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cards. This inference is suggested by the Board's statement that the proposed amendments would not alter the application of the business exemption to the disclosure, rescission and advertising requirements of Title I. However, it would torture not only the English language, but the very nature of business and commercial transactions, to assert that the issuance of credit cards, and resultant imposition of conditions of usage (including liability for unauthorized use), is not an integral part of a credit transaction involving an extension of credit. The above-cited activity engaged in by the UATP relating to issuance of cards by contractor airlines is clearly a credit transaction as contemplated under the Act; however due to the fact that it involves extensions of credit for business or commercial purposes, the provisions of the Act have been expressly stated to be inapplicable.

Therefore, we respectfully submit that the proposal of the Board to amend Section 226.13 to define a card holder to include a person or organization to whom a credit card has been issued for a business or commercial purpose goes far beyond the intent and scope of the Truth-In-Lending Act as demonstrated in its legislative history, and is further a breach of the express statutory exemption relating to such business or commercial purposes.

Apart from the dictates of statutory construction of the Act, there are also very serious practical restraints and inequities that argue against the extension of the limitation of liability to activities such as the UATP.

It has previously been noted that the Contractor airlines extend credit to various corporations, partnerships, organizations and other business entities which in turn distribute, at their discretion, the UATP cards for use by their employees. Charges for air transportation are then registered against the subscriber company or organization UATP account. And in this situation it would be extremely impracticable and grossly inequitable to say by regulation of the Board that the company or organization is only liable for $50, when as an entity it may expose the contracting UATP airline to the risk of unauthorized use by literally hundreds or thousands of cards issued to it. In point of fact, it is not unusual for thousands of cards to be issued to one Subscriber and at least one large Subscriber has been issued over 4,000 cards. The proposed amendment would make these large accounts liable for only $50 and would in effect remove any incentive for the company or card holder to practice or implement sound security measures.

Additionally, it must be recognized that there is a sound rationale behind the Congressional concern over the liability exposure to an individual consumer in the situation where such a consumer has been sent unsolicited credit cards which might be intercepted and fraudulently used, quite unknown to the individual. Some manner of protection is required to eliminate the practice of sending unsolicited cards and to reduce the risk to consumers, who are generally not in a position to protect or insure against such private losses. However, as you may well know, UATP does not engage in, and has never engaged in, the practice of sending unsolicited cards. Quite to the contrary we require, as a prerequisite to opening a UATP account, that each Subscriber must provide a $425 security deposit. And it may also be observed that the UATP Subscriber is in a far better position to protect himself against either his own negligent acts or those of his employees, or the risk of theft or loss that might result in an unauthorized use of the cards. Such Subscriber companies or organizations are not in the same situation as the individual consumer, and can be expected to be able to insure against or assume such risks of loss. Moreover, there would be no justification for transferring this risk of loss from the company or organization, which has the sole authority and discretion to determine who may use its cards and is in a position to monitor and control such use, thereby protecting itself, to the UATP contracting airlines.

In view of the above, we respectfully urge the Board to delete the reference to "business or commercial purposes” as it appears in Section 226.13(a) (4) and 226.13(b) of the proposed amendment. Sincerely,


Secretary. Senator PROXMIRE. Thank you, sir.

Mr. Robert Norris of the National Consumer Finance Association is our next witness.



Senator PROXMIRE. You have a much more detailed statement here. You have a 19-page statement, 18 or 19 pages. I would appreciate it if you could abbreviate that statement, give it to us in about 10 minutes, and the entire statement will be printed in full in the record (see p. 194).

Mr. NORRIS. Thank you, Mr. Chairman.

I am general counsel of the National Consumer Finance Association. I would like to introduce Dr. S. Lees Booth who is senior vice president of the association.

The National Consumer Finance Association, Mr. Chairman, was organized in 1916 and is the national trade association of companies engaged in the consumer credit business.

We are indeed grateful, Mr. Chairman, for this oportunity to appear before this subcommittee to present our views on S. 914 and S. 1630. However, the scope of our presentation is limited to a few general remarks and observations pertaining to title I, the Fair Credit Billing Act, and on three proposed amendments to the Truth in Lending Act, namely, "Good faith compliance," "Limitation on class action liability," and "Credit life insurance and accident and health insurance.

Many of our objections to the provisions of title I of S. 652 (92d Cong.) have apparently been resolved by the provisions of title I of S. 914 and S. 1630, although we would prefer the provisions of title I of S. 1630. See hearings on S. 652 (92d Cong.), pp. 448–51. Our basis for this position is predicated on the observation that sections 167, 168, and 172 of S. 914 pertain to matter traditionally within the province of the various States and will conflict with a multitude of State statutes and court rulings.

However, because the provisions of title I of both bills at best indirectly affect the consumer finance industry we do not believe we should attempt to comment at length on the technical provisions contained therein.

Inasmuch as the provisions of sections 161 (d) and 163 of both bills provide for penalties or forfeitures for certain failures within a specific period of time, we believe that the provisions of the Fair Credit Billing Act should provide some relief for conscientious creditors who find themselves the victims of circumstances beyond their control, such as equipment failure, strikes, computer breakdown, blackouts, brownouts, et cetera. To accomplish this we respectfully direct the subcommittee's attention to the provisions of 15 Ú.S.C.A. section 1640 (c) and would suggest language similar to the following:

A creditor may not be held liable for any penalty or forfeiture provided under tħis chapter if the creditor shows by a preponderance of evidence that the failure to comply with any provision herein was not intentional and resulted from a bona fide effort to comply not withstanding the maintenance of procedures reasonably adapted to avoid any such failure.

It is respectfully submitted that such an amendment as suggested above would provide some relief for the crelitor who might be deprived of substantial sums of income for failure to meet a time limitation when such failure was occasioned by circumstances beyond his control.


Turning now to title II and in particular the limitation on class action liability. NCFA is unalterably opposed to any amendment to the Truth in Lending Act which would directly or implicitly authorize, sanction, or approve class actions for punitive monetary damages under Truth in Lending. On the other hand, we do not oppose consumer class actions for actual damages or which seek equitable relief such as a declaratory judgment or a preliminary or permanent injunction.

In its Annual Report to Congress for 1972, the Federal Reserve Board stated that it believed that potential class action liability is an important encouragement to voluntary compliance with the Truth in Lending Act. How the threat of economic disaster makes compliance voluntary is beyond my powers of comprehension. However, as I understand this somewhat extraordinary and inconsistent statement, it was the Board's position that the threat of class action exposure has a prophylactic effect. The specific recommendation of the Board with respect to a limitation on class action liability is contained in section 208 of S. 914. This proposal, like the proposal set forth in section 213 of S. 1630, simply puts a lid on what has been termed legalized blackmail not an end to it. As a matter of fact, enactment of either of these proposals would tend to constitute a concession and a sanction by Congress that the class action device is appropriate for technical violations of the Truth in Lending Act in the absence of actual damages.

Recently, Judge Medina, in the latest chapter of the famous case of Eisen v. Carlisle & Jacquelin, which was decided on May 1 of this year, had some cogent and compelling observations on the so-called prophylactic effect of the consumer class action device: “The 'prophylactic effect of making the wrongdoer suffer the pains of retribution and generally about providing a remedy for the ills of mankind, do little to solve specific legal problems. The result of this approach is almost always confusion of thought and irrational, emotional, and unsound decisions.” In describing the class action device, Judge Medina concluded by pointing out that its use tended to disregard, nullify, or water down procedural safeguards established by the Constitution, by congressional mandate, or by the Federal Rules of Civil Procedure, including amended rule 23. It is a historical fact that procedural safeguards for the benefit of all litigants constitute some of the most important and salutary protections against oppressions, including oppressions by those whose intentions may be above reproach. Because of the threat of class action exposure. Judge Medina also concluded that such pressure on defendants may induce settlements in large amounts as the alternative to complete ruin and disaster, irrespective of the merits of the claim. Judge Medina also gave judicial recognition to Professor Milton Handler's observation that the class action device is but legalized blackmail. As Professor Handler put it, and I quote:

Any device which is workable only because it utilitizes the threat of unmanageable and expensive litigation to compel settlement is not a rule of procedureit is a form of legalized blackmail. If defendants who maintain their innocence have no practical alternative but to settle, they have been de facto deprived of their constitutional right to a trial on the merits. The distinctions between innocent and guilty defendants and between those whose voilations have worked great injury and those who have done little if any harm become blurred, if not invisible. The only significant issue becomes the size of the ransom to be paid for total peace. .

The specter of the class action suit against creditors loomed with the advent of the Truth in Lending Act. But it should not go unobserved that violations of the act and regulation Z, in the absence of fraud and deceit, are, if it please, violations malum prohibition not violations malum in se. In most reported cases the alleged violation is hypertechnical and results in no actual damage or injury to either the nominal representative or the alleged members of the class.

A review of the class action cases for an alleged violation of the Truth in Lending Act or Regulation Z discloses that in almost every situation the person purporting to represent the class has based his allegation of violation on a legal construction of this very technical and complex statute and regulation. In many cases, the nominal representative of the so-called class is an attorney. As Judge Charles R. Richey pointed out in the recent Graybeal case in the U.S. District Court here in Washington on April 24, "These dual roles are inherently fraught with potential conflicts of interests. . . . Thus plaintiffs may stand to gain little as class representatives, but may gain very much as attorneys for the class." Memo. opinion, p. 9. And in many other cases, the nominal representative is represented by a legal aid attorney. There is, quite properly, considerable concern over the use of rule 23 for client solicitation, sometimes in blatant disregard of elementary concepts of champerty or the Canons of Legal Ethics. Much of the class action litigation has been prosecuted by a few lawyers ready and willing to promote such cases. As Chief Judge Lombard of the Second Circuit Court of Appeals observed in an earlier chapter of the Eisen case, 391 F. 2d at 571, "The only persons to gain from a class suit are not the potential plaintiff's, but the attorneys who will represent them."

The exposure to the class action threat is inappropriate for the businessman conscientiously attempting to comply with the law. The now famous case of Ratner v. Chemical Bank, clearly recognizes that legitimate enterprises should not be forced to defend against exorbitant claims involving unpredictable, technical, or isolated violations causing no financial harm.

The liquidated damage provision of the Truth in Lending Act, and cases such as Ratner, influenced the position adopted by the Federal Trade Commission in an amicus curiae brief it filed in the U.S. District Court for the Northern District of Ohio in a Truth in Lending Act class action. And I refer to Turoff v. Union Oil Co., No. 071-1205. The Commission observed:

Although the imposition of exorbitant penalties would clearly deter knowing and perhaps even some careless violations of the Act, such penalties cannot be expected to prevent violations which result from uncertainty about the statute's meaning or from an unavoidable and yet noninjurious-oversight. In the latter situation, therefore, assessment of large penalties would not seem to further the purposes of the Act.

Of special significance here was the concern expressed by the Senate Committee on Banking, Housing, and Urban Affairs in the report to accompany S. 652:

The purpose of the civil penalties section of the Truth in Lending Act was to provide creditors with a meaningful incentive to comply with the law without relying upon an extensive new bureaucracy. However, the Committee feels that this objective can be achieved without subjecting creditors to enormous penalties for violations which do not involve actual damages and may be of a technical nature.

In Eisen, Judge Medina buttressed our contentions that consumer class action may be appropriate for injunctive relief, when he observed that:

The procedure involved in applying for prospective injunctive relief is relatively simple and inexpensive, social and economic reforms may be implemented and an end put to illegal practices with far more benefit to the community than that derived from minimal or token payments to individual members of a class. Attorney's fees in such cases should also provide adequate incentive to counsel for the representative or representatives of the class.

Recently, Chief Judge Friendly made the following comment on class actions pursuant to amended rule 23, and I quote:

Something seems to have gone radically wrong with a well-intentioned effort. Of course, an injured plaintiff should be compensated, but the federal judicial system is not adapted to affording compensation to classes of hundreds of people with $10 or even $50 claims. The important thing is to stop the evil conduct. For this an injunction is the appropriate remedy, and an attorney who obtains one should be properly compensated by the defendant, although not in the astronomical terms fixed when there is a multi-million dollar settlement. If it be said that this still leaves the defendant with the fruits of past wrongdoing, consideration might be given to civil fines, payable to the government, sufficiently substantial to discourage engaging in such conduct but not so colossal as to produce recoveries that would ruin innocent stockholders or, what is more likely, produce blackmail settlements. This is a matter that needs urgent attention.

Even some basically persuaded proponents of the class action device have questioned the propriety of class action suits for alleged technical violations of the Truth in Lending Act in which no actual damages are alleged or sought. For example, Prof. Richard F. Dole, Jr., of the University of Iowa Law School, although not favoring a change in the present Federal rule 23, has concluded that class actions for civil penalties ordinarily should not be allowed under the Federal Truth in Lending Act.

One other observation concerning the Board's recommendation seems in order: the Board recommends that the upper limit on the aggregate amount of a possible class action recovery be fixed at the greater of $50,000 or 1 percent of the net worth of the creditor, while, of course, giving the courts authority to set the amount of the recovery within these parameters in light of all the circumstances.

The size of the civil penalty imposed against an alleged violator should be directly related to the wrongdoing involved. In the interests of fairness and equal treatment, the penalty should not be related to the financial size of the creditor. Such a variable penalty would tend to foment suits against only the largest financial institutions, and they have by far the best record of compliance with the act.

At the present time, consideration of the class action device is being studied by another committee of the Senate. This study was occasioned by much of the testimony developed at the hearings on the Consumer Class Action Act of 1971. Included in this study is a specific analysis of class actions brought under Truth in Lending. Of the 109 actually identified and listed consumer credit class action cases, 61 are Truth in

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