(Whereupon, at 12:40 p.m., the subcommittee was recessed, to be reconvened at 2: 30 p.m., this date.)

AFTERNOON SESSION

Senator DOUGLAS. The committee will come to order. I understand that Senator Bennett has two or three matters to take up.

Senator BENNETT. Mr. Chairman, I have been sent and have received a copy of a letter addressed to you on the 17th of July, as chairman of the committee, from Ernst Dauer. I put one letter into the record earlier that came to me from Mr. Dauer.

Senator DOUGLAS. I will insert the letter in the record at any place that the Senator wishes.

Senator BENNETT. I don't know exactly where it belongs, but I would hope that will be inserted in the record.

Senator DOUGLAS. It will be inserted in the record. (The letter from Mr. Dauer follows:)

HOUSEHOLD FINANCE CORP.,
Chicago, Ill., July 17, 1961.

Hon. PAUL H. DOUGLAS,

Chairman, Production and Stabilization Subcommittee, Senate Banking and Currency Committee, Senate Office Building, Washington, D.C.

MY DEAR SENATOR DOUGLAS: Thank you for your invitation of July 7 to testify and present my views on S. 1740, as "an expert in the field of consumer credit," for the benefit of the Senate Banking and Currency Committee. Circumstances make it impossible for me to appear in person. It is necessary, however, that my position be made clear since statements of mine were quoted out of context in the hearings with respect to S. 2755.

In introducing S. 1740 before the Senate, you emphasized a pamphlet issued 19 years ago by Household Finance Corp., apparently in the mistaken belief that it supports this bill. Because it does not do so, it is necessary that the record be set straight with respect to the position of Household Finance Corp. This statement is submitted with our request for its insertion in the record. We oppose S. 1740 for a number of reasons: Its title is deceptive and it is being supported by irrelevant references to alleged abuses which it would not cure even if they exist. Its declaration of purpose (preamble) recites conditions which do not exist and a purpose which the bill will not achieve. Its provisions are both inappropriate and ineffective to attain its stated objectives; rather they would substitute chaos for the present orderly progress of State regulation. It would give the fringe of unscrupulous vendors and lenders an advantage over their honest competitors. It would operate to the detriment of the consumers whom it purports to serve. It sets forth what purports to be, but is not, a deceptively simple solution of a complex and difficult problem. Crediting the authors with good faith, we find the bill to be naive and visionary. And finally, the problems with which it seeks to deal are not a proper field for Federal legislation. The title, "The Truth in Lending Act," tends to prevent honest men from discussing a complicated problem. The advocates of this bill have no monopoly on truth or the desire for truth. Those who oppose the bill are placed in a dilemma. Since they do not oppose truth, they have testified that they believe in the abstract principle that the consumer should be given all possible information upon which to make a rational choice; a proposition which all will support, but this bill will not effectuate. Their testimony was publicized as support for S. 2755. The fact was ignored that most of these witnesses pointed out that they do not favor the bill for various reasons including that it is impractical, inoperable, futilely visionary, and self-defeating. Thus, businessmen, trade associations, and Government officials have been publicized as favoring the bill, though care ful reading of their testimony does not warrant such a conclusion.

The hearings with respect to S. 2755 and the remarks when S. 1740 was inserted in the Record listed every type of abuse in the consumer credit field, as though this bill would cure them. Few of these were germane to this bill, as your statement in the Congressional Record on April 27 (p. 6414) seemed to recognize.

The preamble says first, "that economic stabilization is threatened when credit is used excessively." You point to the dollar volume of consumer credit (to which you have added home mortgage debt) as evidence of its excessive use. Every careful student recognizes that the mere volume of outstanding consumer debt is not valid evidence of excessive use. It is well documented that what is "excessive" use of credit is not in fact determinable. The Federal Reserve Board in its six-volume study, "Consumer Installment Credit," reached the conclusion in 1957 (and has given no evidence of change) that the volume of credit, the degree of its use, and the conditions and terms of contracts generally were sound. If we accept the competence of the Federal Reserve Board to reach such a conclusion, the statement in the preamble that "economic stabilization is threatened" becomes very "iffy."

The preamble then says "the excessive use of credit results frequently from a lack of awareness of the cost thereof to the user." The weight of evidence supports the view that consumers do not think in terms of, or place much weight on, the "simple annual rate on the outstanding unpaid balance of the obligation." The decision of a family to use or not to use consumer credit rests on many variables, but chiefly on confidence in the continuity of the family income. "Shifts to consumer credit rates over the cycle"-which do not exist to any material degree (see July 6, 1961, statement of Chairman William M. Martin) – would be insignificant in determining the behavior of consumers compared with their confidence or lack of confidence in future income.

The preamble then states that a full disclosure of the cost of credit is sought to prevent "the uninformed use of credit to the detriment of the national economy." No evidence exists that "uninformed use of credit" is so great as to be detrimental to the national economy. This objective is more colorfully stated in Newsweek of April 4, 1960, which you inserted in the Congressional Record (p. 6424). It states that you "would protect the Nation's bumpkin borrowers from themselves by making credit costs as simple as ABC." The tiny fraction of consumers who use credit "excessively" do so as a result of a variety of factors. Ignorance, illiteracy, poor management, susceptibility to enticing offers, could all be cited. Consumers who now abuse their credit would not be deterred by the disclosure of its cost in terms either of dollar charges or simple annual interest rate.

If the assumption were correct that the current use of consumer credit is excessive and if the assumption were correct that disclosure of finance charges would result in a reduced use of consumer credit, then the end result of S. 1740 would be reduced purchase of goods and services by consumers, reduced rates of production, reduced employment, a reduced scale of living for our citizens, and a reduced rate of economic growth.

In short, the preamble of S. 1740, which states its basis and purpose, consists of a series of unsupported or inaccurate assertions. The inference is inescapable that this preamble was included to create a semblance of constitutionality.

S. 1740 sets forth a deceptively simple alleged solution for most difficult and complex problems. It blandly ignores the wide variation in the well-established customs and practices of the various segments of the consumer credit field. It attempts to give sharply different subject matters a uniform treatment. It seeks to cure all ills by requiring a statement of the "finance charge." The "finance charge" is not measurable with sufficient precision to be able to define it by statute or administrative action. This is obvious in the light of the legislative and judicial history of "interest" in the field of lending. For centuries the Anglo-Saxon courts have tried to resolve the question of what is "interest" in thousands of cases. The courts have had to decide each case on its own facts.

One sentence cannot equate the numberless variations of agreements by which consumers buy or borrow to satisfy their needs or wants. Nor could an administrative agency resolve all the questions of what is and what is not interest in one flash of genius.

One of the principal results of S. 1740 would be to create a framework in which every consumer-creditor would be tempted to conceal or distort the essential facts of its transactions and to vary its conditions so as to set forth a "finance charge" in the most favorable light. This would be particularly easy in sales finance where tangible goods are involved and all manner of variations in nomenclature can be resorted to without fear of exposure. The seller can change the "cash price" of the goods almost at will. S. 1740 would tempt seller or lender to substitute investigation fees, collection charges, brokerage, insurance premiums and commissions, payments ostensibly to third parties, and

other substitutes from the finance charge. The bill would tempt seller and lender to reduce their refunds of charges for prepayment and to increase charges for delinquency or extensions. Determination of what is and what is not actually interest or finance charge must always remain in the last analysis a matter for the courts to determine on the facts of each case.

The "disclosure" would have to be of the original terms of any consumer debt. These terms are often made meaningless by prepayments, renewals, delinquencies, and extensions. The debtor's behavior in these respects can often be manipulated by the creditor to his own advantage. So the creditor who can draw the "slickest" contract, and who is most adept in maipulating the debtor's behavior, can advertise terms which put the candid and responsible creditor at a disadvantage. The crafty creditor will emerge from the transaction with a much higher return than originally contracted for or disclosed.

Thus S. 1740 would create a business climate in which creditors would be driven to deception and consumers would be the victims, not the beneficiaries, of the proposed legislation.

The problems with which S. 1740 deals are not a proper field for Federal regulation. Sumptuary legislation which attempts to regulate the living habits of the people has never been successfully applied by a Federal agency. Witness the prohibition law. Their customary actions are too varied for a remote Government to apply one rule to them. It is the experience and the verdict of the centuries that such legislation has never been successful except at the local level. Legislation in this field, to the extent that it may be required, belongs in the province of the States. They are making sound and continuous progress in correcting abuses in consumer credit.

Cash lending is regulated by small loan laws in more than four-fifths of the States containing more than 85 percent of the total population and about 90 percent of the urban population of the United States. These laws are effective in protecting the interests of the consumer. Whereas 20 years ago there was little or no legislation with respect to the installment credit transactions of commercial banks, these have been consistently improved in recent years for the protection of the consumer.

While historically the legislation in the installment selling field has come later than in cash lending, the rate at which laws regulating sales finance transactions are being adopted has been rapid during the last decade. Today more than three-fifths of the States require disclosure of the elements of the transaction, including finance charges, with a particularity which the administrative machinery of the States can police, but a Federal agency could not expect to enforce.

It remains to set forth the conditions surrounding the issuance of the pamphlet, "Charges on Small Installment Loans to Consumers" in 1942, which does not constitute a "most eloquent plea" for S. 1740. The pamphlet was addressed to commercial bankers. It set forth the reasons why a simple interest rate on unpaid principal balances should be adopted as a standard for the calculation of charges on installment loans made by banks. It was issued in 1942 when the laws regulating installment lending by banks were in a formative stage. At that time, the volume of consumer credit held by banks, sales finance companies, and retailers-all unregulated with respect to charges-was relatively small. The pamphlet expressed the hope of Household Finance Corp. for a type of regulatory law which we then thought, and still think, would be ideal in the public interest. Such laws failed to pass in any considerable number. Different laws were enacted under which practices, then only tentative, have been woven into the fabric of American business and the lives of consumers. Consequently the plea in the pamphlet is for a solution not now attainable. History has passed us by. The proposed legislation would apply to radically different subject matter than that which existed when the pamphlet was written.

The volume of consumer credit held by banks, sales finance companies, and retailers has grown to great size, accounting for the lion's share of the total amount outstanding. In each of these individual fields, the present practices are based upon long-established customs. State laws for the regulation of installment lending and selling have been adopted, and have been solidified, based upon those customary practices within each segment of the consumer credit field. The States are rapidly disposing of the problems which S. 1740 purports to handle.

Household Finance Corp. has always believed that truth in dealing with the public is not only desirable, it is imperative for continued success. Almost 50

years ago, its founders cooperated with the Russell Sage Foundation in arriving at a sound solution to chaotic conditions in the cash lending field when that foundation drew up the uniform small loan law. It supported the adoption of such laws in the various States, believing that this constituted sound legislation, best for the consumer and the public. It has recognized throughout its history the need for greater education of consumers with respect to the sound use of their money. For more than 30 years, through its money management institute, it has made available pamphlets and film material which are designed to promote sound money management and better buymanship by the individual family.

HFC has always believed in full disclosure of the terms of the contract and has advocated such disclosure legislatively. In fact, the uniform small loan law is a model act in this respect. It requires a disclosure to the borrower at the time a loan is made of all of the pertinent elements of section 4 of S. 1740. It also contains provisions to prevent evasion of the limitation upon the rate of charge authorized in the law and prevents deception in advertising. The small loan law customarily requires that the rate of charge be stated as a percent per month, because this is the manner in which the consumer receives his income and the manner in which he customarily pays installments on a loan. Thus, it is stated in the form which enables him most simply to protect himself against miscalculation of the dollar amount of interest due when he makes his payment.

On the basis of 83 years of experience in the field of consumer credit, we believe that we know how lenders, finance companies, vendors, and, above all, consumers will react under varying circumstances and pressures. For the reasons summarized in this letter, we oppose the passage of S. 1740. To enact it would be a tragic mistake. The effective way to deal with these problems is the orderly evolution of intelligent regulation at the State level, rather than an edict directed indiscriminately at diverse business and the millions of consumers in 50 States.

We repeat our request that this statement be inserted in the transcript of the hearings on S. 1740.

Sincerely yours,

ERNST A. DAUER.

Senator BENNETT. Yesterday Mr. Steadman appeared as a witness and at the end of the questioning by Senator Clark, Mr. Steadman made the admission that he would not give a client an opinion that S. 1740 was unconstitutional. It bothered him because he did not get into the record a balancing statement that neither would he give the client a signed statement that it was constitutional, and he wrote me a note for the sake of balancing the record, which I would like to offer for the record.

Senator DOUGLAS. This will be inserted in the record at the conclusion of Mr. Steadman's testimony. (See p. 822.)

Senator BENNETT. I have also learned that the American Bar Association has been studying a procedure or a program for developing research on this problem of consumer finance with the thought of recommending, as it has done in other cases, a uniform law, and Mr. Steadman wrote me today, and I would like to offer for the record also to be placed at the end of his other testimony his explanation of the process by which we hope to develop the background for such a study. Senator DOUGLAS. That will be inserted following the other letter. Senator BENNETT. And he enclosed with it a copy of the minutes of a meeting held May 10, 1961, on this subject, together with other comments which developed this question of their program.

Senator DOUGLAS. That also will be inserted at the conclusion of his testimony.

Senator BENNETT. We have had a lot of discussion about the adequacy or inadequacy of State laws. I would like to offer for the record a table, a simple table, showing the comparison of the Utah