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This well-thought-out and comprehensive Fair Credit Billing Act plugs many loopholes that have been craftily crocheted to catch unsuspecting consumers in their expensive threads.

All the current practices that this bill seeks to correct are, indeed, legal. What they are not is fair.

The purpose of this bill is simple-to bring equity and justice to the credit marketplace. The two parties to credit transactions are hopelessly uneven-in terms of financial strength, legal knowledge, and drafting resources. That is why Congress must set fair standards for consumer credit. This bill will do that, and I support it.

Thank you.

Senator PROXMIRE. Thank you, Ms. Furness. That is a superlative statement. I appreciate the way you started off with such persuasive and understandable examples. I can see that your experience in the media has stood you in good stead to describe examples that anybody can understand and appreciate and I just wish you were in the Senate.

Ms. FURNESS. Thank you, Senator.

Senator PROXMIRE. Tell me what kind of record of complaints does your office have about billing problems altogether! You gave examples, of course.

Ms. FURNESS. I have a number of other examples like those cited. That is examples of not being able to get through to the computer. That is the frustration involved when the consumer knows he is right and wants something done.

Senator PROXMIRE. Have those been increasing or what?

Ms. FURNESS. I really don't know. I have been in this job a little over a month and I am not sure. I imagine it bubbles along about the same. But that is about the only kind of complaint that gets written down.

The more complicated credit transactions don't get written about.

Senator PROXMIRE. It is sometimes argued that abolition of holderin-due-course action is not in the best interests of the consumer, that it would cause smaller retailers to go out of business and thus lead to more concentration and less competition or that it would give commercial banks too much power over retailers in the types of products they offer for sale.

Have you considered these arguments in arriving at your position in restricting holder-in-due-course?

Ms. FURNESS. Yes, I have. Let me address the question of the small retail stores. I want them to exist; I want them to prosper. The only small stores that run a risk of being put out of business with abolition of holder-in-due-course are those not making good on bad merchandise. They are indulging in bad practices in the first place. If a merchant does not make good on a transaction, I am not sure that he deserves to stay in business.

So it might, indeed, put a few small retailers out of business, but they are the type that I don't think we need. They are the type that give all business a bad name.

Senator PROXMIRE. Do you think most consumers really understand how the different billing systems work on revolving charge accounts ?

Ms. FURNESS. I certainly do not. I wouldn't talk to unsophisticated consumers on this subject, but when I talk to the most sophisticated consumers, they are stunned when they learn the difference between the three systems. It is very hard to explain even to sophisticated consumers just how those three systems work.

Senator PROXMIRE. Last Friday, a witness for the retail industry argued that standardizing the various billing systems would derogate the objectives of the Truth-in-Lending Act. Do you believe Truth-inLending would be strengthened if there were one common billing system?

Ms. FURNESS. There is no question in my mind about that because, as I illustrated in my testimony using the same given set of figures, these various systems are now able to come up with such divergent results that it is appalling.

The Truth-in-Lending Act initially was passed with the sole purpose of making it possible for consumers to tell the difference between different kinds of credit and to shop wisely for credit but they can't shop wisely for credit as long as these systems are as complicated as they are.

Senator PROXMIRE. Section 208 of S. 914 would limit a creditors' class action under Truth-in-Lending to $50,000 or 1 percent of net worth, whichever is greater. Thus, in the case of a large multibillion dollar bank, the maximum penalty can be as much as several million dollars.

Section 213 would set a maximum limit of $100,000 regardless of sales. I should say section 213 of the Sparkman-Brock bill. Do you think the penalty provisions of the Sparkman-Brock bill are substantial enough to enforce compliance by industry?

Ms. FURNESS. Frankly, I don't. I far prefer that section of your bill.

Senator PROXMIRE. I think you make a good point about the geographic limitations. S. 914 would allow the card holder to enforce a claim against a bank if the transaction occurred in the same bank. You indicated this might discriminate against New Jersey consumers using a card to shop in New York.

I agree that is a problem. But there is a greater problem. What if New Jersey banks were to issue credit cards to New York City consumers? Under 914, these banks would be immune to card holder defenses and New York holders would be deprived of protection.

Because of this, New York banks would be placed at a competitive disadvantage with New Jersey banks. Wouldn't you agree if there is to be a geographic limitation, it should be based on metropolitanwide areas?

Ms. FURNESS. Absolutely. That must be defined both in the case of New York, and also here. Virginia is right next door. People are not used to thinking in terms of being in another State. It is a shopping area. Surely that whole area should be embraced in this concept.

Senator PROXMIRE. Last year, I voted, and I think the other principal cosponsors of my bill voted against our own bill, S. 652, because vital consumer safeguards were deferred from the billing. I felt no bill was better than a weak and limited bill.

Would you support this position if we can't pass a strong bill this year?

Ms. FURNESS. I certainly would, Senator. I'll tell you why. There is a big feeling abroad that once a bill is passed that has such a delightful title as yours, the Fair Credit Billing Act, that the problems are solved. Then the consumers who don't understand the difference between, for instance, the various systems of computing on revolving charge accounts assume it is a good bill and that everything is taken care of. If it turns out not to be a good bill everything is not taken care of.

I was very sad that you felt it could not help, but applaud the decision. It is a question of doing it right or not doing it at all.

Senator PROXMIRE. Well, thank you very, very much, Ms. Furness. This was most, most helpful testimony. I am delighted to have it and, as I say, I wish you could be on the floor of the Senate to vote with us and in committee.

Ms. FURNESS. I would like to be there for that moment. Thank you so much.

Senator PROXMIRE. Mr. Mandell, Lewis Mandell, University of Michigan. I beg your pardon, I should say Dr. Mandell. I know how hard you have to work to get that, and you might as well enjoy the title.

Why don't you go ahead and deliver your statement? If you skip any part of it, the entire statement will be printed in full in the record. STATEMENT OF DR. LEWIS MANDELL, UNIVERSITY OF MICHIGAN

Dr. MANDELL. Thank you.

I am Lewis Mandell, and I am study director in the economic behavior program of the Survey Research Center of the University of Michigan's

Institute for Social Research. My testimony is based upon several nationwide studies that I have conducted, dealing with consumer finances, credit, credit cards, and knowledge and understanding of credit.

Some reference was made to a book of mine, "Credit Card Use in the United States," and in some of the earlier testimony, I think, when you introduced your bill in the Senate, Mr. Chairman, reference was made to my book. Many of my findings are summarized in books and articles, but the testimony I will offer today will go further than published findings to draw implications relevant to the subject matter of these hearings.

To begin with, I would like to go on record as basically agreeing with the provisions of the Fair Credit Billing Act. While I oppose the unessential proliferation of Government regulation affecting our economic system, my studies of credit cards over the past 3 years have led me to the conclusion that surveillance and some regulation of the credit card expansion is necessary.

I would like to recount about how I got interested in credit cards and some of my findings which lead to my conclusions.

I began my studies of credit cards as an individual who used and enjoyed the use of his credit cards and who, as an economist trained in monetary theory, saw great promise in the ability of credit cards to facilitate transactions, reduce the volume of checks, and lead to a checkless-cashless society, a slogan which was in some prominence a number of years ago.

I still use my credit cards because they provide me with great service at no cost, but I feel guilty because someone must be paying this cost. However, I no longer believe that credit cards facilitate transactions or reduce the volume of checks, and I sincerely feel that credit cards, as they are now constituted, are an inappropriate medium to the promised checkless, cashless society.

When I began my studies of credit cards, I felt that most people regarded them as I did and appreciated them for their safety and convenience. We were able to pay for airline tickets when it was needed or avoid the necessity of writing out a check, particularly in areas where our local banking system did not serve. I personally used bank credit cards. I don't use travel and entertainment credit cards, which, I have come to believe, although expensive, may be the fairest system of credit cards to the consumer.

However, when I tabulated the results of my 1970 survey, I found that only 26 percent of the population thought that credit card use was good, while 41 percent thought it bad, which was surprising to me. In my naivete, I felt that the cards were serving a better purpose.

Without going into extensive detail, I found that attitudes toward credit cards and use of credit cards differed by income group. Higher income families were more favorably disposed toward credit cards because they used the cards for their convenience and tended to pay their bills on time, thereby incurring little or no credit card debt.

Lower income families, on the other hand, saw as the major advantage of credit cards, the opportunity to incur consumer debt in a convenient and respectable manner-I say respectable because the use of a credit card retains the anonymity of the user. A person going into the store and pulling out his credit card, who may not have the means of paying, and who may have to incur installment debt on his purchase is shielded from this knowledge by the use of his card. For all the store clerk knows, this person may be wealthy and maybe is using the card merely for convenience.

For these reasons, I think credit cards have become very widely used.

Lower income credit card users are far more likely to incur debt on their credit cards. They are also more likely to treat this debt as installment debt, paying it off a little at a time.

To my mind, the current movement of much consumer credit from the installment plan to the credit card-revolving credit system has two dangers :

First, the credit card system makes the purchase of an item and the undertaking of additional debt simultaneous. The consumer who must pay for his purchase over time is deprived of the time period between purchase decision and negotiation of debt to consider whether such additional debt is warranted or wise.

A second drawback of credit card debt is its high cost, 18 percent per annum in most States. In many cases, regular users of credit card debt could save up to a third of their interest payments by borrowing at a lower cost lender such as a bank or credit union.

Preventing this, however, is the general ignorance of finance charges on credit cards which I have found to apply to users and nonusers alike.

In your presentation of the Fair Credit Billing Act, Senator Proxmire, your argue that with the retroactive billing system "* * * we have a clear case of the poor subsidizing the rich."

I would argue that such subsidization is implicit in the credit card system, at least the system other than the travel and entertainment type of cards, as the system is currently constituted, and that further the retroactive billing systems constitutes only a small part of this.

Stores and banks have found that even with the 18 percent finance charge, credit card operations rarely do better than break even. Therefore, we cannot expect competitive pressure to force these rates below their present level.

Yet data from my studies show that the poorer families are more likely to pay finance charges than their wealthier counterparts, many of whom never pay a finance charge at all.

Add to this the findings of the banks that merchant discounts alone are insufficient to cover the costs of credit card operations, and this has become fairly well known in the business community in the last few years, and we are forced to the conclusion that credit card users who pay finance charges subsidize the credit card use of those who don't—that the poor, to some extent, subsidize the rich.

Elimination of the retroactive billing system can, at best, eliminate only a relatively small part of this subsidization. It eliminates about a month's worth of the charges. A poor family who pays a little at a time, and maintains a more or less constant balance on their credit card, will not be saved a very large proportion of their interest payments. They will be saving perhaps one-twelfth of the interest charges over the

year. The rest of this subsidy can be eliminated by a complex of new regulations and restrictions, which I judge to be unacceptable, or eliminated by an awareness on the part of those who pay the finance charges and consequently support the credit card system, that they are paying more than they should or more than they must.

This awareness can only arise if the Government begins to take the truth-in-lending law seriously and follows through in its responsibility to make people aware of the meaning and cost of interest rates.

I have done several studies within the past few years which look at the truth-in-lending law and its effectiveness. I did one study in 197071, which examined purchasers of automobiles, both new and used, in a nationwide survey before the law went into effect, and also those who purchased after July 1, 1969.

In the earlier case I found that before the truth-in-lending law went into effect, people could estimate the rate of interest that they were paying on their cars with an accuracy of 46 percent. That is they thought they were paying slightly less than one-half the annual percentage

Senator PROXMIRE. For example, if they were paying 12 percent, they thought they were paying about 6 or 7 percent?

Mr. MANDELL. Yes, sir. I calculated the charges using a computer program based on answers from the interview. It was a survey of consumer finances interview.

We asked in another point of the interview what they would pay on an automobile, percentagewise. And I took only those persons who currently borrowed within the past year and compared the rate they were actually paying to the rate they thought they were paying and calculated an index of accuracy in this manner.

On the identical process for persons who purchased after July 1, 1969, and who by law must have been told the percent rate of interest, I found that the index of accuracy jumped to 53 percent, indicating that although the increase was significant, it was virtually negligible

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