"Any device which is workable only because it utilizes the threat of unmanageable and expensive litigation to compel settlement is not a rule of procedure it 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 violations 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."

See also, Simon, Class Actions-Useful Tool or Engine of Destruction, 55 F.R.D. 375 (October, 1972).

The defense of a class action suit is obviously an exceedingly costly proposition for a corporate defendant and this is true even in a case which is totally without merit. For example, in Douglas v. Beneficial Finance Company of Anchorage, F.2d (9th Cir., 11/7/72), the Court of Appeals reversed the judgment of the United States District Court of Alaska granting a preliminary injunction restraining Beneficial from collecting on notes pending the outcome of the class action which had been initiated by the plaintiff. The injunction applied to virtually all borrowers with open accounts with Beneficial in Alaska. The only issue before the Ninth Circuit was the propriety of the injunction. As the court pointed out, the District Court's granting of the injunction was based on an erroneous legal premise and therefore in effect invalid ab initio. The point to be made in this matter is that the defendant-appellant was restrained from collecting substantial sums of revenue from the date of the erroneous District Court order in April, 1971, until November of 1972 when the Ninth Circuit reversed the granting of the preliminary injunction. Parenthetically, the decision of the Court of Appeals essentialy terminated that litigation but with the effect of visiting upon the defendant substantial losses in expenses, costs of litigation, and loss of revenue. For these reasons it appears that the machinery of the class action device is in immediate need of a drastic overhaul.

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, 54 F.R.D. 412 (S.D., N.Y., 1972), 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. Turoff v. Union Oil Co., No. C71-1205. The Commission observed (p. 11):

"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 noninjuriousoversight. In the latter situation, therefore, assessment of large penalties would not seem to further the purposes of the Act."

The Commission's brief concluded (p. 12):

"Inasmuch as the damages provided for in the Act are primarily to compensate consumers for actual damages suffered, before taking steps which may considerably increase the amount of damages assessed the court may wish to consider the seriousness of the violation involved, whether the violation was an intentional or purposefully misleading failure to conform to the law, the particular defendant's history of violations involving credit practices, whether the creditor corrected the alleged violation immediately upon notification and the extent to which the company's resources would be affected by a large class."

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 [Report No. 92-750 (April 17, 1972), p. 8]:

"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."

There are a number of means that can be employed to protect against permitting damage class actions against technical, first impression, unpredictable, or violations causing no financial harm. For example, statutory permission of class actions can be limited to violations that are carefully and specifically enumerated in the statute-and without any catch-all phrases. This "laundry list" approach has been recently adopted in several Western States-Alaska, California, Idaho and Oregon-and was refined, improved, and recently included in the Uniform Consumer Sales Practices Act adopted by the National Conference of Commissioners on Uniform State Laws. In that Act, class action recoveries are not allowed until a published decision of the courts in the State has specifically prohibited the particular practice, or the prohibited practice has been defined with specificity by a rule-making authority after appropriate hearings. In both instances, class actions are authorized only on a prospective basis. Class action exemption should be granted to violations that occur despite good faith attempts to comply with statutory requirements, and non-conformance resulting from circumstances beyond a company's control. Another approach is to give a businessman the opportunity to recitify mistakes before a class action is permitted. But of most importance, the permissible scope of consumer class actions should reflect a proper balancing of the public need for such litigation against its inherent problems. Judicial resources are limited, and we must decide what our real priorities are and how these limited resources are to be utilized. See Scher, Panel on Class Actions, 28 Business Lawyer 137 (Special Edition, March, 1973).

In Eisen, supra, 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."

In his recent book Federal Jurisdiction: A General View, containing his 1972 Columbia University James S. Carpentier Lectures, Chief Judge Friendly made the following comment on class actions pursuant to amended Rule 23, at page 120, omitting footnotes:

"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 wrong-doing, 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." See also, Brown, Propriety of Class Actions for Monetary Claims Under Truthin-Lending, 27 Personal Finance Law Quarterly Report 15, 19 (Winter, 1972). 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 [S. 984 of the 92nd Congress (February 25, 1971)] which concluded [Staff Review of Class Action Legislation, April 1972, p. vii]:

"(1) that class actions are protracted, expensive affairs that would overburden the federal court system; (2) that the actual consumer victims would seldom themselves benefit, because it would be impossible or prohibitively expensive to identify, substantiate, and disburse damage payments to most individual class members; (3) that the class action device would fall into the hands of unscrupulous lawyers who would bring frivolous or harassing 'strike suits' (which corporations would be compelled to settle for their nuisance value, later reflected in higher costs to consumers); and (4) that the primary exploiters of consumers are not the large corporations, who are able to pay class damages, but the 'fly-by-night' operations, who are likely to be judgment-proof."

Included in this study is a specific analysis of class actions brought under Truth in Lending. 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 Report and Recommendations of the Special Committee on Rule 23 of the American College of Trial Lawyers has concluded that the 1966 revision has been a virtual failure. Report, pp. 6-15 (March 15, 1972). 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. The Subcommittee's attention is respectfully directed to an excellent evaluation of the experience under Amended Rule 23 submitted by Earl E. Pollock, Esquire. Class Actions Reconsidered: Theory and Practice under Amended Rule 23, 28 Business Lawyer, 741 (April, 1973).

In conclusion, 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.

II.

Section 206 of S. 914 recognizes the concept of good faith compliance. This Section provides:

"No provision of this section or section 112 imposing any liability shall apply to any act done or omitted in good faith in conformity with any rule, regulation, or interpretation thereof by the Board, notwithstanding that after such act or omission has occurred, such rule, regulation, or interpretation is amended, rescinded, or determined by judicial or other authority to be invalid for any reason."

The need for passage of this Section or the similar section in S. 1630 [§ 211] was recently illustrated by the holdings in Bone v. Hibernia Bank,

-(N.D.. Cal., 12/15/72) and Kenney v. Landis Financial Group,

-F. Supp.
-F. Supp.

(N.D., Ia., 3/30/72) and the subsequent interpretation by the Federal Reserve Board of April 30, 1973.

In Bone, the Court held that a disclosure statement providing that if a loan is paid in full prior to the final payment date, the borrower shall receive a debate of any precomputed interest in the finance charge according to the "Rule of 78's" was meaningless and failed to comply with the provisions of 15 U.S.C.A. § 1638 (a) and Regulation Z (12 C. F. R. § 226.8(b) (7). Parenthetically, a substantial class action has been filed in California based on the holding of the Bone case. American Banker, 4/25/73, pp. 1 & 15. On April 30, 1973, the Federal Reserve Board issued an interpretation squarely in conflict with the holding of the Bone case. In its interpretation, the Board stated:

"Section 226.8(b) (7) requires 'identification' of the rebate method used on precomputed contracts. Many State statutes provide for rebates of unearned finance charges under methods known as the 'Rule of 78's' or ‘sum of the digits' or other methods. In view of the fact that such statutory provisions involve complex mathematical descriptions which generally cannot be condensed into simple accurate statements, and which if repeated at length on disclosure forms could detract from other important disclosures, the requirement of rebate 'identification' is satisfied simply by reference by name to the Rule of 78's' or other method, as applicable." (Emphasis supplied). In Kenney, the Court held inter alia that a rebate computed according to the Rule of 78's was in effect a penalty and therefore a violation of the provisions of Regulation Z [12 C.F.R. 226.8(b) (6)]. The holding in this case also has been expanded into a substantial class action in Iowa. However, on April 30, 1973, the Federal Reserve Board concluded that "although in a precomputed obligation the finance charge rebate to a customer may be less when calculated according to the Rule of 78's', 'sum of the digits' or other method than if calculated by the actuarial method, such difference does not constitute a penalty charge for prepayment that must be described pnrsuant to [12 C.F.R.] § 226.8 (b) (6)." (Emphasis supplied).

Inasmuch as the Federal Reserve Board has been charged with the responsibility for the promulgation of the regulations under the Truth in Lending Act, it seems only appropriate that creditors relying on the Board's interpretations in the conduct of their business should necessarily be relieved of liability if they in good faith rely on "any rule, regulation, or interpretation . . . by the Board." Moreover, this provision would enhance predictability in the administration of an Act which is admittedly complicated and at times difficult to fully comprehend, and which clearly has been lacking.

III.

Section 216 of S. 1630. This Section provides as follows:

"Any premium for life or accident and health insurance charged by a creditor in connection with any extension of credit shall be stated both as a dollar amount and as an annual percentage rate and shall be disclosed at the same time and in the same manner as the finance charge is required to be disclosed under this chapter and the regulations of the Board thereunder." This proposed amendment appears to be taken from the Report of the National Commission on Consumer Finance (GPO, December, 1972), p. 89. However, the discussion in Chapter 5 "Credit Insurance", of the Commission Report does not develop reasoning to support this proposal. Therefore, it may only be surmised that the basic assumption for this recommendation was that credit insurance is an integral part of the finance charge. Accordingly, the annual percentage rate which relates the use of money to a standard time period was apparently assumed to be applicable. This assumption overlooks the fact that credit life insurance is merely one form of insurance which provides for a certain amount to be paid by the insurance company in the event of death of the insured. As such it has the same characteristics as life insurance, namely, a premium stated in dollars for a period of time and in some way related to the probability of death of the insured. In a similar way, accident and health insurance sold in connection with a credit extension should be related in some way to the probability of injury or illness of the insured. It is paradoxical that the National Commission Report (p. 89) recognized the distinction between finance charges and charges for insurance as follows:

"The Commission recommends that the finance charge earned by credit grantors should be sufficient to support the provision of the credit service. If this goal is achieved by the states, charges for all forms of credit insurance should be set at a level to permit the provision of this service, without subsidizing the finance service or being subsidized by the income received from providing the finance service. Podade men

Recognizing this principle of the different natures of the finance service and the insurance service, it would be confusing, misleading and inappropriate to require that creditors who sell credit insurance add one or more APR's to the one currently required in disclosure statements by the Truth in Lending Act and Regulation Z...

The observations contained herein are also applicable to Section 142 [Advertising of downpayments, installments, and credit insurance] as they apply to stating the cost of credit insurance as an annual percentage rate.

Mr. Chairman, the bills under consideration are extensive and complex. We have attempted to touch on the issues which we consider to be of greatest concern to our membership. If NCFA can provide additional views on other sections which you feel would be of assistance to the Subcommittee, we will be happy to submit them for the record. Once again, we wish to reiterate our appreciation for this opportunity to present our views before the Subcommittee on Consumer Credit. Thank you, Mr. Chairman.

Senator WILLIAM B. PROXMIRE,

NATIONAL CONSUMER FINANCE ASSOCIATION,
Washington, D.C., June 1, 1973.

Chairman, Subcommittee on Consumer Credit, Senate Committee on Banking, Housing and Urban Affairs, Washington, D.C.

DEAR SENATOR PROXMIRE: Once again, please permit me to extend on behalf of NCFA our sincere appreciation for the opportunity to testify on May 23, 1973, in connection with S. 914 and S. 1630.

During the course of my testimony, the question arose as to whether class action law suits are authorized under the provisions of the Truth in Lending Act,

and in particular Section 130 thereof [15 U.S.C.A. § 1640]. Although I believe there is a basis for the contention that class action lawsuits are authorized as a result of judicial decisions, the real question is whether Congress intended at the time of the passage of the Consumer Credit Protection Act to authorize such law suits. The absolute silence with respect to the class action device in the legislative history of the Act suggests, if not supports, the view that Congress did not intend class actions for punitive monetary damages under Truth in Lending. Section 130 [15 U.S.C.A. § 1640] provides:

"(a) Except as otherwise provided in this section, any creditor who fails in connection with any consumer credit transaction to disclose to any person any information required under this part to be disclosed to that person is liable to that person in an amount equal to the sum of

“(1) twice the amount of the finance charge in connection with the transaction, except that the liability under this paragraph shall not be less than $100 nor greater than $1,000; and

"(2) in the case of any successful action to enforce the foregoing liability, the costs of the action together with a reasonable attorney's fee as determined by the court."

I would suspect that the absence of a reference to the class action device was because we had little or no experience with Rule 23 of the Federal Rules of Civil Procedure, as amended in 1966. Even if there were any discussions of the class action device in connection with civil liability under the Truth in Lending Act, which I cannot find, it would seem that the intent of Congress was not to authorize class action lawsuits.

The pertinent legislative history of the Act as it pertains to administrative enforcement and civil penalties, House Report No. 1040, 90th Cong., 1st Sess. (December 13, 1967), pp. 18-19 (1968 U.S. Code Cong. and Adm. News, pp. 197576) is set forth below:

"Your committee believes that administrative enforcement of the credit disclosure features of the bill is fundamental to its legislative purpose.* * * Administrative enforcement can provide the broad and effective application of the principle of disclosure called for in the bill. These provisions not only will protect the consumer, but will further protect the honest businessman from unethical forms of competition engaged in by some unscrupulous créditors who prey upon the poor through deceptive credit practices. Effective administrative enforcement will protect the honest merchant and insure that he is not penalized in the marketplace when he states the full cost of his credit in dollars and as an annual percentage rate.

*

"While primary enforcement of the bill would be accomplished under the administrative enforcement section discussed above, further provision is made for the institution of civil action by an aggrieved debtor. Any creditor failing to disclose required information would be subject to a civil suit with a penalty equal to twice the finance charge, with a minimum penalty of $100 and a maximum penalty not to exceed $1,000 on any individual credit transaction." (Emphasis supplied).

See also, Senate Report No. 392, 90th Cong., 1st Sess. (June 29, 1967) pp. 9, 21. I have attempted to bring this matter to your attention because of our strong belief that Congress should approach any decision of the class action device not from the point of view whether there should be a limitation on liability but rather whether the class action device, in the absence of actual damages, is appropriate for technical violations of the Truth in Lending Act. We are satisfied that if Congress had had the well-reasoned opinion of Judge Frankel in Ratner v. Chemical Bank, 54 F.R.D. 412 (S.D., N.Y., 1972) or the recent learned opinion of Judge Medina in Eisen v. Carlisle & Jacquelin, F.2d (2d. Cir., 5/1/73), it would have seriously considered language in Section 130 of the Act to the effect that an institution or creditor would not be liable for unintentional, hyper-technical, alleged violations of the Truth in Lending Act predicated on a legal construction or interpretation of this exceedingly complex and highly technical statute. Perhaps the staff study of the class action device currently being conducted by the Senate Committee on Commerce will provide insight and guidance on the question of the propriety and suitability of this device in Truth in Lending cases.