Senator BENNETT. We interrupted you, all of us.
Mr. BIMSON. That is all right.

Shall I continue?

Although the American Bankers Association has long supported the concept of full and honest disclosure of the dollar cost of finance charges to borrowers, we take this opportunity to present our views on the many serious problems which the simple annual rate requirement of the bill raises in bank credit transactions, as well as certain other problems relating to the interpretation and enforcement of the bill.

It is the firm belief of this association that to alter traditional methods of presenting finance charges would require a substantial reeducation both of the consumer and industry in general. The conversion of finance charges to a simple annual rate would presumably require the use of mathematical tables or formulas which, regardless of their accuracy, would be relatively complex to use.

We believe that the many variables or changing factors in commonly used types of bank credit transactions would make the accurate computation of a simple rate difficult in many cases and virtually impossible in some. We also are concerned that there may be many problems in defining and applying the term "finance charges," as it is used in the proposed bill, to the many elements in different types of credit transactions.

Since the American Bankers Association believes that disclosure legislation can be much more effectively administered and enforced at the State level, we also are disturbed about the provision in section 6(b) of the bill.

Under this section the Federal supervisory authority would be able to exempt from the Federal law credit transactions in a State only if the State law were identical in its substantive requirements. It is most doubtful that more than one or two State statutes, if indeed there are any, could meet this rigid test. We also believe that the provisions with respect to civil penalties as they appear in the bill could lead to substantial difficulties for lenders because of unjustified harassment by litigation.

As president of the American Bankers Association, I wish to express my appreciation and that of the association for this opportunity to appear before your committee to express our views on the vital questions which are raised by S. 1740.

At this juncture, with the committee's kind permission, Mr. J. O. Elmer, on behalf of the American Bankers Association, will continue our presentation and develop the points which I have briefly outlined above.

Senator DOUGLAS. I suggest that we let Mr. Elmer proceed.
Senator BENNETT. Yes.

Senator DOUGLAS. And we will reserve our questions till afterward.
Go ahead, Mr. Elmer.

Mr. ELMER. My name is J. O. Elmer. I am senior vice president of the Wells Fargo Bank American Trust Co. of San Francisco, Calif. I am appearing before this committee on behalf of the American Bankers Association to present the views of the association on S. 1740.

I appreciate this opportunity to appear before your committee and wish to go into more detail on some of the important questions raised by this bill. I would like to add that for many years I have been actively engaged in the field of bank installment credit lending. At the outset, I wish to repeat that the American Bankers Association has long supported the main goal of S. 1740, the full disclosure of finance charges in connection with extensions of credit. We do, however, have decided reservations about certain provisions of the proposed bill, particularly that which requires that finance charges in credit transactions be expressed as a simple annual rate.

It is our earnest opinion that the requirement contained in section 4(7) of the bill is impractical because it would be extremely difficult if not virtually impossible to comply with in many situations.

In absolutely regular credit transactions, exemplified by singlepayment loans, there are no variables in the terms of the loan and the bank lender can correctly state the simple annual rate with little or no difficulty.

Even with respect to such simple transactions where a bank may be able to make the conversion to a simple rate without much difficulty, there will be problems for small merchants who generate a large amount of consumer credit and who do not have charts and mechanical processes for making the conversion.

Many bank credit transactions involve irregular situations where there are variables or changing conditions which do not lend themselves to a formula which calls for the accurate conversion of finance charges to a simple annual rate. Characteristics of such variables, which would alter the simple annual rate, are—

(1) Extensions of time before the date of the first installment payment;

(2) Minimum charges typically where the transaction is very small;

(3) Skip payments, to adjust the payment schedule to the income periods of borrowers whose income is received at irregular intervals, as in the cases of loans to teachers and farmers;

(4) Pickup payments, where the borrower initially is not able to make an adequate downpayment but must wait until later; and (5) Weekly or irregular payments within the schedule itself. Thus, it is apparent that in consumer credit lending and in personal installment loans, it may be very difficult to calculate the simple annual rate for an individual schedule drawn to meet the irregularities suited to the needs of a particular borrower.

Senator BUSH. May I ask a question, Mr. Chairman?

Senator DOUGLAS. Surely.

Senator BUSH. You say it is very difficult. Would it not be absolutely impossible? Or would it?

Mr. ELMER. It is not absolutely impossible except in the case of revolving credit transactions. In all other cases it could be done but only after an extreme amount of work.

Senator BUSH. That is a good answer.

From a business standpoint, from a practical standpoint, it would be virtually impossible to comply specifically and accurately? Mr. ELMER. That is correct.

Senator BUSH. With the simple annual interest rate requirement?

Mr. ELMER. Virtually impossible.

Senator BUSH. In cases such as these five you are mentioning? Is that right?

Mr. ELMER. Yes, sir; that is correct.

Senator DOUGLAS. You are acquainted with the handbook called "Installment Financing, Practical Handbook," issued by the Commercial Credit Corp., of Baltimore?

Mr. ELMER. Yes, sir.

Senator DOUGLAS. On page 8 of that book (see p. 435), which consists of tables and charts converting interest rates into monthly payments, it gives an example on computing average cash time adjustments on irregular loans, also skip payments of equal amounts and skip payments of irregular amounts.

Does your bank use this?

Mr. ELMER. No, sir; we do not.

Senator DOUGLAS. But you know of many banks that do?

Mr. ELMER. It is possible and we certainly concede that on a schedule of this kind the simple interest equivalent could be computed. We have never said that that was not possible.

We have said that it was extremely difficult and so costly as to seem undesirable for the benefits received by the borrower.

Senator DOUGLAS. Does the American Bankers Association favor irregular payments?

Mr. ELMER. I do not believe that the American Bankers Association has ever expressed a specific opinion.

Senator DOUGLAS. I would like to call your attention to the Standards of Practice on Installment Credit, adopted by the American Bankers Association, which I asked to have verified. It says:

Banks should establish and maintain sound terms in relation to existing economic conditions. Unusually long terms, skip payments, low or no down payment plans should be discouraged.

Balloon notes and other plans which cause refinancing should be avoided. Will you take the card down and show him?

Mr. ELMER. I can see it, Senator.

Mr. BIMSON. That is correct, Senator, as a policy they should be avoided, should be discouraged. We admit and we agree to it and we think that is right.

Senator DOUGLAS. And yet you say that the fact that this system will not adapt itself-and I think it would adapt itself-to irregular payments and skip payments is a reason why we should not pass it. In other words, a practice which you discourage is now used as an objection to the bill.

Mr. ELMER. Senator, from time to time we find ourselves in a position of extending credit to those persons whose income is received at irregular intervals. If we attempt to demand of them payments during time when they have no income, we will only create a default in the obligation and subsequent embarrassment both to the buyer or the borrower and the bank.

Senator DOUGLAS. I only raise this question to follow what Senator Bush asked and to again point out that tables are already developed to help banks and those selling on installment financing to take account of irregular payments and skip payments of equal amounts and skip payments of irregular amounts. That is on page 8 of the book.

Mr. ELMER. May I illustrate how this book would work and give you some indication of my point?

Senator DOUGLAS. Surely.

Mr. ELMER. While it can be done, the labor involved is excessive for the ordinary transaction.

Senator DOUGLAS. Oh, if you have to start from the beginning I agree. But you could have similar books made out.

As a matter of fact, we have an approach for this in the credit union on the basis of 12 percent, and it does not take up too many pages. It is a very thin volume.

If it only takes these pages for a 12-percent-per-year rate, you can have similar pages made up for other percentage rates, and it would not be too large a volume.

Of course, you cannot sit down and do the whole thing afresh. No one pretends you should. Any more than you should figure out all the problems of dynamics before you start to run an automobile.

Mr. ELMER. The gentleman from the credit union explained that he could adapt that method to the utmost irregularity of payments, which is true. However, this means that if the transaction is a relatively normal one which has 12 monthly payments-let us assume there are not any irregularities—the credit union must make 12 separate calculations of interest during the life of this loan.

By the precalculated method of interest there is one calculation made.

As Mr. Bimson pointed out, on the equivalent add-on rate, so many dollars per hundred, this may be a lower effective rate than the credit union charges.

Nevertheless, the principal factor that we put forward here is that it is a very expensive procedure to figure interest 12 times when it can be done just once in the course of a loan.

There is one other point. The credit union deals on an intimate basis with its borrowers.

Senator DOUGLAS. Do you not figure this in advance? will be each month.

have to do it 12 times? Why can you You will have tables to show what this

Mr. ELMER. You cannot do it, Senator, if there are irregularities in the payment schedule.

Mr. BIMSON. Senator, as I interjected before-excuse me, pleaseyou heard the testimony this morning that for 44 days they charged 44 days' interest. For 31 days they charged 31 days interest. That is what I pointed out. They charge interest for every day, and, consequently, they pick up a lot of extra money which they can pay for these charges with.

Senator DOUGLAS. I think it shows the degree of precision with which these tables can operate when they work in days and not months. Mr. BIMSON. Senator, if we went to daily charges like that, the factor that you would come out with would be a higher cost to your consumer than their permissive late payments at the present time under this system. It would increase the cost considerably.

Senator DOUGLAS. I think your banks are just as efficient as the credit unions. If they can do it, you can do it.

As a matter of fact, I am not asking

Mr. BIMSON. We pay taxes. We do not get free rent or free help as was pointed out this morning. If we increase our costs there is

only way we can get that back-increased rates-which we have been trying to hold down.

And I think you will find these installment loan rates generally have not been raised hardly one iota in the last 10 years, contrary to other costs which have gone up.

Senator DOUGLAS. I do not think the question of taxes enters into this point.

But let me say here that we are not proposing that this be figured every day on the installment loans. I think it should be figured each month so you would not pay interest on amounts you do not owe. You should not pay interest on amounts you have already repaid. Mr. BIMSON. They do not, Senator.

Senator DOUGLAS. Well, all right.

Mr. BIMSON. May I suggest that you and Senator Bennett get together and let him explain it? He understands this thoroughly. Let him explain it so we will not take the time to do it now.

Senator BENNETT. I am flattered. Do not put me to the test.

Mr. ELMER. May I illustrate the inaccuracies in this handbook to which you have referred?

Senator DOUGLAS. Surely.

Mr. ELMER. If you take the example at the top of page 9, which is one of the three examples given on these two facing pages, you will note that they arrive at what is called an average cash time decimal of 0.40278.

This figure is arrived at by adding up the sum of the outstanding amounts during the period that this loan had to run.

If you followed the instructions contained in this book, it is then necessary to turn to page 20 of the book and look for a decimal.

Let us assume that this is a 100-percent advance. Look at the decimal under the 100-percent advance that comes most closely to 0.40278. (The table referred to follows:)