the ability to figure $6 or $7.50 or $18 on $197 or $1,970 for 27 months is beyond the average person of high school or even college graduate. Senator PROXMIRE. A person who puts his money in a savings and loan may get interest at 3, 312, or 4 percent. He roughly knows if he leaves it in a length of time, he will get his interest.

On the $6 per $100, if he leaves it in 6 months, he is paying 20 percent, 8 months 16, 10 months 13, 12 months 11, 15 months 9, 18 months 7, all the way down to 36 months 3.89. So there is a difference on a loan. There is a difference with $6 per $100 of it being either an effective 3.89 percent on the one hand, if it is over a 36-month period or some 20.57 percent. And the consumer cannot know this unless he has an understanding of the overwhelming importance of time on this. Therefore I say a true annual interest rate is going to give him the kind of meaning that he has to have in order to shop around and be able to buy effectively.

Mr. BOUSHALL. I don't disagree with you for a moment that it isn't going to give him something that has the potential meaning. My only point is that he doesn't get that meaning because only 5 percent of the American people would understand what that interest rate is, will figure out to be.

Senator PROXMIRE. That may be. I think that 5 percent would shoot up very rapidly once you had this kind of a bill in effect and the lender had to specify what the true and simple interest on an annual basis was. Then people would be talking to it and they would have competitive, they would be informed and they would learn in a hurry.

Mr. BOUSHALL. May I make one more point.

Senator PROXMIRE. Yes.

Mr. BOUSHALL. The department stores in our community charge 112 percent a month for revolving credit. That runs from $100 to $3,000, whatever it is. We lend money on a fixed simple interest, a discount rate on a monthly payment basis, that would not exceed 11.9. The people in our community do not come to us and borrow at 11.9 to pay off the 18 percent per annum. They are paying that. And they are very intelligent, college graduate people, women who had graduated from school, college too. And they do not come to us. We advertise, if you will come down here and consolidate your obligations, we can relieve you of all these payments, these high-interest-rate payments, and we will lend you the money not to exceed an interest rate of 12 percent per annum, 6 percent plus turnover. Yet the department stores have so tremendous a revolving credit volume that they have to go to New York banks and sell them $21⁄2 to $5 million of it instead of people coming to us who lend the money at no greater than two-thirds the cost.

Senator PROXMIRE. I think you make an excellent point. There will still be irrational action. This wouldn't solve all our problems. Mr. BOUSHALL. The 18 pecent on revolving credit has been rising like this the last 10 years in America, while the rise in loans made by banks has risen at a lower rate.

Senator PROXMIRE. I believe this bill will help you generally.

Mr. BOUSHALL. It might help us a great deal, but I won't sacrifice my belief that it is a State function in order to surrender it to the Federal Government in order to improve my business.

Senator PROXMIRE. You don't believe that you do in reference to the Pure Food and Drug Act.

Senator BENNETT. You say the people who are dealing with the department stores are irrational.

Mr. BOUSHALL. No; I didn't say that, I said they wouldn't buy a lower rate.

Senator BENNETT. The Senator did.

Senator PROXMIRE. They may be very rational. There may be irrational behavior.

Senator BENNETT. I think they are very rational. They go to the department store and they find a washing machine or something and say to the clerk, will you hold that while I go down to the bank and make a loan. It is much simpler and more reasonable and time saving and convenient for them to buy what they want and get it that way but with an irregular total on their ticket it is difficult to handle. But you don't want to make a loan for such small sums as $7.75 today and tomorrow morning, when she goes back to the department store, make another loan for $13.30.

Mr. PITMAN. This is why the automobile dealer who charges 10 percent for his new cars, 6 percent for his new car paper in our State controls the business very substantially, although not all of it, but very substantially, and all the borrower would have to do is come to us and borrow it for 6 and 412. He pays the dealers because he can sign the paper and walk away. The same is true of insurance coverage.

Senator BENNETT. We had a banker witness who said he loans on 8 percent simple interest on consumer loans. One of the interesting connections he has with the automobile dealers in his town is that they use him to get an advantage over their competitors. When they get into a price squeeze, they say, "All right. You go down and borrow the money for 8 percent, because this beats my competitors who wants to sell you a car and finance it."

But the situation is reversed when the deal is the other way between the same two dealers. He confesses that Sears, Roebuck is in the community doing a big business on 11/2 percent revolving credit, because this is convenient and they can operate in quantities that are small and irregular compared with the formal business of going into a bank and signing a note and borrowing $100 or $200.

I don't know what variations you will operate under. Maybe you will loan $212.15.

Mr. PITMAN. We will lend any money they want to borrow, sir, but it is very unprofitable when we lend under $300.

Senator BENNETT. Under $300.

Mr. PITMAN. Very unprofitable.

Senator PROXMIRE. Thank you very much, gentlemen.

I think your testimony has been extremely useful and we are very grateful to you.

Our next witness, and our last witness today, is Mr. William J. Foley. Mr. Foley represents the Maine Merchants Association.

Mr. Foley, Senator Muskie, I saw him on the floor, is tied up in a conference on legislation for the Department of Urban Affairs. He wanted to extend his apologies. He wanted very much to be here and he asked me to let you know how much he appreciates your coming to testify.

STATEMENT OF WILLIAM J. FOLEY, MAINE MERCHANTS
ASSOCIATION, INC., PORTLAND, MAINE

Mr. FOLEY. Thank you very much.

My name is William J. Foley. I am executive secretary of the Credit Bureau of Greater Portland, Portland, Maine, which position I have held for 14 years.

I am appearing here on behalf of the Maine Merchants Association, whose membership includes hundreds of retailers of all types in every city and most towns in the State of Maine. Most of this membership is composed of typical small community retailers.

The Maine Merchants Association is opposed to S. 1740, known as the "Truth in Lending Act." The association is opposed to this act, not because they question the desirability of full disclosure of credit costs to the customer, but because, in their opinion, this bill would not accomplish that end, and would be completely impractical in operation.

The various members of the Maine Merchants Association offer a number of different types of credit. These credit plans were devised over a period of years to meet the needs of their business and their customers. Except for the regular 30-day charge accounts, or the 90-day accounts, which are payable in three equal monthly instalments, most of the other types of credit plans involve some finance or carrying charge. This charge is made to help the merchant pay for his cost of doing business on credit. These costs are well known, and have already been presented before this committee. They involve such items as payroll, telephone, supplies, credit bureau and collection expense, bad-debt losses, accounts receivable insurance, bookkeeping machines, the cost of money to carry receivables, and many other items. It is recognized, of course, that any business firm must make a charge to a customer for the use of its money over a period of time. This is true whether the money is used in the form of a loan, or as the cost of merchandise purchased from the firm.

Some of the other types of credit extended by association members include the lease, or installment account; the coupon or script account; the rigid-limit revolving credit account; and the flexible revolving credit account. Each of these types of credit has a finance or carrying charge which the customer agrees to pay at the time of opening the account. The amount of this finance or carrying charge is generally determined by the decision of store management as to what income they must receive from this source to help pay for the cost of doing credit business. Competition too has a bearing on the amount of this carrying charge, since a store will not normally want to make a charge larger than its competitor.

The lease account is generally used for hard goods, or big-ticket. items such as furniture, appliances, or expensive equipment. The finance charge on this type of account is generally obtained from a chart which is available for different rates of interest. Actually this is not interest, this is an add-on.

Senator PROXMIRE. The statement as I have it here says "rates of interest."

Mr. FOLEY. That is an add-on charge.

One store we contacted, one furniture store advised that their chart is based on an interest charge of approximately 8 percent. Another store advises that their chart is based on an interest rate of 10 percent. Senator BENNETT. That is also an add-on ?

Mr. FOLEY. Yes.

Under section 4, S. 1740 has seven requirements for disclosure of finance charges. It requires that any creditor shall furnish, prior to the consummation of the transaction, (1) the cash price; (2) downpayment or trade-in; (3) difference between (1) and (2); (4) charges to be paid in connection with the transaction, but which are not incident to the extension of credit; (5) total amount to be financed; (6) the finance charge expressed in terms of dollars and cents; and (7) the percentage that the finance charge bears to the total amount to be financed expressed as a simple annual rate on the outstanding unpaid balance of the obligation.

On a lease account, it is already the custom of retail stores to furnish all of the information required by section 4 of this bill, except the final item of simple annual rate. In the case of a one-sale transaction, with equal weekly or monthly payments agreed upon, it may be possible to determine this "simple annual rate" by use of the formula already recommended by proponents of this bill.

Senator BENNETT. Would you tell me what a lease account is?
Mr. FOLEY. An installment account.

Senator BENNETT. That is just a synonym for the word "installment"?

Mr. FOLEY. Yes.

However, the formula is based on having equal installments throughout the life of the contract. The question raised by one furniture dealer was "What if payments are of unequal amounts?" I am advised that there are occasions when a customer makes a large purchase and requests that the payments be larger during one particular period than during another. This may be due to seasonal employment, or may be due to another obligation which the customer knows must be paid during a certain period. On that transaction, it would not be possible to determine the simple annual rate by use of the formula proposed.

When we get into the question of revolving accounts, we find that the provisions of this bill would create a real problem of compliance. The term "revolving account" is used to describe a type of account with which the customer makes purchases of wearing apparel, home furnishings, and other retail items, such purchases being paid off according to agreement in 6 months or 10 months or 12 months or 18 months. The account is always considered open and the customer may make charges to this account without revisiting the credit office so long as she does not exceed either a prescribed limit in the amount owing or so long as the total amount owed does not exceed an amount considered safe by the store for credit purposes.

The customer receives a monthly statement and pays monthly a required installment payment. The monthly statement, which is prepared at the end of each monthly period, shows in detail all purchases, credits, and payments made during the period, and the credit service charge which is typically computed on the unpaid balance of the account at the beginning of the monthly period.

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Senator BENNETT. Wouldn't it be more accurate to say "which is typically computed on the unpaid balance of the account at the beginning of the next month"?

Mr. FOLEY. I believe it would be.

Senator BENNETT. Or at the end of the monthly period in which the account is prepared.

Mr. FOLEY. That is done in two different ways, but you are correct there, at the beginning of the next monthly period, I believe, would be

proper.

A typical revolving credit account might involve 35 purchases averaging $6 each during the year, five credits averaging $6, 10 payments varying from $10 to $18, unpaid balance of $80 to $120, and monthly service charges ranging from $1.20 to $1.80 per month. This is computed at 112 percent.

Under a rigid limit revolving account, a customer is given a maximum credit limit, this limit being determined by the size of the monthly payment the customer wants to make and by the amount of unpaid balance the store is willing to accept as a practical credit risk. For example, if the customer's payment is $20 and the store offers a 6-month plan, the customer's maximum credit limit is $120. This means that the account is "open to buy" up to that amount at all times.

Because the rigid limit plans did not provide customers with the flexibility that they required, many stores adopted flexible limit plans. Under this plan, no predetermined limit is established. The amount of credit to be extended is left partially to the customer's judgment, but is basically controlled by the credit office through regular authorization procedure when the customer is paying approximately one-fourth, one-fifth, one-sixth, etc., or whatever the plan might call for, of the outstanding balance. The customer's monthly payments increase as her balance increases, and decrease as her balance decreases. Senator BENNETT. Is the same 112 percent charged on the balance at the end of the month?

Mr. FOLEY. Yes.

Senator BENNETT. The charge is the same, although the method of determining the limit is different.

Mr. FOLEY. That is right.

Senator BENNETT. All right.

Mr. FOLEY. At the time of purchase, no one knows how much the customer is going to buy, or how she intends to pay for her purchases on a revolving account. With so many unknown factors, it would be impossible to quote the annual rate on such an account.

Revolving credit has been evolved over a period of years as an effective customer service by retailers. It is a service which customers like and use regularly. If this bill is passed, it could result in making it impossible for retail stores to offer this type of account.

In summary, it is our contention that under the provisions of this bill, retail stores could offer only three types of accounts. One would be the regular 30-day charge account with no carrying charges. The second would be the 90-day or three-payment account with no carrying charge. The third type of account which could be offered would be the traditional lease or installment account, with equal installment payments over a specified number of months. It would make all other types of retail credit impossible.