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the manner in which these methods operate are not understood by the consumer because they are inadequately disclosed and these methods discourage consumers from exercising their right to withhold payment for defective merchandise. Each of these contentions are without merit. The challenged methods are not discriminatory

Methods embodying a no-finance-charge-option are not discriminatory but operate in an equitable and even-handed manner, encourage prompt payment and proyide all customers with the identical opportunity to avoid finance charges. Let me explain the historical basis of methods embodying a no-finance-charge-option and their favorable relationship to other credit plans from which they evolved. The historical, functional and economic rationale demonstrates the fairness of the

challenged methods Revolving credit with a no-finance-charge-option evolved by combining certain features of the 30-day charge account with features of installment credit. Under the 30-day charge account, which traces its origin back to the open-book credit extended by merchants in agrarian times, customers were not required to pay a separate finance charge but were to make full payment upon receipt of each bill. Credit was not offered for an extended period of time on such accounts.

Installment credit, also in use for many decades, typically related to a single item of merchandise. The payment was to be made in fixed periodic installments over an extended period of time, and the total to be paid included a precomputed finance charge based upon the original amount owing at the time of sale. Under installment credit, a customer who pays the total amount due before the time required for payment is given a partial refund of the precomputed finance charge. With respect to partial payments, on the other hand, if a customer chooses to make payment in an amount greater or at a time earlier than required, no portion of the finance charge is refunded.

Not surprisingly, this distinction between the treatment of full and partial payments was carried forward from installment credit to revolving credit, which was developed in response to consumer demand. Revolving credit avoided the necessity for a separate contract and separate payment for each purchase. Initially, finance charges on many revolving credit plans were computed on the closing balance method, described earlier. This method paralleled the manner in which finance charges were assessed on installment credit in that finance charges commenced from the time credit was extended. However, the closing balance method did not embody the 30-day charge account feature which customers demanded (namely a time period within which full payment may be made without charge). As a result, the previous balance method was conceived.

This method is more favorable to consumers than 30-day credit, installment credit, and revolving credit under the closing balance method. Only the previous balance method (and, with the advent of computers, average daily balance methods with a no-finance-charge-option) combines the favorable features of these other approaches to credit granting. The 30-day account fails to provide the consumer with the opportunity for extended payment terms. Installment credit, while providing extended payment terms, fails to offer the consumer a no-finance. charge-option and requires a separate contract and separate payments for each purchase. The closing balance method eliminates the need for separate contracts and separate payments, but it fails to offer the consumer a no-finance-chargeoption.

Moreover, charges to credit customers under the previous balance method are lower than charges under the closing balance method or, typically, installment credit. Notwithstanding these advantages the previous balance method produces credit revenues which approach the level necessary to cover credit costs. The adjusted balance method, while providing the favorable features of the previous balance method to credit customers, discriminates against cash customers since it produces credit revenues substantially below credit costs. Cash customers are forced to subsidize the credit operation.

Viewed in this historical, functional and economic context, methods embodying a no finance charge option are unquestionably fair, reasonable, logical and non. discriminatory. The cash discount provisions of S. 914 and S. 1630 confirm that the challenged

methods are not discriminatory A credit system is not discriminatory simply because an option available to all may not be exercised in all cases. This is clearly recognized by Section 169 of S. 914. That section is designed to encourage creditors to offer a discount of up

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to 5 percent for cash. It would prohibit third party credit card issuers from precluding merchants who wish to offer cash discounts and would exclude such discount from the computation of the finance charge.

The cash discount option and the no-finance-charge-option under the previous balance method and certain average daily balance methods operate identicallyonly at different times. The customer who does not pay the cash price in full at the time of sale will pay a higher total price than the customer who uses the discount for cash option. Similarly, the credit customer who does not make full payment within the period of the no-finance-charge-option will pay a higher total price than the customer who uses that option. Thus, customers who avail themselves of either of these options, by full payment at one time either at the time of sale or thirty days hence 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 a no-finance-charge-option under revolving credit—is discriminatory, or for that reason should be condemned. The challenged methods do not result in unduly high rates

It is also argued that the previous balance method and average daily balance methods embodying a no-finance-charge-option can produce annual rates of finance charge of as high as 180 or 360 percent.

In support of this argument, a hypothetical example is constructed involving a $100 purchase on the first day of the month and a $90 partial payment on the last day of the subsequent month. Using this factual construction, it is asserted that a creditor employing the previous balance method has provided the customer only $10 of credit over a 1 month period. On this fallacious basis, a 180 percent annual percentage rate is calculated, assuming a 1442% monthly rate. By utilizing an unknown form of average daily balance computation, a 360 percent annual percentage rate is calculated under the same set of facts. However, when one computes true actuarial rates by relating the finance charge to the amount of credit extended over the full period for which the credit was outstanding, the customer has not been relegated only $10 of credit-the amount outstanding at the expiration of the no-finance-charge-option. Rather, the customer has had use of the full $100 of credit for 59 days (from the date of his $100 purchase on the first day of the month to the end of his $90 partial payment on the last day of the subsequent month.) Under the previous balance method, a total finance charge of $1.50 would have been imposed, which would result in an effective annual percentage rate of 9.26 percent--not 180 percent as contended. Under the average daily balance methods with a no-finance-charge-option, a finance charge of $1.45 would have been produced, resulting in an effective annual percentage rate of 9.14 percent-not 360 percent as contended.

Other examples are cited in which customers make purchases at the end of one month and pay most, but not all, of the purchase price toward the beginning of the next month. The fact of the matter is that customers rarely make partial parments of major portions of their balences due. Vor do customers make payments in the beginning of the month, since that would be before receipt of a bill. Moreover, even assuming that such constructed hypotheticals could in fact occur, the fairness of methods embodying a no-finance-charge-option should not be judged in a vacuum or by reference to isolated transactions. For they distort the fact that typical purchase and payment patterns result in actual effective annual yields of less than 18 percent. This is substantiated by available studies.” The challenged methods are clearly disclosed and do not weaken consumer rights

We have shown that computational methods embodying a no-finance-chargeoption are neither discriminatory nor result in excessive rates—but rather are fair and reasonable to both the consumer and the credit grantor. We will now turn to the peripheral arguments which, even if valid-and they are not-in no way undercut the overall advantages of these computational methods to the public.

Thus, it is urged that these methods are inadequately disclosed and discourage consumers from withholding payment for defective merchandise.

& The court in Seibert v. Sears, Roebuck & Co. (Cal. Super. Ct. Alameda Co. 1972), found specifically that "pstances in which partial payment is a high percentage of the previous balance are rare and not reflective of the general operation of the previous balance method. Generally customers pay either the minimum scheduled payment or their entire previous balance.

? Touche, Ross. Bailey & Smart, Economic Characteristics of Department Store Credit, National Retail Merchants Association (1969) ; Jordan & Warren, Disclosure of Finance Charges : A Rationale, 64 Mich. L. Rev. 1301, 1307 n. 29 (1966).

As for disclosure, the Truth in Lending Act and Regulation Z require the creditor to detail his method of finance charge computation in the revolving credit agreements entered into with each credit customer as well as in the billing statement mailed to customers each month. Specifically, if all payments and credits during the month are not deducted prior to the determination of the finance charge, that fact must be disclosed. In addition, each billing statement must disclose the period within which payment must be made to avoid finance charges. These pointed disclosures, at the inception of the credit relationship, and on each billing statement, are repeated month after month.

To be sure, the present level of consumer awareness of all aspects of revolving credit can be heightened. This will, of course, occur with the passage of time. But the fact that not all consumers are totally aware is no reason for prohibiting computational methods which, as shown above, are fair and non-discriminatory.

A novel assertion is made that methods embodying a no-finance-charge-option discourage the withholding of payment when merchandise disputes arise. We fail to see how a creditor's shift to the adjusted balance method or any other method whereby finance charges are imposed monthly would encourage customers to withhold payment when defective merchandise is received. Most important in this regard, where a customer alleges that an item charged to his account is defective, most retailers will see that no finance charges are assessed on that part of the balance relating to the allegedly defective merchandise, pending resolution of the matter. Therefore, the customer is in no way discouraged from withholding payment for allegedly defective merchandise while at the same time benefitting from the no-finance-charge-option. In sum, this theoretical problem-whose occurrence is rare at best-is not in fact a problem of any moment. Certainly, it should not be the basis of dismantling computational methods which are clearly favorable to consumers. The arguments against minimum finance charges are equally invalid

Finally, we see no logic in attempting to eliminate minimum finance charges unless they are imposed on customers in the month of purchase. As I have discussed, forcing creditors to impose finance charges in the month of purchase would deprive customers of the benefits of a no-finance-charge-option. Customers would not react favorably to this new charge resulting from Section 168 of S. 914. Yet, minimum finance charges are necessary to help defray the costs of operating a revolving credit system and to encourage prompt payment of relatively small balances.

Minimum finance charges, as a result of Truth in Lending, generally do not exceed 50¢. This sum is insignificant in comparison to a 5% cash discount which would be encouraged by both S. 914 and S. 1630. A 5% discount on a $33 purchase would be $1.65, more than 3 times the magnitude of a minimum finance charge.

While it is asserted that minimum finance charges operate against the poor, this is not true. These charges are uniformly applied. The balances to which they relate are modest (below $33, assuming a 1142 percent rate) and within the reach of virtually all customers. Minimum finance charges, then, are not discriminatory or unfair simply because they are avoided by some customers whereas other customers do not exercise the very same option.

In sum, the public interest would not be served by prohibiting computational methods, including minimum charges, which offers consumers the benefit of a no-finance-charge-option. In fact, we believe that any such prohibition would be detrimental since it would force retailers to restrict availability, force cash customers to subsidize credit customers, force small retailers out of the credit granting market, and otherwise reduce competition. Certain requirements of the proposed Fair Credit Billing Act would substantially

increase retailers' operating costs without benefitting consumers While numerous consumer complaints have been alluded to as supporting the credit billing requirements of S. 914 and S. 1630, no independent showing has been made or referred to with respect to retailers as a class to be subjected to the requirements of the proposed Fair Credit Billing Act. Thus, while the totality of consumer complaints received by the Federal Trade Commission over an unstated period of time concerning problems in resolving billing errors is only 2,000, how many of these complaints involved our industry? Even assuming that half of these complaints concerned retailing and have been received, let us say, over a two year period—compare this with the billions of transactions on retail credit during the course of a year.

The point is that retailing, being such a highly competitive business and one entirely dependent upon customer satisfaction for its survival, has acted on its own, without prodding, to assure that credit billing errors are swiftly, fairly and efficiently resolved. Most retailers aim to resolve billing disputes within a very few days at most. Accordingly, while NRMA has no major objections to the concepts embodied in S. 914 and S. 1630) with respect to resolving billing errors (since our members have operated consistent with these concepts all along), we must question the soundness of certain provisions which would substantially increase credit costs without producing a corresponding consumer benefit.

THE BURDENSOME AND WASTEFUL NOTICE REQUIREMENTS For example, compliance with the requirement of proposed Section 127 (a) (8) of the Truth in Lending Act, requiring an initial notice and thereafter semiannual notices setting forth the protections of the proposed Fair Credit Billing Act, could perhaps be enclosed with the first billing statement for customers with active accounts at the time the Act becomes effective and every six months thereafter. But how are inactive accounts to be handled. A separate mailing of the required initial notice might be required. The aggregate postage expense for creditors would be astronomical—and no useful purpose would be served, since inactive accounts are not involved in ,billing disputes.

As to the semiannual mailing requirement the same possibility of a separate mailing and wasted postage expense would arise with respect to inactive accounts. While the semiannual notice could be included with the periodic statement for active accounts this could preclude the inclusion of merchandise offerings and other material of interest to our customers. In sum, the potential aggregate cost over a period of time (for postage, materials, and computer time and/or manpower) are staggering—particularly in light of the fact that approximately a third to a half of a retailer's accounts may be inactive at any one time.

Moreover, the disclosures that would be required under the Fair Credit Billing Act do not relate to specific terms of the customer's account as they do with Truth in Lending Act disclosures. Rather, these disclosures merely set forth provisions of the Act, which remain constant. Thus, to the extent that active accounts receive an initial notice and new customers receive notice at the time of the opening of the account, the consumer is fully informed of his rights and the creditor's obligations when a billing disputes arises. Further, the Fair Credit Billing Act will undoubtedly receive substantial nationwide publicity, fully apprising the consumer of the requirements imposed under its provisions.

Accordingly, any notice requirement should be limited to an initial notice to active accounts, and new accounts after the effective date of the Aet.

THE OVERLY BROAD DEFINITION OF "CREDITOR" Another area of "overkill" can be found in the definition of the term "creditor" in both S. 914 and S. 1630. The definition would subject all persons who extend any form of credit to the comprehensive requirements of the bill—even retailers, druggists, doctors, lawyers, plumbers, etc. who do not assess a finance charge, membership fees or dues for the privilege of purchasing goods or services on credit. Thus, while smaller concerns such as these may have devised informal means of billing their customers and resolving disputes when they arises to the customer's complete satisfaction--and are not part of the computer society for which the bill was likely designed, they would nevertheless be required to expend vast sums of money (relative to their size) in meeting the comprehensive requirements of the proposed Fair Credit Billing Act. It would seem more realistic to limit its scope to creditors who impose finance charges or who otherwise assess fees, dues, or charges in connection with the extension of credit. The need to protect against the erosion of any federal billing standards

With regard to the relation of any federal requirements to state requirements, NRMA believes that to the extent that Congress enacts legislation in the field of billing practices, rather than leaving such legislation to the states, it should take into account that states may take inconsistent action, such as by enacting legislation which differs in terms of the nature of disclosures and requirements, time of mailing billing statements and other matters covered by the proposed Fair Credit Billing Act. Lack of uniformity is rarely a benefit to the customer and certainly a detriment, and expense, to the credit granting industry.

If Congress makes the determination, for example, that requiring billing statements to be mailed no later than 14 days prior to the date payment must be received to avoid finance charges, properly balances the needs of the consumer and the capabilities of the credit granting industry, why should one state be permitted to upset this delicate balance by requiring statements to be mailed earlier. Accordingly, if federal legislation is to be enacted, it should preempt state laws which fer with the federally enacted statute. This is precisely what was done when the Consummer Product Safety Act was passed last year

CONSUMER REMEDIES

With respect to consumer remedies, both versions of the Fair Credit Billing Act provide that a failure to comply with its provisions works a forfeiture of the amount in dispute and related finance charges up to $50 in S. 1630 and up to $100 in S. 914. While we believe that the related finance charges should be forfeited in such situations, 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 violation promptly corrects it. After all, it must be recognized that mistakes may occur notwithstanding the best of intentions and procedures.

W'ith respect to the proposed Truth in Lending amendment limiting class action recoveries, we believe that both bills may to some extent ameliorate what has come to be an intolerable situation. When Truth in Lending was enacted, little if any attention was paid to the fact that the Federal jurisdictional grant under Section 130 would permit class actions in Federal Courts. Since enactment, Truth in Lending class actions have proved troublesome and disruptive.

The class action device is a powerful and complicated remedy that incorporates cumbersome and time-consuming procedures which greatly increase court congestion and place heavy management burdens on the judiciary. It is a device that can be readily misapplied to prolong frivolous or harassing claims serving no public purpose, and to force unwarranted settlements of claims which lack merit but as to which the cost of settlement is far less than defending the case successfully. The members of the purported class may, more often than not, have little or no stake in the litigation, with the plaintiffs' attorney being the initiator and the real party-in-interest.

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 frivolous claims but we would suggest that recovery of up to 1% of a creditor's net worth as proposed in S. 914 should be modified. This “limitation" can be just as disastrous as the existing magnitude of exposure. The aggregate recovery should not exceed the lesser of $50,000 or 1% of the creditor's net worth-a sum which is more than adequate to deter violations,

CONCLUSION As SRMA noted last week, in testifying on the report of the National Commission, legislation which would lessen credit revenue and/or increase operating costs should not be enacted without first considering the full effect of such legislation on consumers as well as the credit granting industry.

As we have outlined today, S. 914 would, without justification, substantially lessen revenue. Certain aspects of both S. 914 and S. 1630 would unnecessarily increase creditors' costs without a corresponding consumer benefit. NRMA sincerely believes that these unfortunate consequences can and should be avoided. To this end, we would be pleased to work with the Committee and provide further specific recommendations with respect to each of the bills and detailed reasons therefor.

We appreciate the opportunity extended to YRMA to appear today and express our views on S. 914 and S. 1630.

Senator PROXMIRE. Thank you very much.

Mr. KEENEY. And last but not least is the Menswear Retailers of America, Mr. Laurence Nathan.

Mr. NATHAX. I am Larry Nathan, retail consultant to the Office of Minority Business Enterprise, working with minority stores around the country. I am past president of Menswear Retailers, and a former retailer.

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