Law regulating commercial relations between individuals and companies has always recognized several matters of simple justice: That improper and illegal acts shall be the responsibility of the perpetrator; that aggrieved individuals should have reasonable and prompt means of redress; that third parties not privy to or participating in such acts should not be penalized for that which they did not cause; and finally, that it is the responsibility of government to provide a just system of law in support of aggrieved parties and proper enforcement to control those who act unfairly and contrary to the law.

It is generally accepted that consumers should be protected from the unscrupulous and illegal practices of merchants and that consumers with claims arising out of the sale of goods and services should be able to refuse payment of debt to the seller.

The seller has full knowledge of and control over his merchandise and selling practices. He is protected against excessive consumer claims by choosing not to provide credit to customers who reject merchandise without grounds or alleged misrepresentation when none exists. In short, both parties have firsthand, continuing knowledge of one another. If all third parties which provide a means of payment were required to accept responsibility for merchant performance, it would be tantamount to requiring that the Government which provides a currency system, the lender who provides money, the bank that provides checking account service, in fact anyone providing a means by which value can be readily exchanged would be exposed to contingent liability for unknown acts; over which they do not and should not have dominion or control.

Yet, section 172 of S. 914 arbitrarily and inequitably selects one means of value exchange, credit cards issued by third parties, and requires that organizations which provide them assume responsibility for the acts of merchants that accept them. The essence of the provision is to mandate that the reputation and assets of banks be substituted for the reputation and assets of merchants; and that banks then use their power, acting as judge, jury and policeman, to control the selling practices and merchandise of merchants.

This is a dangerous direction for Congress to take if it truly wishes consumer protection consistent with a free society.

The logic of these sections of the bill seem quite simple. One, that there are too many merchants providing faulty merchandise, or guilty of misrepresentation, or otherwise defrauding or misleading purchasers.

Two, that Government cannot or does not wish to provide laws or enforcement to directly restrain those merchants from such practices. Three, that Government cannot or does not wish to provide a reasonable means by which aggrieved purchasers may gain satisfaction. directly from such merchants.

Four, that the public good nevertheless requires that the practices of such merchants be curbed, and customer grievances redressed.

And five, that the Government should require that these organizations which provide a single method of value exchange, credit card issuers, accept that responsibility.

If section 172 of S. 914 were to become law and customers were to allege defenses or claims, the alternatives available to banks are quite easy to predict.

First, a bank without power over either party to compel production of records or statements under oath, could attempt to investigate and arbitrate the matter. In every case the bank would have a business relationship with one or both of the parties, and would not be in the position of an independent arbitrator. In the face of conflicting claims, the bank would be forced to elect the party against which to take action without adequate means to determine the equity of that decision. Second, a bank could attempt to satisfy both parties by accepting the loss; a patently unjust result, for the bank is not responsible for the conduct of the parties which resulted in the dispute. If it does so, it has simply increased its cost of operation which must be recovered from all merchants and cardholders in the cost of the service, rather than from the responsible party, again an unjust result.

Third, the bank could adjudicate in favor of all cardholders by automatically charging all contested amounts to the merchants. However, parenthetically, we would point out that section 170 of S. 914 and 167 of S. 1630 would prohibit requiring a bank account against which to make those charges.

Senator PROXMIRE. You said would prohibit what?

Mr. Hock. The bank from requiring a bank account against which to make such charges.

The effect of the chargebacks would be to utilize the power of banks to arbitrarily inflict upon merchants the losses on all disputes regardless of merit even though the vast majority of such purchasers were unknown to the merchant at time of purchase. It may be the only practical alternative and what some wish to see happen. It has considerable danger.

Banks would be faced with a compelling need to determine in advance the degree of risk inherent in signing each merchant member. The risk could originate in the quality of merchandise carried by the merchant, the warranties provided by the manufacturer, the selling practices and advertising of the merchant, the reputation and practices of the merchant's employees, in fact by the entire conduct of the merchant's business.

Banks would have to develop means to insure performance of the merchant. They could look to the financial worth of the merchant and refuse to permit new enterprises, those with limited worth, or those suffering temporary reverses, from participation in bank card programs. To do so would be to deny participation to the very merchants most in need of bank card service, and which provide the competition which keeps entrenched merchants from further market dominance. It could well subject banks to charges of group boycott.

It might be possible for banks to retain reserves against losses. However, that, again, militates against smaller merchants with limited working capital and reputation. Parenthetically, it would also be an illegal tie-in under section 167 of S. 1630 and section 170 of S. 914.

Another means of minimizing the risk would be to restrict participation to merchants whose personnel, merchandising practices, quality of merchandise, warranties and other practices are acceptable to banks. To encourage dominion by one segment of the economy over the activities of another may well violate the antitrust laws.

I might also point out that the same problems I am outlining will apply to provisions of the section on billing errors which define a

billing error as a customer refusal to accept merchandise or a claim that the merchant failed to deliver. In either case, the bank is between conflicting claims with no judicial means of solving them.

Although far from clear, it does not appear that section 172 intends that banks must assume contingent liability for merchant acts without ample power to protect themselves and their depositors by regulating the business practices of the merchants, requiring reserves, or restricting participation to larger, better established enterprises.

However, if this is the intent, the Federal Reserve Board, the FDIC, depositors, and stockholders should be concerned, for assumption of such an unknown burden without recourse to the merchant could be

severe.

If these provisions are intended to result in bank control of merchant business practices, banks, merchants, Government, in fact the entire public should be concerned, for such concentrations of power invite abuse.

We respectfully submit that if, in fact, consumers now suffer excessively from faulty merchandise and fraudulent sales practices, that Congress draft laws to directly require the manufacturer or merchant to desist.

That if present laws are adequate, but the judicial system inadequate to provide each aggrieved citizen, or the Government, prompt redress against the responsible merchant or manufacturer, that Congress correct those deficiencies.

That Congress not abdicate direct responsibility by mandating that banks either assume this regulatory burden or underwrite the resultant loss to the consumer.

However, should Congress feel that this burden should now be imposed on banks, we urge consideration of substitute language contained in our written statement. This language was submitted to illustrate certain concepts and has not been fully analyzed in the context of the proposed law. It may require further modification.

The substitute language contains several basic changes. It recognizes that bank cards are used as a substitute for cash and that consumers should not have a right of offset when the card is used in that manner. The proposed language therefore exempts from application purchases made with cash obtained directly from banks through use of the card, and exempts purchases under $100 under the reasonable assumption that such purchases would normally be made with cash. It further provides that the cardholder must exercise his right within 60 days of the time it first appears on his billing statement.

This approach has several advantages. The customer can recover the full amount of the purchase, even if partially paid. Both purchaser and creditor have a clear understanding that recourse lies solely with the merchant after 60 days, and the complicated question of allocation of payments is avoided.

It is reasonable to assume that a problem with merchandise after 2 or 3 months is properly a matter of warranty and therefore inappropriate for inclusion in this act.

The substitute language further provides that the cardholder provide the card issuer with facts regarding his good faith efforts to resolve the differences with the merchant; specifically authorizes waiver of defense provisions in cardholder contracts not prohibited by the

act, and makes such provisions preemptive of State law. These clarifications are necessary if there is to be reasonable uniformity of application nationwide, and if we are to avoid the risk of protracted litigation on technicalities which have so often resulted from the Truth-inLending Act.

Although we have submitted suggested changes, Mr. Chairman, we nevertheless feel that bank cards are evolving so rapidly from a credit to a value exchange mechanism that any Federal legislation in this area is dangerously premature.

Again, may I emphasize our willingness to provide assistance in perfecting either or both of these bills, and in working for their passage should they emerge in a form which equitably balances the legitimate interests of cardholders, merchants, and banks.

That completes my statement.

Senator PROXMIRE. Thank you, sir. The panel is now 6 minutes over the allotted time.

Mr. Reynolds, you are next.

Mr. REYNOLDS. I will try and catch us up.

Senator PROXMIRE. Mr. Hock, would you move the microphone

over?

Mr. REYNOLDS. Mr. Chairman, my name is John J. Reynolds and I am president of the Interbank Card Association. Interbank serves some 5,700 banks and has over 28 million cardholders. We are naturally concerned with any Federal legislation which affects use of bankissued charge cards, and I am pleased to be able to support most of the provisions in S. 914 and S. 1630.

I would like to focus on two provisions of the bill that we fully support, but do give us some difficulty in the way they would work in practice. The first has to do with the correction of billing errors, and the second has to do with civil enforcement.

Both S. 914 and S. 1630 would add a new section 161 to the Truthin-Lending Act which would provide that if an obligor, within 60 days after having been sent a period statement, complies in the provisions of the act, the creditor must acknowledge that notice in writing within 30 days and within two billing cycles-but not later than 90 days and either make appropriate corrections or explain to the obligor why the amount is correct. During the period in which the amount is in dispute, the creditor could not take any action to collect the amount. We feel that, although bank-operated charge card plans have generally done a very good job in handling disputes, consumers may nonethless benefit from the establishment of a uniform procedure for all to follow in handling such disputes. We do feel, however, that the proposed mechanism could be improved in several

ways.

First, the language in subsection (c) prohibiting a creditor from taking action to collect the amount indicated under paragraph (2) of subsection (a) should be clarified so that it is the amount of the error, not the amount of the transaction, that cannot be collected. We are confident that it is not intended that a 20-cent error in posting a $500 purchase would prevent a creditor from collecting all but 20 cents.

Second, paragraph (2) of subsection (b) would include requests for additional clarification within the definition of a billing error.

It is difficult to understand why a simple request for information should constitute a billing error, yet inclusion of such requests within the definition would permit an obligor to abuse the billing error mechanism by repeatedly requesting additional information on his bills and thus effectively delaying payment without incurring finance charges. To eliminate this possibility of abuse, we recommend that requests for additional clarification be deleted from the definition of billing errors and that a separate subsection be added to section 161 specifically requiring a creditor to respond promptly to a request for clarification. This will assure that such requests are promptly handled, but will not bring into play the billing error correction mechanism unless the obligor also alleges an actual billing error under one of the other definitions of that term.

Third, paragraph (3) of subsection (b) would include, within the definition of billing error, situations in which the obligor asserts that he did not receive or refused to accept the goods or services. As Mr. Hock noted earlier, this is not a billing error, and the language of paragraph (3), as well as the parallel language in paragraph (ii) of subsection (a), should be deleted.

Finally, subsection (c) could be interpreted as requiring the creditor to indicate in any statement showing as due an amount in dispute, the fact that such an amount need not be paid until the dispute has been resolved in accordance with subsection (a). Such a requirement may be difficult to meet for all creditors, but it is particularly difficult for those small ones whose billing is done on an outside billing service. It should be sufficient that a creditor indicate in the acknowledgement required by paragraph (A) of subsection (a) that the fact that a statement still shows a disputed amount to be due may be safely disregarded by the obligor pending resolution of the dispute. The Board should be given authority to provide by regulation how this notice shall be effected. Such a provision would prevent the creditor from being in technical violation of the section when he receives a notice of a billing error, but the statement goes out before a correction can be made.

With these minor, essentially technical, modifications, we support these provisions fully.

One minor matter here is whether failure to comply with the billing error procedures of section 161 would subject a creditor to a special forfeiture penalty as well as to the general penalties for noncompliance with the act. We assume that this is not intended and that any bill the committee reports will make that clear.

I would now like to turn to civil enforcement of the disclosure provisions of the Truth-in-Lending Act and of the Fair Credit Billing Act.

Section 130 of the Truth-in-Lending Act provides for a form of civil enforcement through minimum monetary recoveries amounting to a civil penalty. Under that section, a creditor who fails to disclose to any person any information required by the act is liable for twice the amount of any finance charge, but not less than $100 even if no actual damages are shown. It is this $100 minimum recovery which has led both creditors and consumers to have difficulty with the civil enforcement mechanism.