Advertising: More-Than-Four-Installment Rule—( § 219 in 8. 1630 Only)

This provision of S. 1630 would require creditors who do not separately identify the finance charge on credit transactions involving more than four installments to state clearly and conspicuously in any advertisement offering credit: "The cost of credit is included in the price quoted for the goods and services."

The need for this required Federal language in such advertisements seems highly questionable. Where the creditor advertises his price, the consumer may be concerned as to whether he has been told the full price, but it is doubtful that he will care whether the credit charge is presumed to be included in the price or whether no charge for credit is claimed. To him, the price is the price. The Board suggests caution in adopting this provision.

Effective Date-(§ 213 in S. 914 and § 220 in S. 1630)

As written, all the Truth in Lending amendments in Title II take effect upon enactment. This ignores the fact that § 209 (disclosure of closing costs) and § 211 (identification of transaction) in S. 914, specifically direct the Board to write regulations to implement these provisions, and creditors will need lead time to comply with one or both of them. The following is suggested as a possible alternative to the proposed § 213 in S. 914. "Except for sections 209 and 211 which take effect upon the expiration of one year after the date of their enactment, Title II shall take effect on the date of its enactment." (Different section numbers are applicable to S. 1630.)

Senator PROXMIRE. Our first witness this morning is Commissioner Betty Furness, Department of Consumer Affairs, New York City.

We are happy to have you here. You are well-known nationally as an outstanding consumer advocate. It is a pleasure to have you appear before the committee.

STATEMENT OF BETTY FURNESS, COMMISSIONER, NEW YORK CITY DEPARTMENT OF CONSUMER AFFAIRS

Ms. FURNESS. Good morning, Senator Proxmire. It is a pleasure to be here with you today.

I attempted to testify the last time you had hearings on your Fair Credit Billing Act, and due to bad weather, I was circling overhead as your hearings were completing, so I never got to give my testimony and then subsequently your bill got grounded.

This time we have better weather and I made a safe landing. Let's hope that trend will continue for the Fair Credit Billing Act.

I applaud your bill and your efforts to make credit transactions more satisfactory for the consumer. Consumers want credit, need credit, and use credit, though in some instances credit seems to be using them. It's too late to discuss whether or not the extensive use of credit is a good idea. It's here. What we must do now, and what you are doing with bill S. 914, is try to make credit work as well for the buyer as it does for the seller.

Fair credit billing is a phrase that rings with credibility. And that's all we ask.

well, fairness and

The 13 points raised in S. 914 are valid and important. The inclusion of each point reflects specific abuses that occur daily.

I would like to address myself to three points from chapter 4.
You start with corrections of billing errors, and so shall I.

my

In my capacity as commissioner of New York City's Department of Consumer Affairs, I have reviewed recent complaints received by office and, let me assure you, you've touched a nerve with your plan to see that billing errors are acknowledged within 30 days and resolved within 90 days. Let me cite a few examples of consumers who will be very grateful to you if you accomplish this.

A woman in South Ozone Park ordered a pair of trousers in September 1972. In October, she was billed for them, though she hadn't received them. She wrote to the store asking them to credit her account with this item until it was delivered. As of March 1973, they are still billing her, complete with finance charge, telling her her account is in arrears. So is their delivery. Still no trousers.

Mrs. E. H. in Brooklyn wrote to us:

Back in November 1972, we ordered a set of dishes. The dishes were never sent as the store sent a card out in December saying they would not be able to obtain them for several more months. We wrote five or six letters telling them to take the item off my daughter's charge. I even took the time and wasted carfare going up to the store, as I was told their billing computers just spew out bills with no regard to letters from the public correcting wrong billings.

I was assured we would never be billed again, and that the credit charges which have been placed on the last two bills would be taken off as the merchandise for which the credit charges were being put on never was sent out, as they did not have the merchandise.

As you'll see, the new bill has the dishes still on it, as well as the credit charges.

Another New York City woman, dealing with the same store, got a bill in October 1972, charging $14.98 for an item she hadn't purchased. She asked for a copy of the invoice and instead got a finance charge of 50 cents.

Let her tell it:

After 3 months, I received a form to fill out as to why I was delinquent. Based on this, I finally received a copy of the aforementioned invoice. On this invoice there is no imprint of a charge plate, and the signature bears no resemblance to mine.

I will not bore you with the details of the letters and telephone calls that ensued. Suffice it to say that this has been a tremendous nuisance to me.

On February 20th, I received a form letter once again, stating that I would be credited with $14.98, plus $1.50. I assumed the matter to be closed at that point. However, on my next statement, I found a credit only for the $1.50. Not only did the $14.98 still remain on my statement, but a new 50-cent service charge. On February 28, 1973, I was informed that my charge account had been discontinued, and further action will be taken.

Now, those are just a sample of the complaints, but they'll suffice to prove my point. And it's not only housewives who can't get their bills straightened out. I have letters from CPA's and lawyers who can't get past computers and through to real people.

I've even had my own personal experience in trying to unscramble a bill. Failing to get action, I finally took my own advice and wrote to the president of the store. He fixed it and wrote back:

As it happens, our company entered into a servicing contract in October 1971, with a very major reputable company. Since that time, we've had nothing but grief with our accounts. Customer inquiries have increased 1,000 percent and it is only now that we are getting them to a reasonable level.

He does not define "a reasonable level." Perhaps a reasonable level of inquiries could be defined, but a reasonable level of unanswered and unresolved inquiries should be zero.

Your section 161 calling for a reply to an inquiry within 30 days, and a resolution within 90 days, seems reasonable for all parties.

Next, I would like to discuss section 167 relating to a ban on retroactive finance charges. I don't have any recent letters on this subject and I think I know why.

Truth-in-Lending requires that our bills carry notice of the amount of finance charges. People who have read the information think they

understand it. In most cases, it amounts to 112 percent per month, or 18 percent per year on the unpaid balance. All bills carry the same information and consumers figure the charges are all computed in the

same manner.

You know they're not and I know they're not and the stores know they're not, because they're the ones who invented the various different systems of computing, but the average person paying the minimum amount due this month hasn't yet figured out that some stores charge a lot more than others, so they haven't written to me to complain because they don't know they're being taken.

While credit agreements technically inform the buyer how the finance charge is computed, they certainly don't tell you how it works in clear and understandable language, and if they did, the buyer still has no choice but to sign up for whatever system the store uses if he wants to deal with that store.

Stop a billpayer on the street and ask how he thinks finance charges are arrived at. He'll tell you that you pay 112 percent a month on the unpaid balance. And the poor soul thinks if he gives the matter any thought at all, that the unpaid balance is the amount left over after he made his last month's payment.

If the store uses the adjusted balance system, our man in the street is right.

But what our man in the street, and his checkwriting wife don't realize, is that stores have found two other systems of computing finance charges, neither of which are as easy to understand or as advantageous to the buyer. They are, of course, substantially more advantageous to the seller. For "advantageous" read "more profitable" and these systems make a mockery out of truth-in-lending.

One, which many stores use, is the previous balance system. Under this system, no credit is given for payments made during the current month; the charge is figured on the total amount due, not on this month's bill, but on last month's bill.

This previous balance system has proven so unfair to the buyer that it has resulted in a number of lawsuits which have lead some stores to realize that it's probably doomed. Therefore, a number of stores have turned to yet a third system of computing-called the average daily balance.

They claim it is more advantageous to the consumer, and in some cases it is. It is for buyers who pay their bills early in the month because that obviously means that their average daily balance is lower than if they pay late in the month.

But this very feature makes the average daily balance discriminatory. People with available cash can pay earlier. People with enough available cash can pay early enough to avoid a finance charge altogether. The rich stay richer.

But the people who have little cash, who have to wait for a paycheck, or perhaps a social security or pension check, can't pay till later in the month, and their finance charge increases daily. The poor get poorer.

In your statement, Senator Proxmire, accompanying the introduction of your bill, you outlined the various results of different types of computing on one specific transaction. A purchase of $100 is made on March 1. A payment of $50 is made on April 30.

Under the adjusted balance system, the finance charge is 75 cents. Under the previous balance system, the finance charge amounts to $1.50.

Under one system of computing, the average daily balance, the charge is $1.50.

Under another system of computing the average daily balance, the charge is $3.

I don't have to tell you which the buyer would prefer.

But the problem is the buyer has no choice. Not only that, he doesn't even realize that these variations exist.

But they do exist and, I repeat, they make a mockery out of Truthin-Lending. What kind of truth makes one store arrive at a charge of 75 cents and another arrive at $3, using the same set of figures to start with?

The argument has been raised that if the previous balance system is so bad-and it is why don't the States outlaw it, since States traditionally deal with their own local interest rates? That's easier said than done. Some States have done away with it, but others-New York, for example haven't managed to. The previous balance system was challenged in the State courts. A lower court found it illegal.

The decision was appealed to the court of appeals, New York State's highest court, and that court found the system was legal despite a State statute which requires that finance charges on charge accounts be based on the consumers' "outstanding indebtedness." The court said this phrase did not necessarily mean the consumers' outstanding indebtedness at the time of the bill.

It's clear that we need help in New York. This type of computation may be legal, but it isn't fair-which brings me back to the title of your bill.

Fair is fair. And what's fair in one State is fair in another. If the State legislatures cannot, or will not, move to stop these unfair and discriminatory billing practices, Congress must move on behalf of the people.

Let me go back for a moment to the first point discussed, that of settling disputes over billing. Once it is established that disputes must be settled in 90 days, the mechanism will exist in which the buyer can get the attention of the seller on matters of faulty, nonfunctioning, or undelivered merchandise. The buyer can withhold payment on such items and raise, as a defense, the argument that the merchandise is not satisfactory.

That kind of dispute, and its resolution, has traditionally been a matter between the two parties to the transaction, the buyer and the seller.

But in recent years, another party has stepped into the middle of many of these transactions. Banks have issued credit cards, making it possible for a buyer to get credit in countless stores where he doesn't have his own charge account. This has been touted as a great convenience, and indeed it is. More than 12 million families have found it convenient to use these cards in an enormous variety of places of business in their hometown, and in anyone else's hometown.

But this convenience isn't all that convenient in the case of defective merchandise. Though a buyer can stop payment on a nonworking TV set bought on his charge account at a department store, he has

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no such right to stop payment to the bank if he bought the set through his bank charge.

The bank can now say it is not in the TV business, but only in the credit business. The bank paid the merchant, and now the buyer must, in turn, pay the bank. Never mind if the set doesn't work. If the merchant doesn't want to make good on the set, he doesn't have to. He has his money and he's home free.

Under section 172 of your bill, this bankers' immunity, called holderin-due-course, would be abolished as it relates to bank credit cards.

If the buyer fails to get redress from the merchant, he would then have the right to stop payments to the bank. The bank, in turn, could put pressure on the merchant to make good on the transaction by threatening to discontinue his credit card service. Or the bank could charge the item back to the merchant.

This would put buyer and seller back in two-party status. A merchant is far more likely to make good if he hasn't been paid. If he chooses not to make good and sues the buyer, the buyer again has the legal defense that the merchandise is no good, the defense that he now loses when he buys with his bank credit card.

There are two points in section 172 that seem to diminish the worth of that section. I don't know why the abolition of holder-in-due-course should start at $50. A $30 faulty vacuum cleaner is as annoying as a $50 faulty vacuum cleaner, and I feel a merchant should be equally responsible for both. I suggest you consider lowering the $50 amount. I am also disturbed by the fact that the initial transaction must occur in the same State as the State in which the card issuer maintains a place of business. Some metropolitan areas such as Washington and New York cross State lines, and it would seem unfair to buyers making purchases only a few miles from home not to have the same defenses and protections as those buyers in their immediate neighborhoods.

While my own constituency lives and buys in New York City, I can't help but feel that buyers from Newark and Passaic should have the same protections when using bank credit cards in our stores.

Mr. Proxmire, we hear a great deal today about consumer abuses and consumer complaints, and those of us who are trying to assist the consumer are constantly asked what are the most frequent. Lists have been compiled by everyone receiving complaints and they are duly recited.

Nondelivery of mail order items, repairs to automobiles, repairs to appliances, et cetera. The word "credit" seldom turns up. But it is my opinion that credit is the No. 1 consumer problem, if not the No. 1 source of complaints.

Consumers don't write letters of complaint about credit for a variety of reasons. They're embarrassed. They don't want anyone to know they're in money trouble. They're afraid the problem is a result of their own ignorance or lack of understanding of how the system works.

They don't understand how different systems of computing finance charges can result in a 112 percent per month charge turning out to be, not 18 percent a year, but perhaps 180 percent, or, in an extreme case, 360 percent a year.

They don't understand and they shouldn't be asked or expected to understand. This is where you come in.