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MORRISON, FOCRSTER, HOLLOWAY, CLINTON & CLARK

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As explained on pages 1064-1068 of the above-referenced Michigan Law Review article, the inclusion of a geographic limitatlon 18 based on the assumption that consumers generally make major consumer purchases, where the charge card can be viewed as a replacement for installment contract credit, near their homes, to avoid high transportation charges and dealing with unfamiliar merchants. Given this assumption, any geographic limitation adopted should be based on the cardholder's address rather than that of the card issuer. A statewide limitation may be reasonable for small states, such as Rhode Island, but would not be proper for the larger states such as California, New York or Texas. A more realistic geographic limitation that we would offer for the Subcommittee's consideration is a radius of 50 miles around the mailing address of the cardholder. Such a limitation would be inclusive enough to encompass the ordinary shopping sphere while still guaranteeing to the card 18suer that he would not be exposed to a dispute between one of his cardholders and a merchant located several hundred miles away of whom he has no knowledge. It would also be fair to merchants who would be assured when attempting to resolve such disputes that the consumer raising the defense and the merchandise is reasonably available.

Subsection (4) provides that the claim or defense can be asserted in an amount equal to the full amount of credit originally extended if notification is made within three months. It also provides a method of determining the amount as to which the claim or defense can be asserted after six months. Since the status of claims between three months and six months would otherwise be in limbo, it is assumed that the word "three" on page 14, line 2 is a typographical error and that the word "s1x" should be substituted therefor. This correction is supported by your oral remarks in introducing the proposed legislation. 119 Cong. Rec. S. 2811 (daily ed. February 20, 1973).

While a provision that would allow the cardholder to recover the full amount of the transaction from the card issuer, including amounts already paid, for a specified time period might offer the advantage of simplicity of application, we do not feel that it is the proper solution to this question. The purpose of this provision should be to place the cardholder in as good a position as he would have been in had he obtained direct financing from the merchant or had an installment loan assigned to a third party. Clearly, if the purchaser paid a portion of the purchase price in cash to the merchant or obtained financing directly from the merchant, he could only assert his defense as to the balance remaining unpaid. In order to recover the amount already paid, the purchaser would be required to bring an affirmative action against the merchant. Similarly, the California state statutes restricting the holder-in-due-course status of assignees of consumer paper, and most comparable provisions in other states

MORRISON, FOERSTER, HOLLOWAY, CLINTON & CLARK

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that we are aware of, limit the assignee's liability to the amount outstanding at the time that the borrower first asserts his defense to payment. We see no justification for providing greater rights to a cardholder in a bank card transaction than would be available to him if he dealt directly with the merchant or with a third party creditor or assignee. Therefore, we recommend that subsection (4) be revised to read as follows:

(4) the amount of the claim or defense
asserted by the cardholder does not exceed the
amount outstanding, with respect to the purchase
involved, on the date of receipt by the card
issuer of the cardholder's notification of
such claim or defense, and the finance charge
applied thereto after such date.

In addition, a formula for determining the amount outstanding for purposes of section 172 claims and defenses is presently set out in lines 7-15 on page 14. It is our belief that such detailed provisions are more appropriately left to regulations of the Federal Reserve Board. For this reason, we suggest that this formula be deleted and that the following language be added as subsection (b) of section 172:

For the purpose of determining the amount
outstanding under subsection (a)(4), payments
and credits to the cardholder's account shall
be deemed to have been applied in the order
prescribed by regulations of the Board.

There is no explicit requirement in section 172 that the cardholder notify the issuer although such a requirement is implicit in subsection (4). We believe that this requirement should be made explicit. In addition, in order to provide adequate factual information regarding the transaction to permit the card issuer to investigate the complaint, answer the cardholder and provide data that must in fairness be furnished the merchant on the receiving end of the reversed transaction, we suggest that the following language be added after the word "notification" at line 7 of page 14:

and (5) the cardholder gives notice of
the claim or defense to the card issuer.
Oral notice is effective unless the card
issuer requests written confirmation when
or promptly after oral notice is given,
or the cardholder fails to give the card
issuer such written confirmation within
the period of time, not less than 14 days,

MORRISON, FOCASTER, HOLLOWAY, CUNTON & CLARK

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stated to the cardholder when written con-
firmation is requested. Written confirmation
shall, at the card issuer's request, include
facts reasonably sufficient to establish
the claim or defense under this section,
such as specification of the merchant, date
of purchase, amount thereof, the goods or
services purchased, the nature of the
cardholder's defense thereto, and those
acts, if any, that the cardholder has taken
in attempting to obtain satisfaction from
the merchant.

Proposed section 172 also fails to include a definition of "use of a credit card" for purposes of this section. We believe that such a definition should be included to preclude the possible application of this provision to situations involving · payment by check or similar third party payment mechanisms, whether or not such payment results in a credit extension to the cardholder by the card issuer and whether or not a credit card was used to induce the seller to accept the check. Without the inclusion of such a definitional provision, check guarantee programs and check reserve plans might arguably be deemed to be within the scope of this section. To clarify the inapplicability of proposed section 172 to such situations, we suggest the addition of the following language as subsection (c) at the end of section 172:

"Use of a credit card," for purposes of this
section, shall include only an authorized use
and shall be deemed to exclude : (1) purchases
with cash obtained through use of a credit
card; or (2) payment by check, or similar third
party payment mechanism, whether or not such
payment results in a credit extension to the
cardholder by the card issuer and whether or
not a credit card is used to induce the seller
to accept the mechanism.

Relation to State Laws (s. 914, § 173; S. 1630, § 169). We strongly believe that if federal legislation is enacted in this area, it should fully preempt state legislation. This section now provides that more protective state statutes are not preempted "to the extent of the greater protection." This provision may lead to lengthy disputes about which statute, state or federal, provides the consumer with greater protection. The resulting uncertainty in the law can benefit no one. Even absent such disputes, the section seriously underestimates the extremely onerous burden that will be placed on card issuers if they have to comply with a multiplicity of different and very possibly conflicting state and federal regulations. We concur with the following remarks you made in introducing this bill:

MORRISON, FOERSTER, HOLLOWAY, CLINTON & CLARK

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[I]t would be confusing and chaotic to
subject these nationwide credit card plans to
a hodgepodge of conflicting and inconsistent
State law. A national solution is needed to
a national problem. Federal regulation is in
the long-term interest not only of the con-
sumer, but of the bank credit card Industry
as well. 119 Cong. Rec. S. 2810 (daily ed.
Feb. 20, 1973) (emphasis added).

Conforming Amendments (s. 914, § 108). This section 18 incorrectly numbered and should be renumbered as section 107.

Effective Date (s. 914, § 109). This section is incorrectly numbered and should be renumbered as section 108.

More-than-four-installment Rule (s. 914, § 201; S. 1630, § 201 Ititled "Definition of creditor; more-than-fourInstallment rule" 2. S. 1630 deletes subsection (b). Since subsection (6) is a necessary parallel to the amendment set forth in subsection (a), we recommend enactment of this section as set forth in s. 914.

Good Faith Compliance (s. 914, § 206; S. 1630, § 211). s. 914 does not contain the language included in S. 1630 which negates liability for acts done or omitted "in conformity with any interpretation issued by any other agency designated in section 108 unless such interpretation has, prior to the time such act was done or omitted, been determined by the Board to be inconsistent with the Board's rules, regulations, or interpretations." Since many creditors may be subject to the jurisdiction of agencies other than the Board, and may indeed be subject to penalties for non-compliance with the rules and regulations of such other agencies, we endorse the version of this provision included in š. 16 30.

Liability for Multiple Disclosures (s. 914, $207; S. 1630, $ 212). We fully support the intended objective of this section, which 1s to limit an individual to a single recovery for a multiple failure to disclose that is essentially a single error. As presently worded, however, this section could be interpreted to specifically grant to a cardholder the right to additional relief for a card issuer's continued failure to disclose required information. Because section 207 is actually intended to restrict a cardholder's rights to recover for multiple violations of the Truth in Lending Act, and not to grant an additional remedy to cardholders, the language at lines 10-12,

MORRISON, FOERSTER, HOLLOWAY, CLINTON & CLARK

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page 18 of s. 914 and line 24, page 17 and lines 1-2, page 18
or s. 1630 should be changed to read as follows:

entitle the person to a single recovery under
this section; provided however, that this
subsection shall not be deemed to preclude
rights to additional recoveries under sub-
section (a) for continued failure to disclose
after recovery has been granted.

Limitation on Class Action Liability (s. 914, § 208; S. 1630, $ 213). We believe strongly that class actions are Inappropriate in a truth-in-lending context. As was noted by the Court in the landmark Ratner decision, the certification of truth-in-lending class actions may place a crushing burden on financial institutions, while conferring few real benefits on consumers. Furthermore, we believe that an arbitrary maximum on class action liability does not provide an adequate solution to the difficulties presented by the utilization of the class action device to enforce the Truth in Lending Act. An arbitrary maximum on class action liability may, in fact, result in more problems than it avoids. Thus, for example, if a $50,000 maxi mum 11 ab 111ty provision were applied to the class of 800,000 cardholders certified in the Katz v. Carte Blanche case, the cost of distributing the award would far exceed the less than six cents to which each class member would be entitled. Furthermore, any maximum on class recoveries could encourage plaintiffs' counsel to seek certification of several smaller classes rather than one large class, in an attempt to recover multiple maximum awards. In each such action the court would still be required to determine the appropriateness of class action treatment under Rule 23(c)(1) of the Federal Rules of Civil Procedure and to satisfy the notice requirements of Rule 23(c)(2), an exercise that would not only result in an unnecessary expenditure of judicial time and effort, but which notice itself is also likely to generate costs that may far exceed the total amount that any court would determine to be an appropriate liability or penalty for a violation of the Act.

The short comings of the class action device are being recognized more and more frequently by the judiciary. In the overwhelming majority of cases in which the issue of certification of a truth-in-lending class action has been considered, courts have held that the action before them should not be maintained as a class action. Moreover, the recent decision in Eisen v. Carlisle & Jacquelin may threaten the continued viab111ty of the class action device in any consumer context.

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