Ralph N. Larson, president, the Morris Plan Co. of California, San Francisco, C. S. LaRue, vice president and treasurer, Sterchi Bros. Stores, Inc., Knox- Marlin E. Lerch, eastern director of public relations, Household Finance John T. Logan, secretary-treasurer, Simmons Co., New York, N.Y. Allan P. Lucht, treasurer, Federated Department Stores, Inc., Cincinnati, B. F. McLain, Hart Furniture Co., Dallas, Tex. Richard Oblender, president, Oblender's Inc., Lancaster, Pa. Harry O'Brien, first vice president, Bankers Security Life Insurance Society, John M. Otter, president, John M. Otter Co., Philadelphia, Pa. Linton Overstreet, vice president, Rustin Furniture Co., Greensboro, N.C. Abe Pilsk, president, Pilsk Furniture Co., Nashville, Tenn. Elmer E. Present, president, Daniels Jewelry Co., Tucson, Ariz. Harry B. Price, Jr., president, Price's, Inc., Norfolk, Va. J. Miller Redfield, vice president, American Investment Co. of Illinois, St. John Reilley, senior vice president, the First Pennsylvania Banking & Trust Lorenzo Richards, president, Richards Candy Co., Salt Lake City, Utah. Frank J. Ross, vice president, Sears, Roebuck & Co., Chicago, Ill. John W. Schoonover, secretary, the City Loan & Savings Co., Lima, Ohio. Walter W. Stegman, treasurer, Kroehler Manufacturing Co., Naperville, Ill. J. S. Sturgeon, vice president and treasurer, the Magnavox Co., Fort Wayne, Ind. W. W. Trice, Sr., president, Seminole Furniture Co., Tampa, Fla. (Deceased.) E. P. Vanderwicken, vice president, Motorola, Inc., Chicago, Ill. C. B. Whiteside, vice president, the Merchants National Bank, Fort Smith, STATEMENT OF PAUL L. SELBY, EXECUTIVE VICE PRESIDENT, NATIONAL CONSUMER FINANCE ASSOCIATION INTRODUCTION I am Paul L. Selby, executive vice president of the National Consumer Finance Association, the national trade association of the regulated consumer finance companies which operate under license, supervision, and regulation by the State banking department or other regulatory authority in States which have adopted the uniform small loan law in whole or in such substantial part as to amount to adequate regulation of the business of making consumer installment loans to individuals and families under law. As a lawyer and a member of the Ohio bar, I have been directly associated with financial institutions for the past 30 years-first as special counsel to the attorney general of Ohio in building and loan matters, then for 6 years as chief of the Division of Securities of the State of Ohio in charge of the administration of the Ohio Small Loan Act, the Ohio Credit Union Act, the Ohio Pawnbrokers Act, the registration of securities and the licensing of securities, dealers, and salesmen. From this background of experience and long-continued study of financial institutions in general and of consumer credit in particular, I have reached the well-considered opinion that the provisions of S. 1740-the so-called Truth in Lending Act-is the wrong way to approach the problem of providing a full disclosure of credit charges to users of consumer credit. I am authorized by my association to make the following statement in opposition to the bill: OBJECTION TO THE STATED PURPOSE At the very outset, I challenge the validity of the stated purpose of the bill as being unsupported by practical experience or by economic analysis. I have reviewed the record of hearings before your subcommittee of the 86th Congress 73079-61-66 on the prior bill—S. 2755—in that Congress, and I find nothing therein to support the thesis that economic stabilization was threatened in any way by the use of consumer credit or that it would be promoted by a Federal law requiring any specific method of the disclosure of finance charges in connection with the extension of credit. The five volume "Consumer Installment Credit" study published by the Federal Reserve in 1957 and the recently published report of the Commission on Money and Credit offer no contention that there is a need for legislation of this type in the interests of economic stabilization. There is no question whatever that the American consumer is entitled to know the truth about credit rates and charges. However, I do not believe that this bill, if enacted, would be the best way to achieve this purpose. Nor do I believe that economic stabilization is threatened by the present use of consumer credit. Furthermore, I question that this bill, if enacted, would improve the ethics of the few fly-by-night operators who impose on the unwary. There are already on the books laws covering most of the abuses of this nature. On the other hand, the burdens imposed on all legitimate credit grantors could have disastrous effects on our whole consumer credit system. A QUESTION OF CONSTITUTIONALITY In the record of hearings in the 86th Congress appears a statement from the Federal Trade Commission, raising a serious question as to the authority of Congress to enact legislation of this kind. A large proportion, perhaps a majority, of consumer installment credit transactions are purely local intrastate transactions. This witness feels very strongly that the Constitution does not confer upon the Congress authority to regulate such local intrastate transactions under the commerce clause. Furthermore, the so-called money clause-"To coin money, regulate the value thereof, and of foreign coin, and fix the standard of weights and measures."--would seem to confer no expressed or implied authority on the Congress to legislate in the field of cost disclosure on a discriminatory basis relating only to the consumer credit charges. If the Congress should enact S. 1740 into law, I am confident that its provisions would be declared unconstitutional by high judicial authority. INHERENT NATURE OF MONTHLY PAYMENT PLANS The bill fails to recognize basic differences between commercial and consumer credit. The inherent nature of the widespread consumer credit system of America differs in many respects from the business of making commercial loans and long-term mortgage loans and the underwriting of bonds, debentures, and similar undertakings. Consumer installment credit involves short- and intermediate-term credit extensions repayable in monthly or other periodical payments and with substantial privileges and options to the borrower or credit user to change both the amount of the obligation and the length of term to which the rate is applied during the term of the contract. In many cases these desirable provisions are included in the State laws for the protection of credit users. In other cases such as revolving credit, for example, it is usual and customary to afford the borrower the option to pay in cash without charge or to use credit and choose the size and frequency of payments. The exercise of these options at a time after the purchase is made then alters both the amount of credit and the term to which the credit charge is applied. With these options existing, it is an impossibility to compute in advance both the dollar amount of the charge and the simple annual rate, because either one or both of these items may be varied at the option of the borrower. Recognition of these inherent characteristics and differences as between commercial credit and consumer credit transactions brings the realization of the injurious, rather than helpful, effects such as a proposal would bring about. S. 1740 CANNOT BE APPLIED TO MOST CREDIT Most consumer credit systems could not operate at all under the provisions of the proposed bill. I refer to the very capable research and report of Dr. Robert W. Johnson, of the Graduate School of Business Administration at the Michigan State University, which is before the committee under the title of “Methods of Stating Consumer Finance Charges." I need not review the conclusions of that report in detail, but would like to emphasize his conclusions: First, that it would be impossible to compute both the dollar finance charge and the simple annual rate of charge in more than two-thirds of the consumer credit transactions; and second, that it is impossible to compute the simple annual rate of charge so long as substantial variables and options enter into the computation. With a $5,000 fine and imprisonment dangling like the sword of Damocles over the head of consumer credit grantors, even the most honest and the best intentioned credit grantors would hesitate to undertake the complicated computations lest they be charged and penalized under the law. PROGRESS IN STATE LEGISLATION Fortunately, a better way has been found and is widely used. Perhaps the outstanding example of disclosure already required is found in State small loan laws which provide for the delivery to each borrower of a copy of a statute limiting rates and detailing the borrower's rights and a copy of the complete terms of the contract and a statement of the rates at which the charges are computed. A copy of my statement to this subcommittee in the hearings on S. 2755 in the 86th Congress is attached as exhibit A and need not be repeated at length herein. Now, 46 States have adopted such legislation. We confidently expect the other States to enact such provisions in the near future. More than 30 States have enacted sales finance laws and substantial progress is being made in the enactment of bills governing all installments sales and revolving credit transactions with provisions requiring a disclosure of the rate of charge to the borrower. It has been a long-continued effort to obtain effective State legislation, but such substantial progress is being made in this field so long preempted by the States that there is no sound reason for the Federal Government to impose additional expense and administrative costs on the operation of consumer credit business which would only add to the expense to consumers without affording any constructive benefit. CONCLUSION While endorsing the thesis that users of consumer credit should be fully informed about the cost of such credit, we vigorously oppose the enactment of S. 1740 as being unconstitutional, unworkable, and unnecessary, and because it could not fulfill its stated purpose. Hon. PAUL DOUGLAS, AMERICAN RETAIL FEDERATION, Chairman, Subcommittee on Production and Stabilization, Committee on Banking and Currency, Senate Office Building, Washington, D.C. DEAR MR. CHAIRMAN: The American Retail Federation is a federation of national retail associations and statewide associations of retailers, representing through its combined membership more than 800,000 retail outlets. (The names of the association members joining in this statement are attached.) The members of the American Retail Federation are strongly opposed to S. 1740, the so-called truth-in-lending bill. Their opposition is based on three major premises. 1. The provisions of the bill represent a vast extension of the authority of the Federal Government-an extension which should be fully justified before Congress grants such authority. No such justification has as yet been made. 2. As the Chairman of the Federal Reserve Board testified, the bill, if enforceable at all, would require a large regulatory staff to administer its provisions. The costs of administration would outweigh the advantages, if any, which would ensue from the enactment of the bill. 3. If the bill were enacted, consumers would receive less, not more, information about credit costs than they get now. These points are discussed more fully below. 1. The provisions of the bill represent a vast extension of the authority of the Federal Government-an extension which should be fully justified before it is granted by Congress. The bill proposes to regulate the terms of transactions at the very end of the commerce line. As far as retailing is concerned, what is proposed for regulation is the method of stating the terms of credit transactions involving the sale of goods. These goods have come to rest in the retail store. Any interstate journey has ended. The bill deals only with the terms of payment of a local, retail transaction and the method in which those terms are stated to the purchaser. No other commercial activity is so purely intrastate in its character. The bill reaches dealings between the local merchant and the housewife; the car owner, and the corner filling station operator. Federal regulation of this sort should never be undertaken unless the need for it is fully and completely justified. No such justification has as yet been made. The overwhelming majority of American businesses which extend credit do, in all cases, clearly disclose the cost of the credit to their customers. This was proved in the testimony received by this committee last year, even from proponents of the bill. There are, and probably always will be, a small fringe number of unscrupulous dealers who prey on the ignorance of the uninformed. Regardless of any law, such dealers will continue to exist. The law will not reach them. In fact, as will be shown later, such dealers may actually benefit by the terms of a law which hampers the legitimate operations of their scrupulously honest competitors. Furthermore, the States which are the proper instrumentalities to provide such regulation if any is needed, have not been dormant in this field. Forty-eight of the States now regulate small loan transactions, 35 automobile installment sales, 19 all types of time sales, and 11 the recently developed method known as revolving credit. The subject was under active consideration by many State legislatures during the sessions this year-no less than 47, according to the Wall Street Journal of June 27, 1961. Because the States have not been negligent in exercising their power in this field, and because no widespread malpractices have been shown to exist, there is no need, no reason, and no justification for the Congress to extend Federal authority into this field. This point, and this point standing alone, would be ample reason for rejecting the bill. 2. The bill, if enforcible at all, would require the services of a large administrative staff. The costs of administration would outweigh any advantages which the bill might provide. In retailing alone there are probably more than a million establishments that extend credit. The bill would also regulate commercial banks, building and loan associations, savings banks, credit unions, labor unions, consumer financing institutions, small loan companies, and collection agencies. The regulatory problems facing the administrative agency would be complex in nature and enormous in scope. Literally billions of transactions would be affected each year. 3. If the bill were enacted, consumers would receive less, not more, information than they get now. The bill requires that the credit charges be stated as a "simple annual rate." Apart from the proven fact that determining charges on this basis is far from simple, such a requirement would force the practice of building credit costs, or the greater part of them, into the price of merchandise. Consumers will brand any rate exceeding 6 percent as excessive, although all persons conversant with the subject know that it costs far more to provide retail installment credit in small principal amounts. To avoid the loss of consumer goodwill, on which they are completely dependent for success, merchants will have to quote low "annual" rates if this bill is passed. This will mean that consumers will be paying as much for credit, but will get less information about credit costs. Obviously this could only be prevented if S. 1740 were supplemented by a price control law-unthinkable as such a law is in peacetime. This law would have to set up an agency to fix cash prices at retail in order that credit charges could be separated and shown by themselves. To establish and police these prices a large army of "experts," inspectors and agents would be necessary-in other words a full-time, peacetime OPA or OPS. The consumer would ultimately pay the costs of these administrative armies through higher taxes and probably higher prices. And he would still be unprotected from the fraudulent practices of "black credit" operators, who would thrive in the confusion resulting from such legislation. It is requested this be made part of the hearing record on S. 1740. Respectfully submitted. WILLIAM C. MOCAMANT, Director of Trade and Public Relations. NATIONAL ASSOCIATIONS American Retail Coal Association. Associated Retail Bakers of America. Association of Family Apparel Stores, Inc. Institute of Distribution, Inc. Mail Order Association of America. National Appliance & Radio-TV Dealers Association. National Association of Chain Drug Stores. National Association of House to House Installment Cos., Inc. National Association of Music Merchants, Inc. National Association of Retail Clothiers & Furnishers. National Association of Retail Grocers. National Association of Shoe Chain Stores. National Council on Business Mail, Inc. National Foundation for Consumer Credit, Inc. National Industrial Stores Association. National Licensed Beverage Association. National Luggage Dealers Association. National Retail Farm Equipment Association. National Retail Furniture Association. National Retail Hardware Association. National Retail Merchants Association. National Retail Tea & Coffee Merchants Association. National Shoe Retailers Association. National Sporting Goods Association. National Tire Dealers & Retreaders Association, Inc. Retail Jewelers of America, Inc. Super Market Institute, Inc. Variety Stores Association, Inc. Women's Apparel Chains Association, Inc. STATE ASSOCIATIONS Alabama Council of Retail Merchants, Inc. California Retailers Association. Colorado Retailers Association. Florida Retail Federation. Florida State Retailers Association. Georgia Mercantile Association. Idaho Retailers Association, Inc. Illinois Retail Merchants Association. Indiana Retail Council, Inc. Iowa Retail Federation, Inc. Kentucky Merchants Association, Inc. Louisiana Retailers Association. Maine Merchants Association, Inc. Maryland Council of Retail Merchants, Inc. Massachusetts Council of Retail Merchants. Michigan Retailers Association. Minnesota Retail Federation, Inc. Mississippi Retail Merchants Association. Missouri Retailers Association. Nebraska Federation of Retail Associations, Inc. Nevada Retail Merchants Association. Retail Merchants' Association of New Jersey. New York State Council of Retail Merchants, Inc. |