Senator PROXMIRE. Thank you, Mr. Gay.

Mr. KEENEY. We have next, Senator Proxmire, Mr. Michael Zoroya, vice president of the May Department Stores, and representing the National Retail Merchants Association.

Mr. ZOROYA. Mr. Chairman, my summary, on the original paper that we have presented, is about 38 pages, my summary is about 9 minutes that we have summarized.

Would you like to have me cut it down beyond that?

Senator PROXMIRE. Cut it down beyond that if you can. We would appreciate it.

Mr. ZOROYA. I am here appearing today representing the National Retail Merchants Association, a nonprofit voluntary trade association, comprised of some 2,600 corporate members operating more than 26,000 retail outlets and with me is Stuart M. Rosen, of counsel to NRMA.

NRMA is appearing today to express the serious concerns of its members with certain aspects of both S. 914 and S. 1630.

We believe that specified provisions of both bills would be contrary to the interests of retailers and, at the same time, detrimental to consumers. Of significant impact, S. 914 would force retailers either to adopt the closing balance on pure average daily balance method of finance charge computation, or alternately, the adjusted balance method. If the closing or pure average daily balance method were adopted, sufficient credit revenues might be produced to offset credit operation costs. However, such an approach would eliminate an important cost saving option enjoved and demanded by consumers-the option to make full payment and avoid finance charges.

If the adjusted balance method were adopted, while preserving the option to avoid finance charges, creditors would be forced to reduce credit revenues substantially below the level necessary to offset credit

costs.

Moreover, S. 914 would force retailers to forego minimum finance charges necessary to defray the costs of extending credit and encourage prompt payment of smaller balances unless they are imposed in the month of purchase.

Additionally, certain provisions of both S. 914 and S. 1630 would increase the costs of operating a credit program without producing any corresponding benefits to the consumers.

Whether finance charge revenue is reduced below the costs of operating a credit program, and most retail programs are presently operating at a loss, or costs are increased beyond the finance charge revenue produced, the results are the same.

First, reduced credit availability, particularly through the elimination of marginal credit risks, to lessen bad debt losses.

Second, increased credit costs for some consumers who, unable to obtain retail credit, are constrained to seek credit from costlier

sources.

Third, increased cash prices and charges for goods and services, to offset losses in credit operations.

Fourth, increased market concentration, and decreased availability of credit sources, by forcing smaller retailers to surrender their credit operations to banks and third party credit grantors.

In speaking of the option feature, an option feature is not discriminatory, simply because an option is available to all, but may not

be exercised in all cases. This is shown by section 169 of S. 914, which would encourage retailers to offer a cash discount option. The cash discount option and the no finance charge option operate identically, only at different times.

Customers who avail themselves of either of these options by full payment at one time, either at the time of sale under the cash discount option, or within the period provided under methods having a no finance charge option, benefit by paying a lower total price for merchandise.

While not everyone avails himself of the option each and every time, the fact that everyone has the identical opportunity to benefit from either option belies the claim that such a cash discount option, or no finance charge option under revolving credit, is discriminatory.

As to minimum finance charges, the same reasoning holds. These charges do not discriminate. They are uniformly applied. The balances to which they relate are modest and within reach of virtually all customers. Forcing creditors to impose finance charges in the month of purchase would deprive customers of the benefits of a no finance charge option.

Both versions of the Fair Credit Billing Act provide that failure to comply with its provisions works a forfeiture in the amount in dispute.

As to the credit billing requirements of the bills, we believe that penalties are hardly appropriate, especially where the failure to comply was not willful, and resulted from a bona fide error, or where the creditor after discovering a mistake promptly corrects it.

With respect to the proposed truth in lending amendment lumping class action penalties, truth in lending class actions have proved extremely troublesome and disruptive. The possible windfall recovery in the absence of actual damage from a class action has led to many frivolous claims. We believe that the limitation on aggregate recovery might help deter further claims, but we would suggest that recovery up to 1 percent of our creditor's net worth as proposed in S. 914 should be modified. This limitation can be just as disastrous as the existing magnitude of disclosure. The aggregate recovery should not exceed the lesser of $50,000 or 1 percent of the creditor's net worth, a sum which is more than adequate to deter operations. [Statement of Mr. Zoroya follows:]

STATEMENT OF MICHAEL ZOROYA, VICE PRESIDENT AND GENERAL CREDIT MANAGER, MAY DEPARTMENT STORES COMPANY, ON BEHALF OF NATIONAL RETAIL MERCHANDISE ASSOCIATION

INTRODUCTION

Mr. Chairman and Members of this Committee: My name is Michael Zoroya. I am Vice President and General Credit Manager of The May Department Stores Company. I am appearing today to present the position of the National Retail Merchants Association ("NRMA") on S. 914 and S. 1630. In addition to amending certain provisions of the Truth in Lending Act, including the extent of civil liability in class actions, these bills would add a new title to that Act, to be known as the "Fair Credit Billing Act," which would regulate various creditor billing practices.

The National Retail Merchants Association is a non-profit voluntary trade association comprised of some 2.600 corporate members operating more than 26,000 retail outlets. These stores account for approximately 50 billions of dollars in annual sales and range in size from small speciality shops to large department store chains. In the course of selling general merchandise at retail, and as a con

venience to their customers, many NRMA members offer to their customers the opportunity to purchase merchandise on credit.

SUMMARY OF NRMA'S POSITION

NRMA is appearing today to express the serious concern of its members with certain aspects of both S. 914 and S. 1630 which we believe would be contrary to the interests of retailers and, at the same time, detrimental to consumers.

THE OBJECTIONABLE FEATURES OF THE BILLS

As will be discussed, S. 914 would force retailers:

(i) to adopt methods of finance charge computation which, while preserving sufficient credit revenues to offset the costs of extending credit, would eliminate an important cost-saving option enjoyed and demanded by consumers (namely, the option to make full payment and thereby avoid finance charges); or

(ii) to adopt a method of finance charge computation ("the adjusted balance method") which, while preserving the option to avoid finance charges, would reduce credit revenues substantially below the level necessary to offset credit operating costs; and

(iii) to forego minimum finance charges, necessary to help defray credit costs, unless they are charged to all customers-even in the month of purchase.

Further, certain provisions of both S. 914 and S. 1630 would, through unnecessarily cumbersome and rigid specifications regarding billing practices and disclosures, increase the costs of operating a credit program without producing any corresponding benefits to consumers.

THE ADVERSE CONSEQUENCES OF FORCED REDUCTIONS IN CREDIT REVENUES Whether finance charge revenue is reduced below the costs of operating a credit program or costs are increased beyond the finance charge revenue produced, the results are the same. Such deficiencies would lead to reduced credit availability, increased credit costs for some consumers, increased cash prices, and greater concentration in the credit market.

I shall explain why these adverse consequences would occur and how they can be avoided.

Retailers endeavor to cover the costs of their credit operations through charges to those who use credit-not the cash customer.

Unfortunately, as retailers know and studies make clear, revenues derived from finance charges to revolving credit customers are insufficient to cover revolving credit costs. A study commissioned by NRMA in 1968 and conducted by the national accounting firm of Touche, Ross, Bailey & Smart indicates that among merchants examined, most of whom were charging 11⁄2 percent per month applied to the previous balance, revolving credit costs exceeded revolving credit revenues by approximately 2.3% of credit sales. These findings are further confirmed by other recent studies.1

The Report of the National Commission on Consumer Finance (pp. 145-147) indicates that, because of an insufficient assessment of costs of capital, the NRMA study actually understated the deficiency.

Numerous studies, and actual experience, show that when retail credit costs exceed revenues, this leads to:

1. reduced credit availability-particularly through the elimination of marginal credit risks, to lessen bad debt losses;

2. increased credit costs for some consumers, who, unable to obtain retail credit, are constrained to seek credit from costlier sources;

3. increased cash prices and charges for goods and services, to offset losses in credit operations;

1 I.e.. Arthur Anderson & Co.. Study of Finance Charges and Related Expenses of Revolving Credit Accounts of Four Connecticut Retailers, Connecticut Retail Merchants Association (1972): Ernst & Ernst. Retail Credit Operations Study (1971) Peat, Marwick & Mitchell, Determination of Credit Revenue and Related Costs (1971); Dr. Roland Stucki, Utah Consumer Credit Report (1970).

2 See, e.g., Kawaja. The Economics of Statutory Ceilings of Consumer Credit Charges, 5 Western Economic Journal 147 (March 1967); Lynch. Consumer Credit at Ten Per Cent: The Arkansas Case, 168 University of Illinois Law Forum, 592: An Empirical Study of the Arkansas Usury Law: "With Friends Like That ." 1968 University of Illinois Law Forum, 544: The Impact of a Consumer Credit Interest Limitation, Washington State: Initiative 245, Graduate School of Business Administration of the University of Washington (1970).

4. increased market concentration and decreased availability of credit sources by forcing smaller retailers to surrender their credit operations to banks and third party credit issuers. These credit plans generate greater revenues due to discounts charged to the merchant and higher account balances. They operate at lower costs due to more restrictive credit granting criteria and advantages in raising funds.

The National Commission summarized the adverse consequences as follows: "Forcing rates on sales credit below market rates has two consequences:

(1) Reductions in availability-In recent years there has been considerable pressure to force down the ceiling prices [rates] of sales credit, particularly revolving credit-both retail and bank credit card. Were extreme rate reductions forced on cash credit, the effects would be seen immediately: cash credit would become unavailable—just as small loans are [unavailable] for low income consumers in the District of Columbia. But the effect on consumers of a forced reduction in the price [rate] of sales credit is more subtle and complex although the unfavorable impact may be no less than that caused by a corresponding reduction in rate ceilings on cash credit. .

(2) Forced subsidy-A second effect of forcing rates on sales credit below the level that would be set by the market may involve the forced transfer of a portion of the finance charge into the cash prices of goods and services." (pp. 105-106)

"There is no logical reason to select any type of product or service sold by a retailer and legally require it to be sold at a loss. When credit is selected as the required loss leader, the burden of subsidy falls primarily on cash buyers, some of whom have been unable to obtain credit. Thus state laws that put the price of credit below competitive rates are forcing both the wealthy and the less affluent, who do not use or cannot obtain credit, to subsidize the use of credit by others. Such laws also tend to discourage those who can obtain credit from using cash to buy goods. In the Commission's view, lowering rate ceilings on revolving credit below 12 percent per month has on balance been contrary to the best interests of consumers.

"Regardless of the costs of providing any form of sales credit, a reduction by legislative fiat of the permitted gross income from finance charges necessitates adjustments in goods prices, fees, or availability. If not, lowered profits will force some retailers-probably small ones-out of business. While credit sellers may recover part of their lost income by reducing other services or adding fees for services previously furnished without charge, the most likely offset is an increase in cash prices resulting in a subsidy of credit by cash purchasers." (p. 107)

It may be argued that the adverse consequences of forced reductions in credit revenues or increased credit costs, as noted by these studies and in the report of the National Commission, can be justified in terms of the resultant consumer benefits. However, that is not the case under either S. 914 or S. 1630.

The arguments in support of S. 914, challenging certain computation methods that provide an option to make full payment and avoid finance charges, are simply without merit. Moreover, the increased operational costs that would be necessary to comply with certain billing practice requirements under S. 914 and S. 1630 could be substantially reduced, without sacrificing any consumer benefits provided under these bills.

To mandate the methods of finance charge computation under S. 914 would be detrimental to consumers.

S. 914

The most serious concerns with S.914 are as follows: First, Section 167 would preclude any revolving credit grantor, who provides its customers with a period of time within which finance charges can be avoided (a "no-finance-chargeoption"), from "retroactively" assessing a finance charge on any portion of the balance outstanding prior to the end of that period. This provision is designed to force any creditor, desiring to provide a no-finance-charge-option, to employ the adjusted balance method.3

Under the adjusted balance method, the finance charge balance represents the prior the Arkansas Usury Laws "With Friends Like That 1968 University of Illinois Law month's closing balance. Payments are deducted, but purchases are not added, in the month made. Arguably, even the adjusted balance method would be prohibited by this provision, since that balance arose and was outstanding in the account prior to the time when payment was due.

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The adjusted balance method would reduce credit revenues substantially below those earned under either the previous balance method or variations of the average daily balance method which provide a no-finance-charge-option.*

Second, Section 168 would, as a practical matter, prohibit revolving credit grantors from assessing minimum finance charges.

In addition to authorizing the adjusted balance method, S. 914 would also authorize the closing balance and pure average daily balance methods

It might be possible for a creditor to avoid the loss of credit revenues despite Sections 167 and 168 of S. 914. Assuming state law so permits, creditors could simply eliminate the no-finance-charge-option feature and impose finance charges in all cases-even if customers paid their bill in full. Thus, Section 167 would permit methods of finance charge computation (such as the closing balance method and "pure" average daily balance method 5), under which purchases are subject to finance charges in the month made, and no period is provided to avoid such finance charge assessment. These methods which, while fair and reasonable, would produce higher aggregate finance charges than any of the methods challenged under S. 914.

However, we see no valid reason to restrict credit competition by forcing revolving credit grantors to eliminate the no-finance-charge-option or, alternatively, suffer the adverse consequences (for creditors and their customers) of a substantial reduction in finance charge revenues. We believe, as does the National Commission (Report, p. 108), that to stimulate competition there should be as many options as possible for the computing of revolving credit finance charges.

Revolving credit customers consider the no-finance-charge-option to be an essential feature of their account. It is provided for competitive reasons to make revolving credit plans comparable to 30-day charge accounts offered by some creditors and allows the purchase and later return of merchandise without finance charge assessment. This feature, available and disclosed to all credit customers, is contained in virtually all revolving sales credit plans in existence today. It has come to be widely used and accepted to credit customers and, quite frankly, consumers would resent its elimination.

Given customer acceptance and demand for the no-finance-charge-option, it is likely that many creditors would, as a practical matter, be compelled to continue its use by adopting the adjusted balance method. As noted, that method would reduce credit revenues even further below credit costs, to the detriment of creditors and their customers.

The arguments in support of the limitations on finance charge computation are without merit

In seeking to abolish the previous balance method and variations of the average daily balance methods providing a no-finance-charge-optionn, it is urged that: (1) these methods, as well as minimum finance charges, unfairly discriminate against the poor who generally cannot afford to pay their balances in full and are inclined to have low balances under which minimum finance charges would be assessed; (2) these methods result in a astronomical annual rates; and (3)

The methods operate as follows:

(a) Under the previous balance method, the finance charge balance represents the prior month's closing balance. Purchases are not added, and partial payments are not deducted, in the month made.

(b) Under one form of the average daily balance method with a no-finance-chargeoption, the finance charge balance represents the sum of each day's outstanding balance (adding current purchases and deducting current payments) divided by the number of days in the billing cycle. No finance charge is assessed for any month when no prior month's closing balance existed or when payments and credits equal to, or in excess of, that balance

are made.

(c) Under another form of the average daily balance method with a no-finance-chargeoption, the finance charge balance represents the sum of each day's outstanding balance (adding current payments but excluding current purchases) divided by the number of days in the billing cycle. No finance charge is assessed for any month when no prior month's closing balance existed or when payments and credits equal to, or in excess of, that balance

are made.

The methods operate as follows:

(a) Under the closing balance method, the finance charge balance represents the outstanding balance in the customer's account on the last day of the month. Purchases are added and payments are deducted in the month made.

(b) Under the pure form of the average daily balance method, the finance charge balance represents the sum of each day's outstanding balance (adding current purchases and deducting current payments) divided by the number of days in the billing cycle. Finance charges are assessed in every month in which a balance exists regardless of whether payment in full is made.