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On the other hand, I think to the extent the banks are making a profit from a line of business in which they are engaged, they do have some responsibility to be aware of the terms of their participating retailers' credit agreements.

Senator PROXMIRE. Commercial banking spokesmen sometimes make just the opposite argument. They say that banks have no way of policing the retail merchants and, therefore, it is unfair to subject banks to claims and defenses.

What is your reaction to that!

Mr. ENGMAN. They certainly have the ability to look at the terms of these credit documents, and, to the extent they find they have a bad egg in the carton, or they have a history of complaints and difficulties with a particular retailer, they have the ability to discontinue business with that creditor.

I do not see that this is a justifiable excuse for not providing the kind of benefits to the consumer which this legislation would achieve.

Senator PROXMIRE. Another argument against restricting the holder-in-due-course doctrine is that it might force may small retailers out of business, thus increasing concentration and lessening competition in the retail industry. This, it is argued, is against the long-run interest of the consumers.

Now, what is your view on that argument !

Mr. ENGMAN. I am not sure I agree with that view, either. You will note that although the Commission did not endorse a specific method for determining finance charges, it did point out the possibility that the subcommittee might wish to consider a variation on the adjusted balance approach that would exclude current credit purchases from the finance charge.

But, by the same token-
Senator PROXMIRE. We are talking about the holder-in-due course.
Mr. ENGMAN. Oh, I am sorry.
Senator PROXMIRE. Let me repeat the question.

Another argument made against restricting the holder-in-due-course doctrine is that it might force many small retailers out of business, thus increasing competition and, in the long run, I should say decreasing competition and in the long run hurting the consumer because there would be newer outlets and less competition. What is your reaction?

Mr. ENGMAN. I apologize. I did misunderstand the first part of the question. I have seen no evidence to support that argument.

Senator PROXMIRE. Commercial banking spokesmen have also testified that restrictions on the holder-in-due-course doctrine would require banks to exclude questionable merchants from the credit-card plan and thus subject the banks to possible violations of the antitrust laws.

Mr. ENGMAN. As long as a bank makes its decisions on an individual basis and not in concert with other banks, then I do not see that there is any question of antitrust violations.

Senator PROXMIRE. Various witnesses have criticized the geographic limitations with respect to holder-in-due course: S. 914 would permit a cardholder to assert a claim of defense against the card issuer only if the transaction occurred in the same State in which the card issuer maintained a place of business. The critics of this limitation say it would deny relief to consumers who shop across State lines, such as Virginia residents shopping in the District, or New Jersey residents shopping in New York, and Connecticut residents and so forth.

96-687 O - 73 - 7

Now, these critics say, if there is to be some geographical limitation, it should be on the basis of metropolitan areas rather than State lines. What is your thinking on this?

Mr. ENGMAN. I should first of all preface my response by indicating that these are my views, and not necessarily those of the Commission, although I do not know that such would not be the case.

I think there is some merit in the suggestion that there ought to be some thought given to approaching this on a metropolitan basis. I understand from the legislative history that some compromise on this point may be in order, but I would point out that the proposed holderin-due-course rule pending before the Commission does not have any such territorial limitation. While the Commission has not made a final determination as to whether any such limitations are advisable or should be included in any such rule, I think that there is a valid question here, and I personally would be very open to a broadening of the territorial limitation.

Senator PROXMIRE. In your statement, you indicate concern that the imposition of the adjusted-balance method—and I am talking about billing systems could conceivably work a hardship on certain kinds of creditors. What kinds of creditors fall into this category?

Mr. ENGMAN. I am sorry. I lost the last part of that question.

Senator PROXMIRE. What kind of creditors fall into this category? I am talking about the imposition of the adjusted-balance method and the argument that it could work a hardship on certain kinds of creditors. I am talking about page 8 in your statement where you say,

“We are concerned that the imposition of the adjusted-balance method could conceivably work a hardship on certain kinds of creditors whose accounts do not yield finance charges sufficient to make their credit accounts self-supporting.”

Mr. ENGMAN. It is my understanding that this argument has been made by creditors such as department stores and other retail establishments. I should indicate that the Commission is not urging a necessary replacement to the provision in S. 914, but is suggesting an alternative which the subcommittee might wish to consider.

Senator PROXMIRE. Does the Commission have any evidence of the yield of these creditors and any documentation supporting the claim that it would be insufficient?

Mr. ENGMAN. I do not have any such documentation personally, Mr. Chairman. It may be that our staff has received such information from some creditors, and, if so, I would be happy to provide that to your staff.

Senator PROXMIRE. Has the Commission made any kind of a study of this?

Mr. Engman. We do have an ongoing study in this entire area, but I am not aware of any specific findings concerning this matter.

Senator PROXMIRE. Will you submit for the information of the subcommittee when you correct your remarks, any staff information that you can secure on this matter?

Mr. ENGMAN. I will be more than happy to do that, Mr. Chairman. [The information is as follows:]


Washington, D.C., June 11, 1973. Senator WILLIAM PROXMIRE, Chairman, Subcommittee on Financial Institutions, Committee on Banking, Hous

ing and Urban Affairs, U.S. Senate, Washington, D.C. DEAR MR. CHAIRMAN: I am returning herewith a corrected copy of my remarks before the Subcommittee on Consumer Credit on May 22, 1973, concerning the Fair Credit Billing legislation.

In response to your request, I am also enclosing for insertion in the transcript at page 77, line 10, such data as we possess regarding the impact upon creditors of mandating the use of the adjusted balance method. Taken as a whole, I believe this material tends to support the Commission's concern that such a step could conceivably work a hardship on certain type of creditors.

It was a pleasure to provide you with our views on this legislation, and I hope you will let me know if I can be of further assistance. Sincerely,



[EDITOR'S NOTE: Mr. Engman's letter contained excerpts of the Report of the National Committee on Consumer Credit, pages 15–108, 124–125, 139–149, 145–149, for reference of the committee.]




The historical results which I have given you will be certified by our auditors—Peat, Marwick, Mitchell & Co.-in our annual report. Not included in any of the figures are "in-store" credit costs—the people who handle inquiries and applications, receive payments, and check credit limits—and the extra clerical expenses incurred in credit transactions as opposed to cash transactions.

Available studies indicate that other retailers are in the same boat as we. Touche, Ross & Co. did a study for the National Retail Merchants Association in 1969. It showed for a representative sample of retailers that credit costs exceeded service charge revenues by amounts averaging 3.4 per cent of credit sales.

These findings are consistent with the results of other independent studies. Most major retailers do not believe that they recover all their credit costs through service charges. If proper cost accounting were used, I suspect that few—if anyretailers could show a profit on credit operations.

I do not mean to imply that we cannot lower our costs. We are constantly trying to do this. Our credit operations are highly automated. We have 11 regional centers using the most advanced computer equipment. We are capitalizing on the economies of scale available in this vast operation and have been aiming to reach the breakeven point as our credit volume expands further. However, it will not be possible to achieve that aim if legal limits reduce service charges to unrealistic levels. Credit will become just another permanent cost of doing business.

PRICES ROSE WITH LOWER RATE It is predictable what will happen then. A recent study by the University of Washington shows th sin a referendum was passed in 1968 lowering the legal rate ceiling on retail credit in Washington from 112 per cent to 1 per cent per month, credit has become harder to get and more expensive, while the prices of retail merchandise have gone up. The cash customer ends up subsidizing the credit customer.

Our service charges are not designed to make money. We believe them to be fair and equitable and will contest vigorously any actions brought against us under usury laws. Experience has convinced us that more and more customers want retail credit and are willing to pay a fair price for it, but the retail industry will only be able to continue to extend credit on this basis if realistic laws are enacted.

Together with other retailers, we intend to give the full facts on retail credit to the public in order to procure enactment of such necessary legislation.

The credit practices of ourselves and other retailers have come under attack recently as a result of a decision last October by the Wisconsin Supreme Court. This decision held that our monthly service charge of 142 per cent on customer credit balances violated the state's 12 per cent usury law. This decision upset a legal doctrine which retailers everywhere had relied upon as exempting revolving credit service charges from the usury laws. A number of lawsuits have followed in several states. In addition, legislation is being advocated that would further limit retail service charges.

We at Penney's welcome public scrutiny of our practices. We favor fair ci edit legislation and have worked hard in support of the Uniform Consumer Credit Code, which has been adopted in Oklahoma and Utah. What concerns us is that widely held and deeply-rooted misconceptions about retail credit may lead to actions contrary to the interests of both consumers and retailers.

Even the financially sophisticated, such as security analysts, frequently indicate by their comments that they think retailers make a handsome profit on their service charges. It is pointed out to us that we are charging 142 per cent per month on revolving charge account balances, and how can anyone fail to make a profit at 18 per cent per year?

PENNEY'S DOES NOT COLLECT 18 PER CENT To begin with, it is not true that we collect 18 per cent per year. We do not collect at this rate because of the options which our charge customers have each month and because of the way we compute service charges. Let me explain.

Each month a charge customer may decide to pay her balance in full within 30 days of the billing date. If so, she does not incur any service charge. On the other hand, she may decide to spread out her payments over two or more months, in which case a service charge is added to her next statement. Our method makes it possible for customers to take from one to two months to pay without incurring service charges.

This flexibility in selecting the method of payment makes it impossible to predict the amount of service charge a customer will pay or if she will pay any service charge. About 20 per cent of our total outstanding balances is collected each month, a pretty clear indication that many customers use their option to pay in full within 30 days.

“ADJUSTED BALANCE" METHOD USED There are two methods in general use for calculating service charges. The "beginning balance" method computes the service charge on the account's balance at the beginning of the billing period. The "adjusted balance" method, which we use, computes the service charge on the beginning balance less all payments and credits during the period.

The combined effect of the options available to our charge customers with respect to the amount and timing of their payments and the "free periods” provided under our plan result in an effective service charge rate far below 18 per cent per year. Several years ago, in connection with legislative hearings on the "Truth in Lending Act," we did a study on a random sample of a representative group of our credit accounts.

We computed actual service charges over one full year and found that for customers who paid service charges the annual rate ranged from 0.8 per cent to 17.1 per cent, with an average of 10.5 percent. Our measurements were validated by our auditors. We think these findings are still representative.

Of course, these findings do not apply to four states--Arkansas, Pennsylvania, Washington, and Wisconsin—where the monthly service charges have been reduced, by law, below 142 per cent.


Let me give you now some figures on our net cost of credit. We are disclosing these for the first time.

In 1969, the last year for which complete data are available, we collected $79 million in service charge revenues on customer receivables.

We paid interest of $44 million to finance these receivables.
Our provision for bad debts totalled $16 million.

We spent $42 million administering customer credit through our regional credit offices.

All these costs combined amount to $102 million and exceeded by $23 million our service charge revenues.

J. C. PENNEY Co., INC., 1972 ANNUAL REPORT Sales and earings of the Penney Company again rose to record highs in the 1972 fiscal year. For the first time in our history, annual sales exceeded $5 billion, reaching $5.5 billion, a gain of 14.9 per cent over 1971. Net income increased 19.8 per cent to $162.6 million from $135.7 million. This amounted to primary net income per share of $2.86, compared with $2.46 in 1971. On a fully diluted basis, earnings per share also totaled $2.86, against $2.43 the previous year.

Two key factors in the 1972 performance were sales growth and expense control. The Company mounted the most aggressive sales promotion program in its history in order to increase volume and earnings while operating within the frozen markup provisions of the Administration's Phase II program. Fundamental to the sales increase was our success in attuning merchandise assortments to customers' needs and wants.

As a result of the strong profit performance, the Board of Directors on December 27 voted an increase in the regular quarterly dividend from 26 cents to 27 cents per share starting with the February 1973 payment. This was the maximum whole-cent increase under the 4 per cent guideline established by the President's Committee on Interest and Dividends.

Fiscal 1972 marked the first year that sales of full line stores exceeded those of soft line units. Full line stores had a 28.7 per cent sales gain, and we expect these stores to provide the most significant portion of our future sales and profit growth. Sales of soft line stores also were higher, although 35 fewer units were open at year end 1972. Despite their age, soft line stores on the average continued to perform well in both sales and profits, and we anticipate little, if any, deterioration in their results in the years immediately ahead.

Catalog had another strong sales and profit year in 1972 after first becoming profitable in 1971. The catalog performance which resulted from the continued maturing of all phases of the operation, has prompted a reexamination of the opening schedule for the projected third catalog distribution center in Columbus, Ohio. If construction schedules can be met, the opening will be advanced to 1974 from 1975.

The Treasury stores still had a small loss in 1972, but operating results improved, and we expect this division to be profitable in 1973. Expansion beyond 1973 will continue at a somewhat slower pace, with smaller units. Consumer financial services had a profit increase, while Thrift Drug's profit was about the same as that of the prior year. Supermarkets experienced a decline in earnings.

The Company's European operations recorded a loss about equal to that of 1971. Although some improvements in operating results were achieved, these were offset by heavy start-up costs associated with the 1972 expansion, which increased store net selling space by approximately 38 per cent.

A number of steps have been taken to strengthen our European operations, and we expect to report an improvement in 1973. Included among these steps as a recent reorganization designed to provide more effective management direction by placing store operations in domestic subsidiaries. This change aids in utilizing Penney's experience and expertise in the operation of retail stores. Expansion in Europe has been slowed to allow us to solve our operational difficulties.

The Company's expansion program for fiscal 1973 contemplates capital expenditures in excess of $200 million. Store space will be increased by approximately 5.5 million gross square feet. This will include 30 JC Penney stores, five The Treasury stores, 30 drug stores, and three European stores. JCP Realty, Inc., a real estate subsidiary, has participated in the development of two shopping centers in which we will open stores in 1973.

Each new store challenges our ability to attract new customers and increase sales to our current customers. With these objectives, we are devoting more and more attention to store architecture, decor, fixturing, display, and packaging. These elements help provide an exciting showcase for our merchandise, which in virtually all categories reflects our stress on fashion.

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