I suppose this is what good business and competition would suggest he do. Senator BENNETT. If the Douglas bill passes, and I am sure I am not misinterpreting the chairman and author of the bill, this would tend to focus more public attention on the annual interest rate. Is that a fair statement? Senator DOUGLAS. That is correct, of course. The annual interest rate on the unpaid balance. Senator BENNETT. Yes, we are talking about the same thing. This, then, would force the merchant who is selling to make his interest rate as competitive as he makes his price. He would at least try. You take a $100 refrigerator, for example, and without arguing about the morality, you add on $8 to cover the cost of interest. When you take $2 off the $8 or $4 off the $8, that looks like a lot more than when you add $2 or $4 onto the $100. And because the interest cost is such a small part, or compares with the purchase price of the article as a very small part of it, there is a lot of leeway, and I would think that this might very well happen. Would you not agree with me that it is possible for the merchant to bury the cost of his credit in the price or part of it if he should decide to do it, Mr. Morgan? Mr. MORGAN. Senator, if I may comment on that, I think it is quite possible and, personally, I see nothing wrong with it so long as he is stating a price for his merchandise. Senator BENNETT. That is right. Mr. MORGAN. And if there is a separate charge for credit, a price for that charge. In any event, the customer, the buyer, can find out and tell exactly what the total cost, including the credit, be it concealed or otherwise, is going to be. This, I think, is what is good about this legislation. Senator BENNETT. Let me take you another step. Let us suppose this happens: Suppose the ABC department store decides it has to get competitive. So it starts to quote 8 percent on revolving credit. Do not hold me to arithmetic, but it adds 4 percent to the price of its merchandise. It has to add it to the cash price, too, because it cannot make that difference. So the credit union member who comes to you is now under a double problem. You quote him a higher interest rate, and when he goes downtown, he has to pay part of the cost in the merchandise that the merchant has added in order to get his credit price to be competitive. And I think that is a very real, or will be a very real, result of the passage of this bill. Yesterday, I displayed, and I believe they have been inserted in the record, three ads from a department store in Baton Rouge, La., (see p. 296) that say, "We will give you any kind of credit with no charge." I am not sure how long they can keep that up. Maybe they can, but this is the pressure always. Department store A says, "I am going to charge 8 percent on revolving accounts," but everybody's mind is focused on the cost of credit. So department store B says, "712 percent." And the pressure always is to bring it down rather than to raise it up. These people, the merchants, have got to have a profit or they cannot survive. And I think this is another thing that would tend to force them into the situation I have been describing. If they advertise credit for 18 percent and you have it for sale for 12, their customers are going to say, "These fellows are gouging me; I can get credit union money for 12," In fact, there are a lot of credit union members who say that right now, are there not? Anybody who quotes more than the equivalent of 1 percent a month is a gouger. They would not deal with him. And in the examples that you brought to us today, the thing that makes them interesting is the fact that the actual credit cost translated into annual interest was much higher than 1 percent a month. Senator DOUGLAS. In one case, 97 percent a year. it. Senator BENNETT. He was a gouger; there is not any question about This is the end of my comment. As a credit union member, I can see that this may be a mixed blessing, this bill. On the one hand, it may encourage more people to use the credit union service. On the other hand, it may force more merchants to conceal part of the cost of their credit service in their merchandise. And if they do that successfully, then the people who are going to borrow from you are going to be put under a double disadvantage. One final little note. Last time I was home, I asked the officers of our company credit union to tell me how many members were using the services of the union, and I found that the officers were using it and some others, but there were a good many who were not using it. The same day, I went over and visited a friend and said: Is there a credit union in your establishment? Yes. Do you use it? No. I never use it. Why not? Well, I have credit enough to go to the bank and make a loan on ordinary interest, not an installment loan, but a loan which I must repay after 3 or 6 months. So I never use the credit union. So you have this competition all the time. I think—I am very sincere about this summarizing again, that this bill may have a mixed effect on your offerings. Captain Terrill who testified the first day said that the Navy credit union tried to state its figures in simple annual interest, 9 percent, instead of three-quarters of 1 percent a month. And he said it created so much confusion: We had to drop it. Our people could not understand it; they did not want it. He said to this committee: The only way we could possibly change to a simple annual rate is to require everybody to do that. In other words, that meant to me that there are people who understand the kind of rate they are quoted and are satisfied with it, and there would be a period of confusion if by law they were forced to be told it is no longer three-fourths of 1 percent, but 9 percent a year. I appreciate the testimony that you have given. I think this is a very real problem for you and other people who lend money, but have no merchandise. You would have a problem of adjusting yourselves to the increased competition on credit rates which this bill would force on the American people. That is all, Mr. Chairman. Senator DOUGLAS. I will merely make two comments. The first is that while in certain circumstances, ignorance may be bliss, it is, on the whole, not something which should be encouraged. And it is desirable to reduce it. The second comment is really a quotation from a wise old man who was once an Associate Justice of the U.S. Supreme Court, probably the most famous man that ever sat on the bench. "The test of truth," said Judge Oliver Wendell Holmes, "is the ability to establish itself in the competition of the market." Provided that the market is fair, provided people know the facts, this is my faith, and I think it is your faith. Let the issue be tested as to which institution can best serve the American public, and we will abide by the results. We simply ask that the facts be known. Senator BENNETT. In that kind of a test, Senator, why would it not be wise to allow this group to change to simple annual interest and test it against the proposals of other people who do not use that plan? Senator DOUGLAS. It is asking one person to measure with a foot rule and the other with an inch rule. Senator BENNETT. Senator Douglas and I go on like this too long. He has given you two quotations. I have one, the author of which I cannot identify. I have forgotten his name. "He who increaseth knowledge, increaseth sorrow." Senator DOUGLAS. I think this testifies to the position of the Senator from Utah; he does not want to increase knowledge. The converse of this would be increasing ignorance. Mr. MORGAN. Mr. Chairman, if I may make just a closing comment to you, sir, I would say that credit unions would be very happy to compete in the marketplace on the basis of truth and honesty and rates stated. To Senator Bennett, I would like to say that I was a little apprehensive when he said he might ask us some critical questions. I appreciate his fairness. Our apprehension was unwarranted. We are very happy to know, sir, you are a member of a credit union. Senator BENNETT. I am a member of the lodge; I cannot tar you fellows. Mr. MORGAN. We do appreciate the opportunity to appear; we hope we have contributed something. Senator DOUGLAS. You contributed a great deal. I want to thank you very much. Mr. MORGAN. Thank you, sir. Senator DOUGLAS. Our next witnesses are representatives of the Consumer Bankers Association, Mr. Ralph W. Pitman, Mr. Thomas C. Boushall, and Mr. Robert A. Fischer. Gentlemen, we are very glad to have you. Won't you sit down, gentlemen? I would suggest that we permit these gentlemen to testify without interrupting. 73079-61-37 STATEMENT OF ROBERT A. FISCHER, EXECUTIVE DIRECTOR, ACCOMPANIED BY RALPH W. PITMAN AND THOMAS C. BOUSHALL, CONSUMER BANKERS ASSOCIATION Mr. FISCHER. With your permission I will read my statement first and then have Mr. Boushall and then Mr. Pitman follow me. My name is Robert A. Fischer, and I am executive director of the Consumer Bankers Association, with headquarters in Washington. The association was organized in 1919 and is composed predominantly of commercial banks which have a deep interest in the field of consumer banking. Our members are located throughout the country. At our 40th annual national convention in October 1960, the Consumer Bankers Association unanimously adopted a resolution regarding the proposed legislation on interest disclosure. In the interest of being helpful, and hoping to make a contribution to the lending industry, I would like to read the resolution as it was adopted; we believe it contains an alternative solution to the problem with which we are faced. Following is the text of our resolution : Whereas we believe that banks have the serious responsibility for continuing and maintaining consumer credit in banks upon the firm, sound, and beneficial basis it has come to occupy over the past 50 years, and Whereas while we believe that the members of the Consumer Bankers Association observe the principles of truth in advertising and disclosure of costs to users of installment credit; nevertheless, there are segments of business which through their failure so to do prejudice the far greater number of those who do, and Whereas we believe that the problem of compelling disclosure and truth in advertising is a State and local problem and not a National problem: Now, therefore, be it Resolved, That this association carry on an organized and continuing program, urging it members to 1. Express the cost of borrowing in terms of dollars; 2. Express rate of charge in terms of dollars per hundred per year; 3. Scrupulously observe the prime responsibility of banks for guiding seekers of installment credit so that such seekers of credit do not assume a burden of debt inconsistent with their ability to repay; 4. Carry on in their respective communities a continuing program directed to the public, to competition and to State and local government officials concerning the true principles upon which consumer credit has been successfully and soundly administered by banks during the past 50 years; 5. Adhere to the principle that if legislation is deemed necessary, it must be susceptible to practical administration and must be administered at the State level and not at the National level; and be it further Resolved, That a copy of this resolution be forwarded to each member of the association, to members of the Senate Banking and Currency Committee, to members of the House Banking and Currency Committee, to the secretaries of the State banking associations, to the Installment Credit Commission of the American Bankers Association, to the Federal Deposit Insurance Corporation, and the Federal Reserve Board. Thank you. Senator DOUGLAS. Who is your next witness? Mr. BOUSHALL. My name is Thomas C. Boushall. I am chairman of the board of the Bank of Virginia at Richmond and representative of the Consumer Bankers Association. All bankers are perforce in favor of truth in lending. There can be no objection to such a purpose. However, I respectfully submit that there are basic reasons for sound, legitimate, and appropriate objection to the enactment of this "truth in lending" bill. 1. The control, supervision, and development of legal provisions with respect to the lending practices, rates, statements, or other representations to a customer in any lending of money or in financing any installment purchases are a matter properly reserved to the States and should under no circumstances be a prerogative preempted by the Federal Government. To develop hearings on any abuses in this area that would stimulate more and more States to adopt corrective legislation is one thing. To express impatience that the States have not acted promptly or in keeping with congressional thinking would set a precedent whereby all reported abuses in all our economic, political, labor, or social relations should be corrected, supervised, and policed by the Federal Government. Such a course of action is repugnant to all American philosophy of conduct and government. 2. The stated purpose of the bill is to curb excessive use of credit for the acquisition of property and services. The claim that "excessive use of credit results frequently from a lack of awareness of the cost thereof to the user" and that "to assure full disclosure of such cost with a view to preventing the uninformed use of credit to the detriment of the national economy" is, as I see it, to tilt at windmills being blown across the Nation without any hope of correcting the very abuses complained of, but with the dangerous result of curtailing informed and uninformed use of credit that would seriously impair the health of the national economy out of all proportion to the minimal good that such an act could possibly achieve. It is a strange paradox to me to have this bill presented to the Congress to curtail excessive use of credit by the uninformed while there is tremendous pressure, and I think already passed, by the Congress and the administration to make available $15,000 homes with no downpayment and 40 years to pay, together with numerous other administration bills seeking to stimulate the use of all sorts of credits, informed or uninformed, to put the economy into high gear. It is indeed difficult to identify the differences here that do not represent a head-on collision of philosophy for opposite reasons. 3. To police the extension of $52 billion of consumer credit now outstanding, and being repeated annually, with $43 billion of such credit in the installment area, representing at least 43 million transactions annually, extended by at least 60,000 agencies, is a job so colossal as to stagger the imagination as to the policing force necessary if the purpose of the act is to be fulfilled in any degree. May I interpret there to say that passing a law is not of any effect unless it is going to be enforced. And I have seen it estimated that it would take a police force of 83,000 new employees of the Federal Government to do that. And if you figure what 83,000 new employees are going to cost the Federal Government in terms of salary and expenses, I think you get a right collossal figure as the cost of correcting this abuse. The Federal Reserve Board has requested already that the task not be assigned to their care and execution. The burden of policing regulation W during wartime was more than the several Federal |