Lending class action cases. Presumably, the results of this study will provide insight and guidance on the appropriateness of the class action device. Therefore, it would appear that consideration of class action legislation even when addressed to a limitation of liability thereon is premature.

Both the American Bar Association and the American College of Trial Lawyers are currently engaged in studies on amended rule 23 of the Federal Rules of Civil Procedure. Both organizations have concluded that rule 23 has not achieved the results intended when rule 23 was amended in 1966. In fact, the American College of Trial Lawyers has concluded that the 1966 revision has been a virtual failure. We further understand that the recommendations regarding consumer class actions for monetary relief will be placed before the house of delegates of the American Bar Association by the section of corporation, banking and business law at the annual meeting in August of this year.

In conclusion, Mr. Chairman, for the reasons advanced herein, but more importantly because of the serious studies currently being undertaken on the propriety of consumer class actions for monetary relief, it is respectfully submitted that consideration of congressional approval of the class action device in truth in lending cases is ill-advised and premature.

Senator PROXMIRE. Could you bring your remarks to a close in the next minute or so, and then we will have questions. We will put the rest in the record.

Mr. NORRIS. Thank you, Mr. Chairman.

I would like to pass on to the good faith requirement, which we endorse. We have set forth in our statement a recent excellent example why this amendment should be rapidly enacted by Congress.

We also address ourselves to the proposed amendment to Truth in Lending, section 216 of S. 1630 pertaining to credit insurance, which we oppose for the reasons set forth in the prepared statement. Thank you very much.

Senator PROXMIRE. Thank you, Mr. Norris, I don't quite understand your statement where you say, "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."

As I understand it, no amendment in Truth in Lending is necessary to authorize class action suits. They are already authorized by the present law when they meet rule 23 of the Federal Rules of Federal Procedure.

The only question before the committee at this time is the maximum liability for so-called punitive damages under class action suits. Under existing law, the maximum liability can be as much as $1,000 per member of the class and the creditors' liability is set equal to $100 per member of the class.

This can produce an astronomical liability to a creditor with a large number of customers, and both S. 914 and S. 1630 seek to eliminate. the minimum liability feature and reduce the maximum liability.

Are you saying we should do nothing? Wouldn't your members be better off if you placed some limitations on a creditor's class action liability?

Mr. NORRIS. Mr. Chairman, we wanted to bring as forcefully as we could to the attention of Congress, to this subcommittee, and to the committee in general, our deepseated feelings about the inappropriateness of the class action device for alleged violations of the Truth-inLending Act.

Senator PROXMIRE. Are you recommending that we should prohibit class actions under Truth in Lending by an amendment? It is not in there.

Mr. NORRIS. Just for the penalty. If there is actual damage, or there is an effort to obtain an injunction, we feel these are appropriate. If the consumer or a large number of consumers have been actually damaged, then I feel that a class action suit should lie.

Senator PROXMIRE. You see, the trouble is that it is so hard to show actual damages in a disclosure violation. Truth-in-lending law is a disclosure proposal, as you know, and for a consumer to show that he was damaged because the facts were not disclosed isn't feasible under most circumstances.

So we would like to provide some incentive for the clients, and if you confine it to damages, damages are very hard to demonstrate and the incentive to compliance wouldn't be very great because the suits wouldn't be brought.

Mr. NORRIS. You see, our position is something like this, Mr. Chairman. I am aware of cases in which the cases were not fully litigated but they have been settled for very large sums, wherein very little filters down to the individual consumer. The attorneys make off, if you like, with the large bulk of the recovery.

Now, with the threat of an enormous class action suit, running into the millions of dollars, for example, the Ratner case, in that case, the bank decided to fight it out. But I am sure during the course of that litigation in New York, they might have been very much tempted to settle that case for an enormous amount of money with the prospect of the possibility of a recovery somewhere between $13 million and $130 million.

They might have been tempted to buy it off for $100,000.

Senator PROXMIRE. That is exactly what we are trying to proscribe in S. 914 and S. 1630 by setting the maximum liability, or limiting it. There is a provision for $100,000 as a flat limit. My own bill provides a limitation of $50,000 or 1 percent of the net worth, whichever is large. That is what the Federal Reserve Board recommends. You are right. It is a frightening thing and, as you point out in your very welldocumented statement, judges have indicated that it was appalling, and we are not getting much action because they recognize how devastatingly destructive the endorsement of the class action can be.

But we are trying to impose limitations that would make it practical. Mr. NORRIS. Mr. Chairman, with respect to your bill, there might be a situation completely unintentional, hypertechnical violation, unpredictable. As a matter of fact, a form might be prepared on advice of counsel, and in that situation, the limitation which is suggested in your bill, Mr. Chairman, the company has a net worth of, let's say, $100 million. They might be very well subject to a penalty of $1 million, or 1 percent of $100 million.

Senator PROXMIRE. The court can take all those factors into account. That is a maximum that we are suggesting. That is not the required penalty. Let me read a part of the bill:

In determining the amount of award in any class action, the court shall consider among other relevant factors the amounts of damage awarded, the frequency and consistency of failure of compliance by the creditor, the resources of the creditor, the number of persons adversely affected, and the extent to which the creditor's failure to comply was intentional.

So if it was unintentional, the judge would be constrained under these circumstances if he is following the law to very sharply reduce the penalty.

Mr. NORRIS. Mr. Chairman, the problem that I find with that—and I understand that and appreciate it, and I think it is an enormous improvement-the problem still lies that the judge is going to ultimately fix that figure, and the defendant, faced with a large class action, knowing what the upper limits are, might very well be tempted to settle the case, as Judge Medina pointed out, "irrespective of the merits of the case," and that is the problem, because the statute is a very complex statute.

Senator PROXMIRE. Let me ask you this: Would you prefer to have nothing done as compared with passing one of these two bills, S. 1630, or S. 914?

Mr. NORRIS. Mr. Chairman

Senator PROXMIRE. That may be the option. It may be your position, which I understand now, I understand what you want, you made that clear, but if this is the option, of S. 914, S. 1630 or zero, nothing, which would be gone along with?

Mr. NORRIS. What we would like to see is Congress disapprove class actions

Senator PROXMIRE. I know that. You said it before. We know what you want, and I understand your position. Congress may do that. But I am saying that if you had a choice limited to these positions, the positions taken by the chairman of the subcommittee, which is S. 914, and the position taken by the chairman of the full committee, S. 1630, or no action at all.

Mr. NORRIS. It is a very tough question, Mr. Chairman.

Senator PROXMIRE. I don't know why you are not served by taking one of these two bills rather than no action, because no action means all the evils you complained about are still going to continue, and at least you have a limitation of excessive penalties in both these bills.

Mr. NORRIS. Well, obviously, Mr. Chairman, the upper limit of $100,000 is preferable, and I think I would suggest that if in fact the plaintiff can show actual damages, perhaps at that point in time this should be recognized and this should not be an upper limit. We feel very strongly that we

Senator PROXMIRE. Neither bill would set a limit on actual damages. The actual damages are in addition.

Mr. NORRIS. Well

Senator PROXMIRE. If you feel that is not clear, we will be happy to review the language.

Would you favor some sort of qui tam approach? Under the qui tam procedure, an individual consumer can sue a creditor alleging a

violation of the act and asking for injunctive relief. If the suit is successful, the individual collects a penalty from the company which also is required to pay a larger fine.

Mr. NORRIS. Yes. He sues on behalf of himself and the United States. Senator PROXMIRE. He has to notify someone in the Government. The Department of Justice would be a logical office.

Mr. NORRIS. Frankly, Mr. Chairman, I think there is a lot of merit to that approach, because theoretically, what we want to do is to stop the evil conduct, which seems to me that the Government is the appropriate authority to stop evil conduct, and if an individual detects evil conduct and gets the Government into it, I think the consumer is better served. But I frankly, Mr. Chairman, I can't really talk to the qui tam theory with any strong feeling. I haven't really studied it, to be perfectly honest with you.

Senator PROXMIRE. Thank you very much, Mr. Norris, for your most helpful testimony. As I say, this is an extraordinarily welldocumented statement you made.

Mr. NORRIS. Thank you very much, Mr. Chairman.

[Complete statement of Mr. Norris and a letter received at a later date follows:]

STATEMENT OF ROBERT B. NORRIS, GENERAL COUNSEL, NATIONAL

CONSUMER FINANCE ASSOCIATION

My name is Robert B. Norris. I am General Counsel of the National Consumer Finance Association. The National Consumer Finance Association (hereinafter referred to as NCFA), organized in 1916, is the national trade association of companies engaged in the consumer credit business. It represents nearly 1.000 member companies operating approximately 18,000 loan and finance offices. The business of these companies is primarily direct credit lending to consumers and the purchase of sales finance paper on consumer goods. However, some members have retail subsidiaries, others are subsidiaries of manufacturers, others are subsidiaries of highly diversified corporations and a growing number are subsidiaries of bank holding companies. The consumer credit business, in which all NCFA member companies are involved was traditionally a creature of state statutes, requiring strict formalities with respect to documents, forms, and customer notification. In recent years, the consumer credit business has also been subject to the provisions of the Federal Consumer Credit Protection Act, 15 U.S.C.A. §§ 1601 et seq. (1968).

We are indeed grateful for this opportunity 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 [Fair Credit Billing] of both bills and on "Limitation on class action liability" (§ 208 of S. 914 and § 213 of S. 1630), "Good faith compliance" (§ 206 of S. 914 and § 211 of S. 1630), and "Credit life insurance and accident and health insurance" (§ 216 of S. 1630), Title II [Amendments To The Truth In Lending Act].

TITLE I

Many of our objections to the provisions of Title I of S. 652 (92nd 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 (92nd 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 matters 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, etc. To accomplish this we respectfully direct the Subcommittee's attention to the provisions of 15 U.S.C.A. § 1640 (c) and would suggest language similar to the following:

A creditor may not be held liable for any penalty or forfeiture provided under this 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 notwithstanding 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 creditor 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.

TITLE II

I.

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]." The basis for this somewhat extraordinary and inconsistent statement was the Board's view that the "threat of class action exposure" has a "prophylactic effect". Report, p. 13. 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 Eisen v. Carlisle & Jacquelin,-F. 2d- -(2d Cir., 5/1/73) had some cogent and compelling observations on the so-called "prophylactic effect" of the consumer class action device:

"[T]he 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 cases involving claims of money damages all litigation presumes a desire on the part of the judicial establishment to make the wrongdoer pay for the wrongs he has committed, but to do this by applying settled or clearly stated principles of law, rather than by some process of divination. Punishment of wrongdoers is provided by law for criminal acts in statutes making it a crime punishable by fine or imprisonment to violate the antitrust laws. In certain civil suits punitive damages may be awarded; and in private antitrust cases the possible recovery of triple the loss actually suffered by a plaintiff is very properly praised as a supplementary deterrent. But none of these considerations justify disregarding, nullifying or watering down any of the procedural safeguards established by the Constitution, or 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." (Emphasis supplied). Judge Medina also gave judicial recognition to Professor Milton Handler's observation that the class action device is but "legalized blackmail". See Handler. The Shift from Procedural Innovations in Antitrust Suits, 71 Col. L. Rev. 1, 9 (1971), in which Professor Handler stated: