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indeed, our request for pre-emption presupposes that the Congress has, contrary to our primary desire, itself decided to intrude into an area historically left to the states. Because the pre-emption would be narrowly limited to the extent of Federal intrusion in a specified area of state commercial law, we think its benefits outweigh any possible objections. Indeed, such pre-emptive effect might generate useful experience to judge the desirability of perhaps broader Federal preemption of state commercial law in the Truth in Lending area generally.
On the subject of civil enforcement of the Truth in Lending Act, our statements pointed out the unsuitability of class actions as vehicles to obtain penal monetary damages under the Truth in Lending Act, and the fact that the great majority of the court decisions in recent years had decided against allowing suits there has come to my attention a decision of the United States Court of Appeals for the Third Circuit in Katz v. Carte Blanche, No. 72–1054, May 22, 1973, and I feel that for completeness of the record I should call this decision to your attention. The suit arises under the Truth in Lending Act, and the Court of Appeals noted the potential of class actions for conservation of judicial resources and the utility of class actions in establishing, by declaratory resolution or otherwise, the legality of a defendant's conduct. While recognizing these potential benefits of class action treatment, the Court specifically noted that whether class action treatment would be appropriate for recovery of monetary damages, particularly minimum penalty damages under the Truth in Lending Act, was another matter. The Court noted the defendant's claim that astronomical liabilities could be involved if class action treatment were appropriate for such monetary amounts. The Court expressly reserved decision on whether such class actions were permissible in any circumstances under the Truth in Lending Act and on whether such a class action might be appropriate in the particular circumstances that might be developed upon trial of the case before it. The decision thus appears to express the same concerns that were expressed in our testimony concerning the inappropriateness of class actions for minimum statutory damages under the Truth in Lending Act.
Also since my testimony, it has been pointed out that $ 169 of S. 914 may have some entirely unanticipated effects. As that section now reads, an affluent buyer who has a third-party credit card could receive a five percent discount for using cash, but a disadvantaged buyer who lacks the standing to obtain a credit card would not. Thus the rich who have the most credit cards would pay less than the poor--we cannot believe that this consequence was intended. In addition, 8 169 does not take into account the effect of state usury statutes, for while any discount would not, by the terms of $ 169, be considered as finance charges for Federal Truth in Lending purposes, no provision is made for pre-empting state usury laws. We feel that $ 169 has indeed pinpointed a real problem which is ripe for Congressional action : however, we suggest that the consumer information purposes of Truth in Lending and protection of the less advantaged consumer require a law to compel merchants to offer a single cash price to all, rich or poor, credit or cash, without any discount for cash or the equivalent credit add-on. The merchant has adequate protection since he is still free to offer credit, either through his own credit plan or through a third party, or none at all: he will merely have to deal fairly with all consumers and with consumer creditors.
In closing, I very much want to say that I deeply appreciate the interest you have consistently demonstrated in the welfare of our cardholders and in the effective and fair operation of open-end credit plans, and in the courtesy you extended to all of us at the hearings last week. We look forward to working with you so that the best potential of bank card systems will be realized for every cardholder. Sincerely,
JOHN J. REYNOLDS, President and Chief Executive Oficer. •
Note: 15 day chargebacks, 11,307; 120 day chargebacks, 3,556; total, 14,863. See table below:
SUMMARY OF CHARGEBACKS RECEIVED, CATEGORIZED BY REASON
total excluding missorts
23.0 16.0 5.0 4.0 3.0 .2 .1 3.0 17.0
1.0 9.0 3.0 5.0
.9 1.0 2.0 .9
INACCURATE AND UNFAIR BILLING PRACTICES
THURSDAY, MAY 24, 1973
U.S. SENATE, COMMITTEE ON BANKING, HOUSING AND URBAN AFFAIRS,
SUBCOMMITTEE ON CONSUMER CREDIT,
Washington, D.C. The subcommittee convened at 10:15 a.m. in room 5302, New Senate Office Building, Senator William Proxmire presiding.
Present: Senators Proxmire, Bennett, and Hathaway.
Senator PROXMIRE. The committee will come to order. I apologize for being late, but we had a hearing at 9 o'clock, and we had 21 mayors present.
Our first witnesses this morning are Mr. William C. Dunkelberg and Mr. Ray McAlister. Is that right?
Mr. MCALISTER. What did you say? You say "Southwest ?”
Senator PROXMIRE. I know what you mean. You are from north Texas.
Mr. McALISTER. Southwest Texas; I think that's where L. B. J. was from.
[Discussion off the record.]
STATEMENTS OF WILLIAM C. DUNKELBERG, STANFORD UNIVER
SITY, AND RAY MCALISTER, NORTH TEXAS STATE UNIVERSITY
Mr. DUNKELBERG. I certainly appreciate the opportunity
Senator PROXMIRE. Let me interrupt to say we do have a number of witnesses this morning. As you may know, we have eight, I think, and we would appreciate if you could confine your remarks to 10 minutes or so, and we would have time for some questions.
Mr. DUNKELBERG. OK. I'll keep my watch ready and steady.
I certainly appreciate the opportunity to be here today and to report a little bit about the work I have been doing on and off for the past 6 or 7 years in the credit area.
What I would like to report on specifically is the work that I've done recently for the National Commission on Consumer Finance, using some data that I collected in a California study and also some national cross section sample data from the Survey Research Center
at the University of Michigan. That study was sponsored by the Ford Foundation.
The details of the studies will be published soon, I hope, by the National Commission in their working papers, under the title of “An Analysis of the Impact of Rate Regulation on the Consumer Credit Industry." I will try to summarize very quickly what those results
The first thing that I decided to look at was the value credit to consumer users, since when we start talking about subsidy issue, we have to decide what value the consumers get from the use of credit as a commodity, however it is used.
There are numerous benefits that one could enumerate, and I chose to speak briefly about a few of them. One major advantage, of course, is that credit allows consumers to finance durable goods consumption more like other types of consumption. Some consumers view credit as a budgeting device. It helps them plan their expenditures.
A lot of consumers we now know view credit and the use of debt as a way to insulate stocks and liquidate assets that they own. Those liquid assets do provide a value to the consumers, and we see that supported by the data, since we observe many consumers owning enough liquid assets to pay off debts that they do hold in their portfolio, but we observe them holding debt and assets simultaneously. Another great advantage—and this applies particularly to the open-end-type credit that we are talking about today—are the benefits of cash management. For many consumers, the credit card and the open-end-type credit provides a very flexible way to manage cash balances, to finance purchases of a fairly large size without having to incur a lot of transaction costs. In essence, it provides a line of credit to the consumer. For many consumers, that line of credit may be several thousand dollars in magnitude. The consumer then has the option of taking as much debt in his portfolio, or as little as he likes each month. He can pay a little, he can pay it all or none, any part he wishes.
The final benefit that I considered was a general one, and that is that in many cases it is beneficial to the consumer to be able to buy durables, whether they buy on credit or pay cash, rather than acquire the related service in the market.
So there are certain advantages that accrue to the consumer from ownership rather than acquiring service in the market; that is, generating a service at home rather than buying it. And when we talk about durable goods, this becomes an important issue since access to credit or lack of access may determine whether or not these benefits can be ob tained by a particular consumer.
Now, it's difficult to quantify the value of most of these things that I've talked about, but in the case of durables, it is possible to at least make an attempt, and I attempted this using one particular example: ownership of the washer and dryer.
The reason I chose the washer and dryer was that there is a very close market substitute for that service; namely, the use of a laundromat. In the case of a stove and a refrigerator, there isn't a very clear substitute, and I think the rate of return attributable to the ownership of those items is so high that it was just not worth doing the calculation.
So I made a set of assumptions which I report in the paper relating to the rate return on durable goods, and I won't review those here.
They are fairly conservative assumptions, and essentially what I tried to do was to find out in an investment sense what it was worth to a consumer to own the washer and dryer, instead of using the services of a laundromat. Essentially this meant calculating the net cash savings a consumer would make or earn during a year if he were to own a washer and dryer, rather than go to a laundromat to get the laundry done.
Now, the results of that study are summarized briefly in the written testimony that I submitted. Let me just say that under the assumption of the variable life of the washer and dryer, that is, assuming that the faster, or the more frequently you use it, the faster it's going to wear out, the rate of return ranged from 7 percent for use levels of 1 load a week, to about 54 percent for an 11 load per week use level. I regard these as being fairly conservative based on the assumptions we made, but nevertheless, indicative of the rather sizable amount of savings that could potentially accrue to a consumer.
The one cost I didn't take direct account of was the cost of capital for financing this so-called investment, and the reason I didn't include that in the calculations explicitly was because I wanted to focus on it. So that, for example, if we look at use level of six loads per week, we see that the net gain to ownership annualizes at a rate of about 22 percent. This would suggest that, other things equal, if a consumer could get funds at any rate less than 22 percent and if he did six loads of wash per week, he would find that he was better off acquiring the durables, the washer and the dryer, and producing this service at home rather than using the laundromat, borrowing the money to make the purchase.
Now, you see that in some cases consumers may well be willing to pay 30 or 40 percent for money if they had to, in order to acquire the services, that is, in order to be able to buy a washer and dryer and provide these services at home. The rates of return tend to be very high.
The other thing I would like to point out is that distribution of the value accruing to consumers is independent of their income or wealth. In this case, it really depends on family size, which determines how many loads of wash one does per week.
Now, if we look the credit availability and consumer's access to capital markets, it is pretty easy to see from this simple example that if a consumer were denied access at any price to a capital market and was unable to finance the purchase of the durable in any other way, this would impose a real—fairly high in some cases—dollar and cents cost on the consumer per year. In the impact study--national commission Working Paper-we calculated that at use levels of 6, 7, 8, 9, 10 loads per week, this cost could be substantially over $100 per year.
Relative to income, of course, these costs are even more exaggerated; $100 to $200 to a family with a $5,000 income, is much greater than to a family with less.
Regulatory changes that we have seen going on, such as the move to reduce rates from 18 to 12 percent, indeed affect consumers' access to the credit markets, and essentially what I wanted to do was to find out what this looked like, who was affected when these kinds of changes were made. One would suspect that the incidence in the population of any reduction in the amount of credit available, or any increase in rates or whatever, would not fall equally in all population groups.
To take a look at this, I simulated credit scoring methods on the national cross section sample of families, one of those that I worked on