Reserve Board be permanently enjoined from taking any action to enforce or otherwise give effect to such regulations. A decision has not yet been rendered.
In view of the foregoing, we feel it is clear that the Truth-in-Lending Act is intended to benefit the individual consumer and is not intended to protect or insulate the commercial or business users of credit cards and other credit financing arrangements. We suggest that there is no valid reason why a contractual balancing of loss and risksharing ability between commercial enterprises should be disturbed by this consumer-oriented legislation.
If this committee were to approve, and the Congress to enact, the amended provisions in question, in the case of UATP there would be no deterrent to prevent subscribers from relaxing their controls over the distribution and use of air travel cards. Absent this deterrent, it is reasonable to assume that unauthorized use of air travel cards would greatly increase, and that there would be significant losses to the airlines.
Practically speaking, a limitation of $50 maximum liability for commercial or business use of UATP credit cards would be tantamount to removal of all liability. It would destroy any realistic incentive for a company to strictly monitor and control the distribution and use of air travel cards. It would also eliminate the impetus to immediately notify the carriers of lost or stolen cards. The carriers would thus have no means of protecting themselves against unauthorized usage until, through their collection efforts, they learn of such loss or theft of air travel cards.
The business users, such as the UATP subscriber companies, are able to protect and even insure against negligent acts of their personnel, or risks of theft or loss that might result in an unauthorized use of credit cards. There is no justification for transferring this risk of theft or loss, prior to notification thereof to the airline, from the company or organization that determines who may use its cards and is in a position to monitor and control such use to the UATP contractor airlines, as would occur under the proposed amendment to the Truth-inLending Act contained in section 210 of S. 914.
Consequently, we respectfully submit to this subcommittee that the Truth-in-Lending Act does not require "clarification.” The congressional purpose and intent of the act is manifestly clear and well stated. There is no reasonable rationale for extending to the business or commercial community the protection with respect to credit cards that is necessary for the individual consumer. We, therefore, oppose the inclusion of the provision entitled “Section 210. Business Use of Credit Cards," to the extent that it would remove the business purpose examination from the liability provisions applicable to cardholders.
Mr. Chairman, that completes my statement, and I thank you again for the opportunity to appear here. I would be happy to answer any questions which you might have.
Senator PROXMIRE. Thank you, Mr. Buchanan.
Mr. Buchanan, suppose a businessman has his own American Express Card and a company air travel card in his wallet. Suppose, further, that a thief steals his wallet, and before the businessman can notify anyone, the thief buys $1,000 in airline tickets on each of the two cards. Now, under the present Federal Reserve interpretation, the businessman would have a liability for $50 under each card. Under your proposal, he would have $1,000 liability under the air travel card.
How do you justify this difference?
Mr. BUCHANAN. The UTAP is a unique kind of card inasmuch as it is issued primarily for business travel. In the case of
Senator PROXMIRE. You say primarily, but not exclusively. It can be used for personal use?
Mr. BUCHANAN. It can be used for personal use depending on the policy of the company to which the card is issued. It is our understanding that practically no commercial account permits its employees to use the air travel card for their own personal transportation. We have been so advised by a number of large companies. I can't speak for all 107,000 of them.
Senator PROXMIRE. It could be used
Mr. BUCHANAN. It could be used if within the policies of the subscriber company, yes. We feel, in answer to your question
Senator ProxMIRE. It is your knowledge that it has been used in that way, isn't that true?
Mr. BUCHANAN. Not to my knowledge, sir, but I would not doubt that it could possibly be used in that manner.
Senator PROXMIRE. Go ahead. Mr. BUCHANAN. In answer to your question, we believe there is a distinguished difference between the American Express card that you used as an example, and a card issued to a large corporation such as the ones I have named, and the others that constitute the 107,000 subscriber companies. The majority of travel and entertainment cards are
issued to an individual, and that individual is directly responsible for the use of those cards.
On the other hand, the universal air travel cards are issued to large corporations, and the corporation itself is responsible for the charges made under the card.
Now, insofar as notification is concerned
Senator PROXMIRE. They can also be issued to individual proprietors, can't they?
Mr. BUCHANAN. They can be; yes, sir; but for the most part they are not, however, as noted in my statement. There is a $425 deposit requirement, and a number of individuals feel that that kind of a deposit is not in their best interests for the individual-type card.
Senator PROXMIRE. We are talking about corporations. You are not talking about the thousand biggest corporations when you say that $150 or $425 would be a problem.
Mr. BUCHANAN. In no way, sir.
Senator PROXMIRE. It would be a small company, or a proprietorship that does a good business. I understand there is a Senator who has one of those.
Mr. BUCHANAX. Yes, I think there is. I think there are Congressmen who have air travel cards, also.
Senator PROXMIRE. So you don't have to be a big corporation.
Mr. BUCIIANAN. No, Mr. Chairman, and I did not intend to imply that all such contracts are with large corporations, but that the vast majority, to the best of our knowledge, are with corporations. With regard to the notification
Senator PROXMIRE. I understand the Senator secured the card about 15 years ago, forgot about it, and was shocked, surprised, dismayed when he found he didn't get interest on the $425.
Mr. BUCHANAN. He does get interest on it; yes, sir. Was that your statement?
Senator PROXMIRE. It was his understanding that he didn't. Maybe his wife spent the interest.
Mr. BUCHANAN. There is a provision for the payment of interest on the deposit. The amount of interest paid is based upon the usage of the card. The more usage, the less the amount of interest that would be paid. This is under a CAB-approved intercarrier agreement. If you wish, Mr. Chairman, I will be happy to submit the rather detailed formula for the record.
Senator PROXMIRE. Actually, let me ask you this: How do companies protect themselves now from careless employees who fail to safeguard their credit cards and neglect to inform the company of a lost or stolen card ?
Mr. BUCHANAN. The companies have their internal policies as to directing the cardholders concerning the uses of the credit card and the notification of the company personnel who are responsible for the administration internally of credit cards issued to their company.
In addition, it is our understanding that some corporations can and do in fact purchase insurance against the loss or theft and the improper use of credit cards issued to their companies.
Senator PROXMIRE. Is there any evidence that consumers fail to notify credit card companies of a lost or stolen card as a result of limitation on personal liability enacted into law?