pose of this act to assure a full disclosure *** with a view to preventing the uninformed use of credit * *

(2) Consumers will be informed as to the rate of charge in easily comparable terms. Consumers so informed can shop the market for the most favorable credit terms with dignity and with assurance that rate quotations are valid, and are similar in meaning wherever used in the United States, and are the same simple percentgae as is taught in the secondary schools in our country. Furthermore, they will be comparable to those quoted in general by savings institutions. The result will be a fantastic reduction in the money, time, and effort costs to consumers in shopping for credit services. Rate quotations would facilitate analysis of the credit portfolio.

I believe the bill will reduce the cost of credit to the consumer: (1) Pricerate competition would be more effective and less deceptive. To support my position I quote from the Household Finance Corp. pamphlet as published in the Congressional Record: "* * * competition cannot achieve its desired results in any field unless the charges of competitors are easily comparable *** the borrower should know what a loan will cost him in terms which are identically defined for all cases.. Everybody admits that. The question at issue is what the borrower should be told about the effective rate of charge." The pamphlet continues to argue for "The case for the simplet interest method," and favors stating a monthly rate on the unpaid balance, rather than an annual percentage as provided in S. 1740. In summary, this bill defines terms so that effective price (rate) competition cannot continue to be thwarted by the semantics of quotations which frustrate the consumer and confuse the lender. The lenders capable of providing the desired credit services at lowest cost are more likely to be selected by consumers, resulting in lower cost of credit.

(2) A simplified standard rate method would reduce the cost of service training of employees. Once a uniform system is adopted, the public schools can again train both consumers and credit personnel to figure interest rates and costs in terms which continue to have meaning throughout life. The result will be lower cost of personnel training and a reduction in errors, for both the consumer and lender would use the same credit terminology.

(3) Declaration of reliable rates might induce some consumers to place greater emphasis on the rate quotations in their credit decisionmaking. If so, they will tend to avoid high cost (rate) loans and be encouraged to secure loans at lower rates. The result would be a lower total credit cost to the consumer. From my observation in financial counseling, I find not an investment portfolio, but credit portfolio of obligations with rates of charges ranging from 0 to 42 percent and higher for the single family. When this variation in costs and rates becomes apparent to the family, it attempts to move out of the high cost (rate) credit toward lower-rate credit. Since credit costs and rates are not fully disclosed, consumers may unmindfully abuse credit services, using those which cost more than their conveniences are worth.

I believe the bill, if enacted, will reduce the amount of Government regulation that has prevailed in the credit field. There are enough intelligent consumers to discipline properly the market in major respects, if they are armed with the necessary information for intelligent decisionmaking. A well consumer-disciplined market essentially needs Government regulation only to maintain and enforce the basic rules of trade.

In summary, I believe the bill, if enacted, would enable consumers to make credit decisions which are appropriate to their needs, reduce the cost of consumer credit, stimulate desirable competition, reduce the need for Government regulation, and, in general, rid us as a nation of much effort that contributes little to our national strength and happiness.

III

The remainder of my remarks will be in the form of responses to statements made by those opposed to this bill :

1. "The bill would invite Federal control over credit extensions."

This statement invokes the fear of big government. No controls over credit rates or credit extensions, such as regulation W, are provided in the bill. The only reference to control is over methods of disclosing the finance charges and rates. It is assumed that full disclosure will result in more informed use of credit and thus would indirectly affect the volume of credit. But any changes in behavior would presumably be beneficial to the consumer.

To argue against a bill because it would enable more effective enforcement of Federal controls (if and when needed), assumes a peculiar form of ethical behavior and attitude toward compliance with the law. In summary, Federal control is not the issue.

2. "Proponents of the bill assume that a consumer finance charge or a 'timeprice differential' is interest and should be treated as interest."

The bill is concerned with credit charges and the charges incident to the extension of credit, including interest. The bill assumes interest to be a part of the finance charge, but does not equate finance charges with interest.

Consumers with whom I have talked fail to see any significant distinction between finance charges and interest. From a family economic standpoint there is no difference whether the amount needed to complete the purchase of a car is obtained through a cash loan and applied to the car purchase, or in included in a time-payment plan. Both are alternate ways of getting the required amount of cash the consumer does not have. Consumers should not be denied the opportunity to compare these and other sources of gaining the needed funds on an easily comparable basis. Cash loans and sales credit sources are, and should be, competitive and easily compared by the consumer.

To argue that the finance charge is primarily a service charge and not pure interest, makes little sense to the consumer. What concern is it and should it be to the consumer that a particular form of credit involves a higher allowance for bad debt losses, requires higher investigation costs, or has a higher overhead expense, etc? Such cost factors are of concern to the consumer only as they affect and are manifested in the rate and cost of credit quoted. Consumers need to be mindful of alternative sources of acceptable credit and the comparable prices (rates) of each. For intelligent consumer decisionmaking the consumer needs information as to the availability of acceptance products or services and comparable prices (rates or rentals). This is true whether the consumer is buying a rug, renting a car, or renting the use of money (or its equivalent). A good consumer is too busy these days and has too many decisions to make to be burdened with the details of business costs over which he has not direct control. Costs are the vendor's concern-the service the vendor has to offer and the price for which that service is available is appropriately of concern to the consumer. In summary, the bill avoids the argument by including interest as a component of the finance charge.

3. "The actuarial method is the only legally correct method, and this involves tedious calculations."

One is tempted to question the legality of all the various methods currently in use if the actuarial method is the only legal method.

The issue raised is valid and appropriate, not as an argument against, but for the bill. The issue was just as valid 26 years ago when LeBaron Foster studied the various methods of computing charges, and concluded that the proportional method (constant-ratio method) was satisfactory for the consumer to measure the relative costs of alternative credit arrangements. He rejected the actuarial method as impractical, although mathematically correct.

I shall quote from "Installment Credit Costs and the Consumer," an article by LeBaron R. Foster appearing in the January 1935 issue of the Journal of Business of the University of Chicago:

"The assumption basic to the proportionate method finds no counterpart in actuarial practice. Indeed, it blandly ignores the science of interest, as that science has been developed in the investment and insurance world. Were merchants to state installment charges in such form that scientific calculation methods could easily be applied, the proportionate method would not be tolerated. But as a means of analyzing the heterogeneous terms in current use, the proportionate method exhibits clear advantages of simplicity and wide applicability. Presumably that is why the method is employed in judicial administration of the British Moneylenders Act, is endorsed by the finance companies themselves" (p. 38).

LeBaron continues with two pertinent questions: "If the proportionate method is unscientific, does it give rise to significant errors? And do these errors invalidate rate comparisons based upon the proportionate method?" To answer these questions he applied three commonly used methods of calculating rates to cases which involved a wide range of rates. He concludes "*** that the nominal compound interest and the proportionate methods yield similar results when either is used consistently to compare the cost of one installment con

tract with another." The actuarial method was more likely to mislead than to instruct the consumer.

His concluding paragraph reads:

"As retailers now state their installment terms, it is necessary to resort to an involved calculation technique to discover actual rates. This necessity would no longer exist if all retailers were required to state their charges in terms of a percentage per month on the actual unpaid balance as it declines from month to month. Consumers could tell then, from the seller's terms, just what rates they pay" (p. 45).

One of the major provisions of the bill is for a regulatory body whose duty would include the establishment of standardized and practical measures of finance charges and rates.

4. "We support full disclosure, but translating these charges to a simple annual rate might prove to be too complicated a process."

This quotation is taken from a letter written by a vice president of a large New York bank. It reflects the position taken on S. 2755 by the American Bankers Association. Within the year this same bank, along with many other banks throughout the country, adopted a system for paying "daily interest" on savings accounts. If interest quoted at a nominal annual rate can be computed and applied daily on savings, why can't finance charges be similarly applied to credit? I have no doubt but what the bankers and other financial institutions could find this not to be such a complicated process. The many volunteers working in credit unions and who have frequently not had the benefit of advanced training in finance have for years employed a nominal rate, applied daily, with no apparent difficulty.

"An executive of a very large auto finance company write: "Our records are kept by a highly mechanized electronic computer system. A translation of our charges into true interest rates would involve many complexities and would raise our cost of doing business and our charges to borrowers." Has this executive considered starting with a nominal annual rate? If the credit unions can do it, certainly an industry equipped with a highly mechanized electronic computer system can do it. If not, then I question whether the industry is not needlessly complex. If it is too complicated a process to convert finance charges to rates, why not start with rates and compute finance charges? Business methods are this adaptable, surely. 5. “* it is utterly impossible to develop the printed set of tables necessary for the clerks in stores and banks to use in conforming with this bill, except in a volume the size of a telephone book." (William J. Cheyney, proceedings, Texas consumer credit management conference, November 1960. p. 15).

Mr. Cheyney has invoked fear of the unknown. If he were realistic he would realize that stores and banks employ a limited number of different rates. The number of sheets or tables for any one rate is quite small. I have here the factor tables used by a bank in Tulsa, Okla., for paying "daily interest." There are only five sheets. This number would be reduced if the interest were not compounded quarterly, and had they not been so painstakingly honest as to supply a separate page for the first quarter of the year in which leap year appears. Mr. Cheyney's threat is ridiculous.

6. Finance charges cannot be computed at the time credit is granted. With reference to revolving credit, Mr. Holthausen has stated: “*** it is impossible to tell a consumer in advance of each of her hundreds of revolving credit transactions, what the simple annual rate of interest will be for any particular purchase or group of purchases. If the proposed legislation were enacted in its present form, this type of credit would be impossible to administer" (hearings, S. 2755. p. 788). Dr. Johnson makes this same point with reference to credit union operations: "The borrower of a credit union today is clearly informed of the basic monthly finance rate charged. *** It would not be possible to show the borrower the ultimate dollar cost at the time the loan is granted, since the actual dollar cost will depend on his payment record" (Johnson, Robert W., "Studies in Consumer Credit, No. 2," Graduate School of Business, Columbia University, p. 23).

I grant that these gentlemen have a valid, but unimportant point. It is true that the total charges cannot be computed in the absence of full information as to the time of payments. Perhaps it is not important in such cases that the total cost be revealed, and I suspect that in situations where the rate is disclosed there

is less interest in the total cost. For example, I find it no particular hardship that a filling station attendant cannot tell me what 13.2 gallons of gas at 28.9 cents a gallon will cost. If I am short on cash, I may ask for $2 worth of gas. Usually, however, I shop for gas by paying attention to the price per gallon. The declared purpose of the bill must be kept in mind. Section 5(a) gives to the Board sufficient power of administration, it seems to me. For example, the case of the credit union note could be satisfied by requiring full disclosure of the finance charge if payments were made in accordance with the terms of the note. In the case of a revolving credit account for which there is a declared simple annual rate, compliance could consist of the creditor issuing to the person after each payment, a statement showing the disposition of the payment, the amount for finance charges, and the amount for reduction of the indebtedness. Furthermore, advertising could give the cost of a typical account as a means of informing the public of the total cost.

7. The finance charge, especially if expressed as a percent rate, could be buried in the cash price of the product or service.

It is contended that the problem is even more serious for those engaged in direct lending: “*** Those who have no price of merchandise into which to submerge a part of the credit charge, would have no recourse than to' quote, under the proposed legislation, and annual percentage rate that would put them at a terrible comeptitive disadvantage" (Cheyney, p. 17).

The assumption upon which these arguments rest is basically that the consumer is unable to compare price and quality in today's markets, and thus is incapable of buying intelligently. The implications of this assumption point with certainty to the need for more effective consumer education, more informative advertising and product labeling, and for improved standards for consumer goods and services. It is a severe indictment of the ability of the consuming public and of the free enterprise system. It is heartening to learn that students and spokesmen for business recognize the plight of the consumer.

Mr. Holthausen is of the opinion that if all articles sold on credit plans were widely advertised brand products, and had recognized list prices, such as new automobiles, the consumer could decide the "better buy" by adding price and dollar finance charge. However, in the case of other items, such as used cars, "How can the consumer compare price, quality and interest?" he asks. (Hearings, S. 2755, p. 786.) Dr. Johnson, in support of this position, cites a case in which the price of a used car was raised over 10 percent to absorb or hide the credit charge (p. 94). Isn't it strange that the dealer had not already raised his price by such an amount, if his customers cannot tell the difference?

Dr. Johnson also illustrates dramatically how a dealer might manipulate finance rates and prices to make a very attractive finance rate. He even goes so far as to suggest that it might be necessary to set a minimum below which finance charges should not be allowed to dip. Would he go so far as to suggest that the practices of providing 30-day credit "for free" should be abolished? And does he not imply that enough is known about the cost of administering credit that it is possible to determine which costs are attributable to product and other services and which to credit services? And, if it is suggested that the finance charge might be absorbed in the cash price of products, might not the cash price of products, in reverse fashion, have been absorbed in the finance charges? One might conclude from observation that finance charges have been very attractive to business. Either retailers have been engaged in expanding an unprofitable line of business, or the addition of credit services has been very profitable. "Cash only" stores are disappearing.

It seems strange to me that those so close to retailing should question the technique of creating an attractive mix of services for consumer appeal. If I read the trade papers correctly, many stores are turning either to trading stamps or discount pricing to attract customers. What is economically or ethically wrong for stores to offer credit at true bargain rates? The use of credit to buy, hold, or attract consumers is nothing new. What would be new would be full disclosure and less deceptive statements.

I wish students of business would address themselves to the possible shifts in pricing that are predicted as a result of full disclosure. Evidently, full disclosure of credit terms in meaningful and standardized terms makes credit eligible for attractive merchandising. Certainly there is a better answer than to deny full disclosure of credit charges. I suggest a more positive approach: namely, to strengthen consumer education, improve standards, and labeling of consumer goods, and eliminate fictitious pricing.

8. The interest mold-The horror of standardization.

There is the ever-present fear that through standardization, initiative and creativeness will be inhibited. Forgotten are the limitations of freedom that lack of standardization brings to the users of products or services not standardized. For example, when I open a second can of paint, I am so thankful the product has been standardized and blends on the wall with the previously painted surface. I prefer to be creative in my original selection of the paint. The issue is to decide what areas should or could be standardized so as to promote efficiency, allow creativity, and stimulate higher productivity in other sectors of life. Credit is so basic to our modern money way of life, it is one sector of life that should be standardized.

9. "Proposals for converting all consumer finance charges into annual rates are unworkable * * *" (Johnson, p. 16).

Implicit in such statements is an unrealistic assumption as to the inflexibility of business. Credit is a very ancient practice. Yet, consumer credit has come into major significance only in our lifetime. Why must we insist on preserving traditional concepts that do not fit today's modern living? Consumers are changing, and so is business. Why can't the changes be in the direction of reducing the confusion in life?

The present system is exceedingly inefficient for the modern, intelligent consumer. I have faith that the business community can adjust to meet the modern needs for credit by consumers.

I suggest that we start our thinking about credit language in terms of what measures will reward and encourage intelligent and efficient consumer decisionmaking. For national survival we must think in terms of measure that bring out the best in man. Education should not be confined to the classroom. Education should be on-going. The market could provide a wonderful laboratory for continuing adult education. Those who have learned how to compute interest in the secondary schools should be encouraged to press their talents into service as they enter into making credit and investment decisions; it is a tragic social waste that such an investment in human resources should be dissipated through the retention of obsolete market practices and the creation of deceptive techniques. It is inadequate to suggest that "Consumers should be educated to the wise use of credit" if the market environment renders the tools obsolete upon first application.

If it is agreed that full disclosure of credit costs in easily comparable terms would be desirable, then let us require such disclosure. Business can and will adapt its practices to such a requirement. On the other hand, if adaptability is questioned, then I suggest that it might be more appropriate for a school of business to give more attention to how business might change to meet the needs of a people engaged in a highly competitive battle for talent, rather than study how present business practices, which are admittedly deficient, should be preserved.

10. "Consumers are now so misinformed that full disclosure of credit costs, especially if rates are quoted on a simple annual basis, might create a significant shock to the economy" (hearing on § 2755, p. 809).

It is frightening and shocking to think that the stability of the economy rests on misinformation. Must we fear the consequences of revealing the truth? It is significant that this aspect of credit escaped consideration in the recent report of the Commission on Money and Credit.

11. Consumers don't want to know the percentage rate.

To this might be added: "*** and we don't want them to know," or, **** and quite frankly, we don't know the rate either."

One spokesman for a very responsible national business association responded to my inquiry as to why his organization, which favors free markets, had not supported S. 2755. He wrote: "Some of our members feel that government should not be paternalistic. It should not try to hold the hand nor guide the hand of the indifferent citizen."

I cannot testify as to the number of consumers who want to know the rate, but I can speak myself. I have wanted to know the rate, and the pursuit of such information has been most trying. Furthermore, I do not qualify as an indifferent citizen, at least in this respect. I shall not repeat what was included in last year's testimony. But I do want to call attention to my testimony with reference to my attempt to secure the full facts concerning an auto financing contract. Filed with the committee are the 13 letters and documents which yielded an unsatisfactory answer (p. 600). Also, I related the difficulty I had