law with respect to secured retail installment sales and the provisions of S. 1740, to show how and where these two are parallel and where they differ. Senator DOUGLAS. That will be inserted at any point satisfactory to the Senator from Utah. (The table referred to follows:) Comparison of Utah law or secured retail installment sales (15-1-2a) with 8. 1740 Utah S. 1740 I. Contract disclosure provisions in writing: 1. Cash sale price.. 2. Down payment. 3. Unpaid cash balance. 4. Insurance and optional benefits must be separately listed. 5. Official fees separately listed.. 6. Amount of unpaid balance. 7. Amount of finance charge (time price differential). 8. Contract balance (total dollar charge). 9. Number of installments.. 10. Date of each installment. 11. Amount of each installment. 12. Simple annual rate... II. Delivery of installment contract. III. Delivery of all insurance contracts.. IV. Must contain all of agreement.. V. Must be signed by buyer. VI. Must be signed by seller.. VII. Regulates rates.. VIII. Provides for credit refund for payment in advance. Senator BENNETT. That is all I have. X X. X X. X X. X Senator DOUGLAS. The first witness this afternoon is Mr. Andrew Lamb, treasurer of Montgomery Ward & Co., accompanied by Mr. Charles J. Barnhill, counsel for the company. I may say for the record I am glad to have representatives both of Montgomery Ward and Sears, Roebuck, two great Illinois corporations of which we are very proud. We are very glad to welcome them. Senator BENNETT. How did you get them both? Senator DOUGLAS. Probably through the enterprise of Chicago. We are the center of the mail-order business of the country due to the foresight and intitiative and good business standards of these firms. STATEMENT OF ANDREW LAMB, TREASURER; ACCOMPANIED BY CHARLES J. BARNHILL, COUNSEL, MONTGOMERY WARD & CO. Mr. LAMB. Thank you very much, Mr. Chairman. Mr. Chairman and gentlemen: My name is Andrew Lamb. I am treasurer of Montgomery Ward & Co., Inc., an Illinois corporation. With me is Charles J. Barnhill, counsel for the company. Montgomery Ward was founded in 1872 and introduced credit services to its customers in 1917. The company operates 527 retail stores, 645 catalog stores, and 9 mail-order houses. It is the third largest retailer of general merchandise in the United States. During 1960, annual sales approximated $14 billion, of which approximately 40 percent were credit sales. In accordance with the request of the Honorable Paul H. Douglas, Senator from Illinois, I am appearing before this subcommittee in order to testify and present the views of Montgomery Ward on S. 1740. It is the stated purpose of this bill to assure full disclosure of credit charges with a view to preventing the uninformed use of credit to the detriment of our national economy. Montgomery Ward agrees with the principle of honest and proper disclosure to its customers of the credit charges incurred on purchases of merchandise. There are many States which now have laws that require full disclosure of credit charges. We comply with such laws and, in addition, we make full disclosure of our credit charges in those States which do not have such laws. Montgomery Ward endorses the principle of full and honest disclosure of the credit charges simply because we consider it to be good business practice and sound customer relations. I am authorized to state that Montgomery Ward is opposed to S. 1740. Our principal objections to this bill are 1. The bill is unworkable.. 2. The bill disregards and confuses the legal distinction between the lending and borrowing of money and the sale and purchase of merchandise on credit. 3. The bill is discriminatory and it does not contribute to more informed use of credit. Our objections are not that we are opposed to disclosure of credit charges, but rather as to the manner by which this bill requires the disclosure to be made. It is our belief that we have consistently made full disclosure of credit charges to our customers for the past 44 years. Montgomery Ward and most general merchandise retailers would be seriously affected by this bill. Montgomery Ward is not unique. Our problems are those of a large segment of the retailing industry. Our objections and our comments, therefore, are applicable, in my judgment, to a large segment of the retailing industry. Our first objection to this bill is that it is unworkable. The bill requires retailers to disclose credit charges for the sale. of merchandise stated as a simple annual rate. This can be done only if assumptions as to time of credit usage or amount of credit charge are made as to each credit sale-in our case, some 30 million transactions per year. These assumptions might or might not be true. Such disclosure would frequently be based on erroneous assumptions. This would lead to false disclosure statements which would be misleading and deceptive to purchaser. Deceptive and untruthful disclosure would negate the objective of this bill in that such misleading information would contribute to and not prevent the "uninformed use of credit to the detriment of the national economy." Informed use of credit presumes valid information for the cost of credit, not misinformation." The bill requires retailers to do that which cannot be done; to truthfully disclose credit charges as a simple annual rate. We, at Montgomery Ward, have devoted considerable time in attempting to determine a practical method for computing a simple annual rate required by this bill. We have concluded that the many experts who testified last year on a similar bill were correct when they concluded that no amount of mathematical skill can satisfactorily convert retail credit service charges to a simple annual rate as required by the provisions of the bill. Let me present a few of the difficulties in the computation of a simple annual rate as they apply to our company. Montgomery Ward offers two types of deferred payment plansrevolving charge and time payment. Both plans involve credit charges for additional services rendered. Under the "revolving charge" plan, the customer is permitted to make purchases and use this plan as a 30-day charge account or as a deferred payment account. The customer may elect to use the account as a means of extending payments over a period of months. If he so elects, the customer is assessed a monthly credit service charge of 12 percent of the unpaid balance of the prior billing period. His scheduled payment is approximately 10 percent of the unpaid balance or a minimum payment of $10 per month. A typical revolving charge transaction does not permit the seller to know how long the customer will use the credit, since the buyer may exercise any one of many repayment options. One of the features of the plan is that the customer may pay the amount in full within 30 days of the billing statement, or he may pay the minimum scheduled monthly payments as called for in his agreement, or any amount in between these two limits. The revolving charge plan permits the customer to defer, until after the billing date, his decision as to the amount of payments within the prescribed limits he wishes. to make. Thus, the period of time the credit is to be used will not be known until some time after the sale has been consummated. The bill requires disclosure prior to the consummation of the sale, an impossibility without knowledge of the time of credit usage. Furthermore, a typical revolving charge transaction does not permit the seller to know the amount of the credit charge at time of sale. Since the customer has an option to pay in full within 30 days with no credit charge, there may be no credit charge. Approximately one-third of our revolving charge customers exercise this option. The bill requires disclosure prior to consummation of the sale, an impossibility without knowledge of the credit charges. Thus, both time and amount of credit charge are required for a simple annual rate computation, neither of which is known at the time of a typical revolving charge sale. The other means of credit purchasing is on a time payment account sometimes referred to as a monthly payment account. Under this plan, a customer is charged a price which consists of the cash price plus a stated amount for credit charge indicated in the current catalog or provided on the retail sales check. The customer is advised of the monthly payment at the time of sale, or, if not ascertainable at time of sale, then by mail. The uncertainty of the elements essential to the computation of a simple annual rate also applies to time payment sales. In a time payment transaction, after the initial purchase, the amount of the customer's payment is based on the balance owed prior to the current purchase plus the time price amount of the current add-on purchase. If a customer had made a purchase in other store departments the same day or on a recent prior day, such purchases would not be known at the time of the current sale. Therefore, it would not be possible for the seller, prior to the consummation of the current time payment add-on sale, to compute the correct amount of the repayment schedule. Since this is not possible, the seller would not be able to know the time component essential to the computation of a simple annual rate. The bill requires a simple annual rate disclosure prior to the consummation of the sale, an impossibility without knowledge of the time of credit usage. We have sought for a practical solution as there is a compelling economic motive to reach such a solution. In the final analysis, any additional cost to credit grantors to make compliance with this bill possible, must be passed on to the consumer in the form of higher prices. The general merchandise retailer who deals primarily in small ticket sales is particularly conscious of this fact. Montgomery Ward does deal in small ticket sales and is, therefore, anxious to have a practical solution presented. An impractical solution might lead many retailers to discontinue selling on extended credit or to conceal the credit cost in the selling price. This poses a serious dilemma to those retailers who cater to both cash customers and credit customers. It is not as simple as to say that the retailer will offer a cash price only or that he will offer a substantially higher credit price. The retailer must decide whether he will retain more customers by adopting the lower cash price policy or adopting the higher credit price policy. In either case, many retailers would suffer the loss of a substantial portion of sales volume. Many retailers could not easily adjust to the forced transition. Retailing is an industry in which wide range swings in profits can occur with relatively small changes in sales volume. The economic consequences of a major readjustment in retail trade practices to adjust themselves to an all-cash or all-credit pricing policy are of serious proportions. Until a practical solution is found or until the requirement for simple annual rate computation is removed from the bill, all general merchandise retailers selling on credit are under a sword of Damocles. It is significant that those who favor the simple annual rate computation have not found, so far as I know, a solution in the year that has elapsed since the introduction of a similar bill. The nearest that the supporters of this bill have come to a solution is to dismiss the problem summarily with a suggestion that a regulatory agency charged with the administration of the bill will spell out the technical details for computing the simple annual rate. Referral of the problem to a regulatory agency still does not solve it. The agency then must endeavor to find a solution. However, Mr. William McChesney Martin, Jr., Chairman, Board of Governors of the Federal Reserve System, the agency charged with administering this bill, stated the complexities during last year's hearings: In its present form, the bill seems to us to raise a number of difficult problems of administration and enforcement. Very detailed and complex instructions would be needed to insure uniformity of credit grantor. Our second objection to this bill is that it disregards and confuses the recognized and well-established legal distinctions between the lending and borrowing of money on the one hand and the sale and purchase of merchandise on credit on the other. One transaction relates to financial institutions; the other relates to merchants. A merchant supplies his customers with merchandise. If the customer desires, the merchant provides the additional service of selling merchandise on credit. The merchant is not engaged in the lending of money. Yet this bill provides that these two entirely different transactions must conform to a single arbitrary yardstick by requiring a statement in both cases of a "simple annual rate." This is a yardstick which until now has been applied only to the lending and borrowing of money. During the course of a year, Montgomery Ward will handle approximately 30 million charge account transactions, in about 1,200 different locations, for approximately 212 million customers buying merchandise on credit. These will include the purchase of merchandise; and possibly several purchases may be made in any 1 day, 1 week, or 1 month (the usual billing period); crediting merchandise returned by the customer; making adjustments for one reason or another to the customer's account; and crediting payments made by the customer. Some accounts are paid prior to the time any service charge is made and others pay their account from 2 months to almost any number of months after their initial purchase, depending upon their consistency of buying from Montgomery Ward. This is a retail credit service, not lending of money. This bill seeks to legislate that a lending institution and a retailer offering credit services must follow the same procedures or practices. This is equivalent to legislating that the two are the same, when, in fact, they are not. Legally and factually, the financial institution and the retailer are engaged in different businesses, and a legislative declaration will not and does not change this fact. Our third objection to this bill is that it is discriminatory and that it does not contribute to more informed use of credit. The bill would force retailers to conform to the trade practices of financial institutions. This is discriminatory because such a legislative directive can only work to the hardship of the industry that is compelled to change its practices, specifically the retailing industry. The financial institution is engaged in the lending of money and its trade practices generally conform with the requirement for a simple annual rate computation. The retailer does not lend money and his trade practice is oriented to the pricing of goods and services at a stated price and Montgomery Ward discloses the charge for credit services in dollars and cents. The retailer discloses that which is truthful and the only part that can be truthful-the credit service charge in dollars and cents. It is my opinion that a simple annual rate disclosure could not be truthful. Untrue and misleading simple annual rates negate the stated purpose of the bill, which is "to assure a full disclosure of such costs with a view to preventing the uninformed use of credit to the detriment of the national economy. A false impression is created when the differential between the cash price and time price is compared with the charge for use of money offered by financial institutions. This can only work to the disadvantage of the retailer. The retailer is put in the position of attempting to justify to his customers that his charge is for credit service and is not comparable to a financial institution's charge for the use |