One way to define the new class of "creditors" to encompass the large companies (who can reasonably be expected to comply with the provisions and whose customers may need the protection of the Fair Credit Billing Act) would be to define this class in terms of those who are "card issuers"-a term already defined in § 103 of the Act.

In addition, the Board believes it is unnecessary to name specifically those portions of the Truth in Lending Act which would be applicable to this new creditor class. (It would appear that additional sections, such as §§ 105, 108, and 111, would need to be added under the proposed statutory structure). The Board believes that the introductory language in § 127 of the Act requiring disclosures only "to the extent applicable," by itself, will screen out those provisions relating to finance charges and annual percentage rates which are inappropriate for 30 day accounts.

Consequently, as an alternative to the proposed additions to § 103 (f), it is suggested that the definition of "creditor' be redrafted as follows:

"The term 'creditor' refers only to creditors who are card issuers, or who regularly extend, or arrange for the extension of credit which is payable by agreement in more than four instalments or for which the payment of a finance charge is or may be required, whether in connection with loans, sales of property or services, or otherwise. The provisions of this title apply to any such creditor, irrespective of his or its status as a natural person or any type of organization." (Additions indicated.)

Other conforming amendments (with additions and deletions indicated) are suggested as follows:

108 (1) "The term 'open-end credit plan' refers to a plan prescribing the terms of credit transactions which may be made thereunder from time to time and under the terms of which either a finance charge may be computed on the outstanding unpaid balance from time to time thereunder, or a credit card is issued."

121 (a) "Each creditor shall disclose clearly and conspiculously, in accordance with the regulations of the Board, to each person to whom consumer credit is extended [and upon whom a finance charge is or may be imposed] the information required under this chapter or chapter 4."

121 (b) "If there is more than one obligor, a creditor need not furnish a statement of information required under this chapter or chapter 4 to more than one of them."

§ 122 (a) “Regulations of the Board need not require that disclosures pursuant to this chapter or chapter 4 be made in the order set forth in this chapter, and may permit the use of terminology differing from that employed in this chapter if it conveys substantially the same meaning.

122(b) "Any creditor may supply additional information or explanations with any disclosures required under this chapter or chapter 4. Disclosure of Fair Credit Billing Rights—(§ 104 in S. 914 and § 105 in 8. 1630) Section 127(a) of the Act would be amended to require creditors to provide customers with a semi-annual statement of the customer's billing error rights (8161) and the restrictions imposed on adverse credit reporting (§ 162). The Board questions whether annual notice would not be sufficient, particularly in view of the large number of inactive accounts.

Disclosure of Billing Contract—(§ 105 in S. 914 and § 106 in S. 1630)

The Board foresees no problem with requiring the creditor's address for receiving billing inquiries to be placed on the periodic statement.

Chapter 4-Credit Billing

Correction of Billing Errors-§ 161

Under this provision, if within 60 days a cardholder gives the creditor written notice (not on the creditor's bill itself) of a billing error, and also gives its amount and his reasons for believing it is in error, the creditor must: (1) within 30 days send a written acknowledgement, and (2) within two complete billing cycles (in no event later than 90 days) either make appropriate corrections, or send a written explanation why the creditor believes the account to be correct. The Board believes that the provision will be helpful in assuring that consumers receive a prompt and fair hearing on questions about billing statements, which has sometimes been denied them as they have attempted to correspond with an unresponsive computer.

As a technical matter, the Board questions whether the word "accounts" in section 161(a)(3)(B)(i) (line 8 on page 5 in S. 914 and line 18 in S. 1630) wasn't intended to be "amounts."

Prohibition of Retroactive Finance Charges—(§ 167 in S. 914 only)

Section 167 in S. 914 is apparently designed to prohibit the use of the previous balance method of computing finance charges, as well as the average daily balance when it involves a "free ride". While the Board believes that valid questions have been raised concerning the fairness of the previous balance method (under which partial payments are not deducted when computing the finance charge), it questions whether the average daily balance method, particularly when coupled with a free ride, is, in fact, objectionable. To the Board's knowledge, the use of such method has not occasioned the consumer concern which now surrounds use of the previous balance method, and its use has not been prohibited in those States which have outlawed the previous balance method. Since use of the average daily balance method with a free ride takes account of payments when made, and involves assessment of finance charges only on the balances outstanding each day in the month excluding current purchases, its use appears fair to both consumers and creditors, and the Board questions the wisdom of its prohibition. An undesirable side effect of the prohibition may be the elimination of the "free ride," to the consumer's detriment.

Length of Billing Period—§ 163

This provision prohibits the imposition of finance charges unless a biling statement is mailed at least 14 days prior to the date by which payment must be made to avoid imposition of such charges. The Board supports the attempt to cure the "shrinking billing period" problem which may deprive consumers of the ability to avoid finance charges.

Prohibition of Minimum Finance Charges-(§ 168 in S. 914 only)

This section in S. 914 would prohibit the imposition of any minimum finance charge unless (1) it is a fixed charge imposed uniformly on all accounts without regard to the amount of credit outstanding or (2) it is imposed on all accounts where the minimum payment has not been received during the two preceding billing periods.

The Board questions the need for a Federal prohibition on minimum charges, particularly since, as a result of the Truth in Lending Act, they usually do not exceed 50¢. It also seems reasonable to permit creditors to impose a minimum finance charge on those accounts which require an extra billing because the customer decides to carry forward a small balance. While the prohibition can be avoided under the proposal if the charges are imposed uniformly on all accounts, this provision may have the undesirable side effect of encouraging the blanket imposition of such charges which, to the Board's knowledge, is now uncommon. In addition, the provision permitting imposition of minimum finance charges when the minimum periodic payment has not been received during the two preceding billing periods would appear to confuse finance charges with bona fide late payment charges, which are not finance charges under the present statutory scheme.

Use of Cash Discounts—(§ 169 in S. 914 and § 166 in S. 1630)

This section would prevent banks or other third party card issuers from prohibiting a merchant offering a discount to induce a cardholder to pay by cash or check rather than using his credit card.

Any discount of 5% or less offered by the seller is excluded from the finance charge if (a) it is offered to all prospective buyers and (b) its availability is disclosed in accordance with regulations of the Board.

While caution should be exercised in excluding any cost of credit from the finance charge, the Truth in Lending Act as it now stands is an impediment to merchants offering a lower cash price to customers who are willing to pay cash in lieu of using their credit cards. (A discount available only to cash buyers is an additional charge to credit purchasers.) The Board therefore cautiously supports this provision, with the suggestion that in order to be effective, the provision should be expanded to exclude discounts of 5% or $5, whichever is greater. As the proposal is written, it would not bring relief to many vendors of low cost merchandise who desire to offer cash discounts as a competitive tool. For example, in order to make a cash discount attractive in the sale of gasoline, a 4 or 5¢ per gallon differential between cash and credit purchasers may be necessary. Such a 4¢ or 5¢ per gallon discount translates into

a discount which exceeds 5% (given an average price of 40¢ per gallon), but the dollar amount of the cash discount would rarely, if ever, exceed $5.

2

Rights of Credit Card Customers—(§ 172 in 8. 914 only) 2

By this provision in S. 914, credit card issuers are made subject to all claims and defenses (other than tort) arising out of any purchase transaction in which the card is used, provided:

(1) A good-faith attempt has been made by the cardholder to obtain satisfaction from the merchant,

(2) The amount of the transaction exceeds $50,

(3) The transaction occurred in the State in which the card issuer maintained a place of business, and,

(4) The amount of the claim or defense does not exceed the full amount of the transaction if notice is given within three months or, if notice is given later than 6 months, the unpaid balance.

The Board believes that this section is an improvement over last year's corresponding provision in S. 652 in that it takes account of that provision's possible application to tort claims, transactions in which the card is used as a substitute for cash, and transactions outside the card issuer's area of influence over merchants. However, in this latter respect, the Board believes the geographic limitation could be improved by drafting it in terms of the initial transaction having occurred either within 100 miles of the card issuer's place of business or within the same State in which the card issuer maintains a place of business, whichever is greater. The fact that a District of Columbia resident makes a purchase in the Virginia suburbs, for example, should not deprive that cardholder of the protections of the provision. In addition, the Board believes that a $100 minimum would be a better measure of the distinction between a credit transaction and one in which the card is used as a substitute for cash.

As the provision is written, there seems to be a gap between three months and six months where it is unclear whether the card issuer is subject to claims for the full amount of the transaction or just the unpaid balance. It may also be desirable to have a cut-off period for notice of claims and defenses after which the assignee is freed of responsibility for the product.

Conforming Amendments—§ 108

By this provision, §§ 166, 167, and 168 are added to § 111 (d) of the Act, which provides that except as indicated, the Act does not affect the validity or enforceability of any contract or obligation. It appears that the sections prohibiting the imposition of finance charges when bills are not mailed within 14 days (§ 163), outlawing contractual prohibitions against merchants offering a discount (§ 169 in S. 914 only), prohibiting tie-in services (§ 170 in S. 914 only), restricting the right of offset (§ 171 in S. 914 only), and making card issuers subject to claims and defenses (§ 172 in S. 914 only) should also be added to this provision.

Title II-Amendments to the Truth in Lending Act

More-than-four-instalment rule-§ 201

The new Fair Credit Billing provisions make inclusion of the more than four instalment rule into section 121(a) inappropriate and therefore the Board suggests that § 121 (a) be amended as indicated in our comments on § 103. Transactions involving more than four instalments would specifically be covered by the new definition of "creditor" also suggested in that discussion.

Points or discounts presumed to be passed on and included in finance charge— (§ 203 in 8. 1630 only)

This provision in S. 1630 is intended to require all seller's points to be included in the finance charge. Unfortunately, the inclusion of seller's points in the finance charge results in some very complicated disclosures. On the assumption that simplifying disclosures may be more important than adhering to a theoretically precise position that all charges—no matter how indirectly imposed-must be included in the finance charge, the Board's staff is reviewing the question whether it might ultimately be more beneficial to take the position that seller's points need not be included in the finance charge. Therefore the Board is not presently prepared to support this proposal.

2 The catch line "Rights of Credit Card Customers" is used in S. 1630 for a provision identical to § 166 "Prompt Notification of Returns" in S. 914.

Repeal of exclusion of charges for appraisals and credit reports from finance charge (§204 in S. 1630 only)

The Board supports this provision in theory, but notes that the effect of this change on the APR would be so minimal as to raise questions whether it is worth the reprinting of forms and restructuring of disclosure procedures which it would entail.

Reports on annual percentage rates applicable to major types of closed end credit-(8206 in S. 1630 only)

This provision in S. 1630 requires the Board to publish a statistical series showing an average and a distribution of annual percentage rates for at least three major types of closed end consumer instalment credit: new automobiles, mobile homes, and personal loans. Data now published by the Board at the request of the Committee on Interest and Dividends-in the G.10, J.3, and G.11 releasesmeets the substance of this provision and it recommends against making this a statutory requirement.

Liability of Assignees—(§ 207 in S. 1630 only)

This provision in S. 1630 specifies that any criminal or civil action that may be brought against the original creditor may be maintained against any subsequent assignee where the violation is apparent on the face of the instrument.

While the language in the Act is ambiguous, section 181 may already place such liability upon an assignee. This section could, however, stand clarification and the Board is inclined to support this recommendation, with the suggestion that the proposal be combined with the existing § 131.

Full Statement of Closing Costs-(8 208 in S. 1630 only. A related provision appears as § 209 in 8.914)

This section in S. 1680 requires a full statement of "closing costs" to be given the customer prior to the time any downpayment is made in non-real property transactions. Since the commonly understood definition of "closing costs" encompasses charges incurred only in connection with real property transactions, the meaning of the provision is uncertain.

The Board supports the concept of early disclosure in real property transactions encompassed by the provision's requirement of disclosure at the time the creditor makes a real property commitment.

Good Faith Compliance—(§ 206 in S. 914 and § 211 in S. 1630)

While both bills reflect the Board's recommendation in its Annual Report for 1971 that a provision be inserted in the Act giving a creditor a good faith defense where he has relied on a rule, regulation or interpretation of the Board which has subsequently been declared invalid by the courts, S. 1630 would expand this provision to encompass interpretations of other enforcement agencies. Since the Board is the sole agency with rule writing authority under the Act, it seems desirable to confine this provision to rulings of the Board.

Limitation on Class Action Liability—(§ 208 in S. 914 and § 213 in S. 1630)

These provisions specifically authorize the bringing of a class action in appropriate circumstances and set a limit on the amount of recovery by the class-the greater of $50,000 or 1% of net worth of the creditor in S. 914 and $100,000 in S. 1680.

The Board believes that potential class action liability is an important encouragement to the voluntary compliance which is so necessary to insure nationwide adherence to uniform disclosure. It believes that any inquiry into the justification for class actions should not be restricted to whether the possible liability in such suits exceeds the actual damages incurred by the class members. Equally important, in the Board's view, is the prophylactic effect of the threat of class action exposure. That threat elevates a possible Truth in Lending law suit from the ineffective "nuisance" category to the type of suit which has enough sting in it to insure that management will strive with diligence to achieve compliance. While the Board believes that the class action vehicle in some form should be preserved for appropriate Truth in Lending suits, it is conscious of the difficulty of formulating an equitable rule which will preserve its effectiveness without, at the same time, exposing legitimate business to unwarranted claims in frivolous law suits. In its Annual Report the Board suggested that the best way to meet this problem was to set an upper limit on the aggregate amount of possible class action recovery (the greater of $50,000 or 1 percent of net worth was suggested

by the Board) while, at the same time, giving the courts the authority to set the amount of actual recovery within this limit in light of the circumstances of the particular case-for example, the severity of the violation and the size of the offender.

Laying aside the question of what the appropriate ceiling in a class action should be, the structure of the civil liability provisions in S. 914 appears preferable to the S. 1630 version. The Board is not aware of any controversy over the present civil provisions with regard to individual recovery. Nevertheless under S. 1630 the individual's right to twice the finance charge in the event of a proven violation has been omitted in favor of "such additional amount as the court may allow" above actual damages. While conceivably the recovery granted by the court under this flexible standard could result in an award in excess of twice the finance charge, it appears that a fixed recovery which can be calculated by the consumer (for example on a used car contract with $400 of finance charges) would more surely insure that the encouragement to private enforcement intended by the present civil liability provisions would be preserved. There is a minor problem with the numbering of this section in S. 914. This provision contains a new 8130 (b). However, there is already a § 130 (b) in the Act which would not be affected by the amendment. It is suggested that the new § 130 (b) be renumbered § 130 (1).

In order to broaden the unintentional error exculpatory provision in section 130 (c), section 208 (c) would insert "title" for "chapter." Elsewhere the broadening amendments have simply added "and Chapter 4" rather than switching to "title." Consistency suggests that this designation should also be used here.

In § 213 (c) of S. 1630 the references to 206, 207 and 208 should be to 211, 212 and 213 respectively.

Credit Life Insurance and Accident and Health Insurance-(§ 216 in 8. 1630 Only)

This provision in S. 1630 would require the creditor to calculate and disclose an annual percentage rate for credit life insurance premiums in addition to the APR already being disclosed as a measure of the cost of the credit. Section 142 of S. 1630 would also require this additional APR in certain credit advertisements. The Board questions whether these provisions are in the consumer's best interest. The Truth in Lending disclosures are already exceedingly complex, and the addition of a new rate would further complicate them and could detract from the more important disclosures already being made.

Advertising of Open End Credit Plans—(§ 217 in S. 1603 Only); Advertising of Credit other than Open End Plans—( § 218 in 8. 1630 Only)

The Board has outstanding a proposal for restructuring the advertising provisions of Regulation Z. It is designed to reduce the requirements in open end credit in line with the thrust of the proposed § 217 in S. 1630. However, the bill selects different items for inclusion in an open end credit advertisement than does the Board. The Board believes that the present statutory requirement that any "freeride" period be shown is a good one; the proposal would not include this requirement. On the other hand, the bill would require disclosure of the minimum periodic payment, whereas the Board's proposal would not.

Section 217 would permit an open end creditor to advertise the annual percentage rate without "triggering" the additional advertising requirements. Unfortunately, while the rate, by itself, is a meaningful term in closed end credit, it is not meaningful in open credit. For example, a variety of creditors may all advertise an 18% annual percentage rate when there may be major differences which make one plan much more costly than another. One creditor may use the "average daily balance" method where payments and credits are taken into account on the date made in assessing the finance charge. Another may use the "adjusted balance" method in which all payments and credits are considered as if made on the first day of the billing cycle. Another creditor may have an additional transaction charge which would not be reflected in the rate quoted in an advertisement. The Board questions the wisdom of this provision.

With regard to other-than-open-end advertising (§ 218), the Board's proposal to amend Regulation Z would prohibit use of the add-on or discount rate and the flexibility of the Board's rule may be preferable to the proposed statutory prohibition. Likewise the Board's proposals for amending the Regulation Z requirements once full disclosure is triggered may be preferable to the other proposed statutory changes.