If possible, we would appreciate this letter being inserted into the official Hearing Record. Again, we wish to express our appreciation for your cooperation in this matter.

Respectfully submitted.

ROBERT B. NORRIS.

Senator PROXMIRE. I am going to ask a panel of distinguished bankers to come forward.

STATEMENTS OF KENNETH V. LARKIN, THE AMERICAN BANKERS ASSOCIATION; ROBERT B. DOYLE, FIRST VICE PRESIDENT, CONSUMER BANKERS ASSOCIATION; JOHN J. REYNOLDS, INTERBANK CARD ASSOCIATION; D. W. HOCK, PRESIDENT, NATIONAL BANKAMERICARD, INC.; AND MATTHEW HALE, CHIEF COUNSEL, AMERICAN BANKERS ASSOCIATION

Senator PROXMIRE. I see you gentlemen have a single statement, but it is quite a statement. It is 59 pages, and it is not quite eleven o'clock, but I know we like to have time for questions.

I see the former chief of staff of this committee at the table, too, Matthew Hale, a man whose great ability and integrity we have known for years. He is a great asset.

So, if you would present your statement-I would appreciate it if you could condense it. We will print it in full in the record and make it available to all members of the committee and subcommittee. We have a number of questions we would like to ask.

[The statement may be found at p. 236].

Mr. LARKIN. Senator, my name is Kenneth Larkin. I am senior vice president of the Bank of America. We could agree, perhaps, that I serve as informal chairman of this panel group. We asked Mr. Hale to join us. We would like to each present a statement that would perhaps take no longer than 10 minutes, speaking to a few major points that are more clearly

Senator PROXMIRE. When you say 10 minutes, you mean for the panel, or 10 minutes each?

Mr. LARKIN. Ten minutes each.

Senator PROXMIRE. All right. If any of you can abbreviate it, bless you, and we will listen more carefully to a 2-minute statement than a 10-minute statement. The first 2 minutes, we are all ears. After that

Mr. LARKIN. All right.

I am appearing on behalf of the American Bankers Association, Mr. Hock is president of National BankAmericard, Mr. Reynolds is president of Interbank Card Association, and Mr. Doyle represents the Consumer Bankers Association.

We are again presenting our joint views on S. 914 and S. 1630, two versions of a proposed fair credit billing act. What we would like to do is for me to open with general comments and a discussion of the question of minimum finance charges, methods of calculating finance charges, relations of State law to some provisions in the bills, and Mr. Hock will then cover the questions of waiver of defense and matters related to creditors rights and remedies.

Mr. Reynolds will address himself to the question of civil penalties under Truth-in-Lending, and he will also discuss some problems with respect to billing procedures and routines prescribed by the two bills. Mr. Dovle will close with a brief analysis of those many sections of the bill which would affect closed end credit, other than the changes in penalty provisions which Mr. Reynolds would have covered.

We appreciate the opportunity to again present the Senate subcommittee with our views in panel format on proposed credit card legislation. I might say I think we have come a long ways since our original appearance, and the bank credit card has come a long way since our original appearance.

To illustrate, between the first quarter of 1972 and the first quarter of 1973, we have seen these kinds of growth: A 9-percent increase in the number of banks participating with 10,500 banks joined either to BankAmericard or Interbank. The number of merchant outlets has increased 5.5 percent with each of the major systems claiming around a million merchants. Of course, there is a very substantial overlap there. The number of card holder accounts has risen 6.5 percent to 31,500,000, and, of this number, 18,800,000 are active, a 2-percent increase over last year.

Our sales activity rose 27 percent, with over 133 million drafts being processed in the first quarter.

I would like to point out that the average size of draft, however, rose only from $18.20 to $18.48, which gives continued credence to our oftstated belief that the bank credit card continues to be used in large measure as a cash substitute.

At the end of March 1973, bank card outstandings hovered around $5.2 billion, a figure 30.3 percent higher than a year ago. More importantly, delinquencies over 90 days have declined 22 percent, and even more happily chargeoffs have declined some 42 percent. In other words, 1972 was a crossover year for many banks. We have crossed over from loss to profit.

We are only a few of the many competitors who vie for the con'sumer's business. Consumers obtain financing from finance companies, credit unions, various types of savings institutions. However, the rapid expansion of bank card credit in this overall field makes it clear that this kind of credit is increasingly satisfactory to consumers. They use it to buy things they want at interest rates they are willing to pay, and it is becoming profitable to banks who expect to realize a net income from this kind of consumer credit that makes it possible to attract more funds into this field.

As an additional benefit, and one that should not be understated, is that bank cards promise to be a key to a new paperless payment mechanism which may free us from the threat of being drowned in a sea of checks, 28 billion a year now, and growing at a rate by ABA estimates at approximately 7 percent per annum.

7

So, with the sort of growth figures listed, a very high degree of satisfaction is indicated by the consumer who acquires something he wants at rates he can pay. This is not to say there are not complaints, but in the vast majority of cases, the bank card systems are working smoothly, better than they ever have before, and to the benefit of all. Nevertheless, we have come to the conclusion that a statute spelling out certain standards and procedures and providing certain pro

tections for consumers and creditors alike is now called for. We believe S. 914 and S. 1630 could serve as a basis for such action.

We support many of the features of both bills in principle. Most of the routines the bills prescribe for correcting billing errors, improper credit reporting, returns, and so forth, will benefit consumers and creditors. We also endorse many of the technical changes to the Truth in Lending Act which are included in both bills. We are particularly pleased to see that S. 914 and S. 1630 would relieve a creditor from monetary liability for a violation of the Truth in Lending Act if he acted in good faith compliance with a regulation of the Board, even though it might later on be overturned by a court.

We also support the idea that the Board should be given the authority to regulate itemization and timing of closing costs on real estate transactions, although, as brought out in our written statement, this is subject to a number of conditions.

Finally, we support the provisions of S. 1630 which would establish a quarterly reporting system for annual percentage rates and provide a grace period during which a card issuer may accept payment without a finance charge being imposed, even after the date on which such a charge might be imposed, without creating a violation of the Truth in Lending Act.

We also agree with this bill's attempt to rework the present overly detailed requirements for the advertising of credit terms and its requirement that premiums for credit life would have to be stated as an annual percentage rate.

So now we would like to get into those things on which we perhaps differ with the bill as laid out.

I would lead off our discussions with a question of what S. 914 refers to as retroactive finance charges. We think this is a key issue, and we stated in our written testimony that section 167 would in effect. require that a finance charge be assessed on an open end account only on the basis of the closing or adjusted balance.

If I understand the chairman's statement, when he introduced S. 914, that is what he intended by this language. However, we doubt that the actual wording of the bill would accomplish that. Under the adjusted balance system, the closing balance from the previous month's billing period is and must be reduced by the amount of any payments and credits received, and the total is used as the basis for the finance charge. I might say that that is the system that my bank uses.

Consequently even under the adjusted balance system, one will end up with a retroactive finance charge being assessed against some amount that was outstanding in the obligor's account prior to the time when such payment is due-that is, what he did not pay off or receive credit for during the billing cycle.

Since, by its terms, section 167 would ban the previous, average daily balance, and adjusted closing balance methods, it could be interpreted as requiring what is known as the actuarial daily balance. in which the creditor does not give a truly free period, but rather begins to apply a finance charge as soon as the transaction occurs. Should the bill remain in this form, then only the latter method which presupposes a high degree of computer availability and sophistication would be left, much to the detriment of cardholder and small merchant alike. We do not believe this is the intent of Congress, and

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know of no Senator or Representative who has told the American consumer that he favors forcibly wrenching this free period away from him, even though the credit grantor is willing to offer such free periods.

However, even assuming the intent of S. 914, it is merely to standardize the adjusted balance method and not to impose the actuarial average daily balance system which, of course, does not involve a free ride period, we do not believe that the adjusted balance approach alone is the proper one for many reasons.

A compelling reason is that it is relatively unfair to consumers who liquidate their account very early during the free period, and they do not, therefore, receive the same benefits as those who wait until near the end of the free period.

Moreover, we would point out that the impact of any of five or six common methods for figuring a balance is quite small, when considered from the standpoint of a given and average consumer. However, the combined impact of the change on the extender of credit could be severe, and this is particularly true of small merchants.

We do agree with the report of the National Commission on Consumer Finance, which we quoted in our written statement, that it is not necessary to ban previous or average daily balancing methods and that adjusting them or moving from one method to the other does effectively raise or lower the interest rates which are controlled traditionally by State law. Here again, we reiterate the setting of rates as a matter heretofore left to the States, and does not belong in a Fair Credit Billing Act.

Really, the problem that should be dealt with in such a piece of national legislature is one of disclosure. If Congress feels that present disclosures required under truth in lending are not adequate, then a possible solution lies in a change there, and not in a straitjacket method of computation.

We also oppose section 167, because it is discriminatory in nature. By its own terms, it is applicable only to those plans which offer the obligor an opportunity to avoid a finance charge by paying his outstanding balance in full on or before a certain date. A creditor who does not offer such a free period option would be free to use any method of finance charge he wished. Clearly, there is no justification for this type of discrimination. In addition, section 167 is discriminatory to nonseller operated plans, because if the seller-creditor loses income, he can adjust his prices to recover income loss. Bank card plans are carefully regulated by State law and thus cannot increase finance charges.

We strongly opposed section 167 because it is in effect State regulation. We believe this should be left to the State legislatures. It was recognized that this argument has been under consideration for a long time. When S. 914 was introduced, it was also stated that the States have done very little to legislate on the issues of balances and debtors rights and that the argument for State regulation in this area is really an argument for no legislation at all.

On the contrary, we believe the States are regulating rates and balances according to the needs of their citizens. True, many of them have not legislated in their jurisdictions to impose what the bill seeks. This could well be because they have adjusted their rates, balances,

sizes of loans, and maturities in an integrated credit picture that gives their citizens what they want.

But we would point out this: If indeed Congress feels that one particular method of rate calculation is onerous, and ill-advised, and even pernicious, and can bring substantive and persuasive evidence to bear, then perhaps that particular area should be expressly addressed. Certainly, the average daily balance method, retroactive though it may be, is an imminently fair one. To paraphrase a popular comedian today, what you get is what you pay interest on. Yet, the deceptively simple wording of section 167 would eliminate even that method of calculation.

Just a few final comments on section 168, which would prohibit minimum finance charges except for two types: a uniform charge designed to recover billing costs and a uniform delinquency charge. This provision would effectively prevent a creditor from charging a minimum finance charge on small extensions of credit for which the finance charge would not otherwise recover the administrative cost of making the extension of credit, unless he also assessed such charges against those larger credit extensions, even though the finance charge applicable to them is sufficient to recover administrative costs. Such a requirement is not in the consumer's interest. Moreover, we would add that the final report of the National Commission on Consumer Finance saw nothing wrong with minimums.

Indeed, many State laws expressly authorize a minimum finance charge for small extensions of credit. There is no evidence that the minimum finance charge provisions of State law are being abused. The need for Federal action in this area has not been established, and we, therefore, oppose this provision as unwarranted and undesirable Federal intervention in an area traditionally left to State regulations. That completes my remarks, and I would like to request Mr. Hock to continue.

Senator PROXMIRE. Mr. Hock?

You took 121⁄2 minutes. We will see how long Mr. Hock will take. Mr. Hock. I will try to be brief.

I appreciate the opportunity to appear again before the committee. National BankAmericard is a membership corporation representing nearly 5,000 member banks, which provide BankAmericard services to approximately 24 million card holders, and over 900,000 merchants. We recognize an affirmative duty to seek and support laws which serve the best interests of cardholders and merchants, as well as member banks.

We recognize an equal obligation to use our knowledge and experience to seek modification of laws proposed with good intent but which nevertheless may operate to the detriment of the very individuals they are designed to protect.

Many provisions of both bills are consistent with sound bank card operations, and we are prepared to support them, although we have suggested certain modifications.

However, we have substantial concern about the effect of certain provisions. Section 172 of S. 914, which makes banks liable to claims and defenses of individuals who use bank cards as a means of payment, is one such provision.