The present provisions of the D.C. Code are inadequate to deal with the modern types of lending, especially consumer lending. The present ceiling of 8% simple interest has been in the Code since 1920, and there are no provisions directly applicable to installment lending by banks. As a result there are areas of legal uncertainty in connection with some very common practices such as the use of credit cards and the use of the discount method of computing interest. These question are presently in litigation. However, we think it would be much better for these questions to be resolved through legislation. The court processes will not only take a long time but also may leave unresolved answers with regard to fact situations different from the ones presented to the court.

As you know, the District and the Maryland and Virginia suburbs constitute a single metropolitan area. Major consumer expenditures, such as an automobile loan or home-improvement loan, will ordinarily be filled in whatever part of the area offers the best price or convenience factor. It thus seems both fair and practical to relate the District interest ceiling to those of Maryland and Virginia. The bill, by adopting the lower of the two, where differences exist, is favorable to the consumer.

This office supports the adoption of S. 1938.
Sincerely yours,

WILLIAM B. CAMP, Comptroller of the Currency. HECHINGER,

Washington, D.C., August 24, 1971.

DEAR TOM: I urge you, when you reconsider S-1938, that you not allow this to pass your Committee without its including the specific authorization of the rates on revolving credit based upon the prevailing rates in the adjoining states of Maryland and Virginia, and also to include those items which were in the testimony of Benny Kass, D.C. Commissioner, National Conference of Commissioners on Uniform State Laws, and in his letter to you of August 9, 1971.

Cordially,

JOHN W. HECHINGER,

President.

WASHINGTON, D.C., August 26, 1971.

Re S. 1938.

To: Senator Thomas Eagleton.
From: John A. Spanogle.

Mr. Robert Harris of your staff invited me to submit comments on S. 1938. I was unable to write them before your hearings on August 5.

Three basic points should be made on S. 1938 as it was introduced.

1. The bill, as introduced, would be a great disservice to every District of Columbia consumer. It would allow D.C. banks to establish a consumer lending industry in the District for the first time, but it would provide no regulation of that industry whatsoever. Thus, it would allow consumer lending activities to begina field we all know is fraught with great potential for fraud-without protecting one single D.C. citizen from these frauds. There are no protections from balloon payments, wage assignments, credit insurance abuses, default judgments, deficiency judgments, pre-judgment attachments, harassment of debtors and misrepresentations. The substitute proposal of the lobbyist for Sears, Roebuck & Company is even worse, for it allows lending by both banks and retailers without regulation. The enactment of either bill would favor only creditors. What is needed is comprehensive legislation, which will deal with all potential abuses, before the D.C. consumer lending industry is created.

2. The bill, as introduced, is so ambiguous as to be unworkable. The interest ceiling is dependent upon Virginia or Maryland law. Are credit insurance and other "additional charges" similarly dependent? Are rebates on prepayment, refinancing or consolidation also dependent? Are delinquency, deferral, attorneys' and repossession charges limited? If not, lenders can easily avoid interest ceiling limitations. For example, credit insurance charges alone have been used to add 15% to the effective interest rate.

Further, the bill is not effectively enforceable against those who violate its interest rate ceilings. A violator who is caught and successfully sued need only pay back his ill-gotten gains. 28 D.C. Code § 3305. He does not lose any principal or allowed interest because he violated the ceiling, but only the usurious interest. Thus, there is no deterrent to violation. There also appears to be no agency charged with enforcing usury statutes, so enforcement may be left to private parties a source of only random enforcement at best, especially with a very ambiguous statute.

Both S. 1938 and the Sears substitute suffer from this problem of ambiguity. 3. The bill gives to the adjoining states the ability to set the District's interest rates without regard to economic conditions in the District. Interest rate ceilings will determine the availability of money for consumer loans. If it is felt that funds are not sufficiently available, because of consumer complaints, rate ceilings should be raised. (If there are no such complaints, rate ceilings need not be raised.) If it is later felt that too much money is available for consumer loans, and that consumers are complaining of being overextended through improvident loans, the rate ceilings should be lowered. Thus, rate ceilings should be constantly monitored to determine current consumer reaction to the availability of loan money to them.

However, it is impossible for legislators in Virginia or Maryland to find out how available consumer loan money is in the District, and no reason for them to care if they did. It is also unlikely for the Federal Congress to obtain this information, and very difficult to enact legislation on the subject unless catastrophe faces the District's residents. Therefore, to obtain the type of flexibility necessary for consumer protection legislation, it may be necessary for the Federal Congress to abandon all attempts at enacting specific rate ceilings and protective provisions, and instead to grant the authority to so do to the D.C. Government.

I understand that the hearings on August 5 examined in some detail the U3C and the Report of the D.C. Commission on Interest Rates and Consumer Credit. Some of my ideas on the U3C have already been furnished to Mr. Harris, consisting of a study of the U3C as compared to present Maine law, and a bill based on the U3C and submitted to the Maine legislature.

There are three basic problems with the U3C: (1) Its provisions against frauds and abuses are filled with too many loopholes to be effective. (2) It has no provisions for enforcement by private parties, and too many limitations on the public agency's enforcement powers to provide effective public enforcement. (3) Its rates, ranging up to 39%, may be too high and encourage improvident loans by high-risk lenders.

The report of the D.C. Committee does make some changes to approach each of these problems, but does not make sufficient changes to eliminate any of the three problems. A comparison of the bill submitted by them and the bill submitted to the Maine legislature will quickly illustrate the shortcomings of the former. However, with approximately ten amendments, the Maine bill has obtained the support of both the banking and retailing industries. I will send a copy of these amendments to Mr. Harris as soon as they are in final form.

In conclusion, I would urge the Committee to reject both S. 1938, and the substitute bill prepared by Sears, Roebuck & Company, in their present form. Instead, I would urge the Committee to report out a bill giving the D.C. Government full authority to set rates and also to establish by ordinance provisions protecting consumers against frauds and abuses. If the Committee reports out a bill based on the U3C, I urge it to go beyond the timid reforms of the D.C. Committee and to eliminate all the loopholes in the anti-fraud and anti-abuse sections, to provide effective enforcement through both private party and public agency action, and to reduce the possibility of mass overextension of consumers under the rate ceilings of the uniform version. If the Committee would like further explanation of any of the points in this memorandum, I will be happy to provide it.

THE METROPOLITAN WASHINGTON BOARD OF TRADE,

Hon. THOMAS F. EAGLETON, Chairman,

Washington, D.C., September 8, 1971.

Committee on the District of Columbia,

United States Senate,

Washington, D.C.

DEAR SENATOR EAGLETON: At the request of its 250-member Retail Bureau, the Metropolitan Washington Board of Trade wishes to augment its testimony of August 5, 1971, in favor of S. 1938.

Our prepared statement on that day was limited to the issues presented by S. 1938 which, as introduced, applied exclusively to "banking institutions" and would not have affected the retail industry. Your questions at the hearing suggested, however, that the Committee is disposed to deal more broadly with all forms of personal loan and consumer sales credit. The retail industry supports that approach.

We endorse the Uniform Consumer Credit Code with appropriate amendments to incorporate:

(a) The additional consumer protection provisions recommended by the District of Columbia Commission on Interest Rates and Consumer Credit and;

(b) Fixing maximum rates of interest on loans (Sec. 3.201) and maximum credit sales service charges (Sec. 2.201) conforming to the Commission recommendation that such transactions be "competitive with those in the surrounding jurisdictions of Maryland and Virginia.'

As a fully acceptable alternative, we support the amendment of S. 1938 to extend the reach of the bill to all loans to natural persons and to all retail credit sales in the District of Columbia.

As the Committee knows, the regulation of retail credit sales in the District of Columbia has been a source of considerable confusion over the last three years. The District of Columbia City Council adopted in January, 1969, a regulation dealing with consumer credit sales. Portions of the regulation, however, conflicted with the federal Truth-in-Lending Act creating a serious problem for retailers in the District. Conduct that complied with federal law would have violated the D.C. regulation and vice versa. In either case, credit sellers would have had an exposure to serious penalties.

When efforts to persuade the District government to revise the regulation were unsuccessful, an action was commenced in the United States District Court and retailer-plaintiffs obtained a temporary injunction restraining the District from enforcing the regulation.

While the case was waiting trial on the issue of a permanent injunction, the District of Columbia Council adopted Resolution 70-12 creating a Commission on Interest Rates and Consumer Credit. Consumer groups and credit grantors were fully represented. In September, 1970, the Commission filed its report recommending among other things:

(1) That District of Columbia law ought "to permit financial institutions and others extending credit in the District to be competitive with those in the surrounding jurisdictions of Maryland and Virginia."

(2) ".. that the consumer protection amendments incorporated in the accompanying proposed District of Columbia Uniform Credit Code be enacted by Congress."

The City Council received the report, but took no action on it.

Early in 1971, however, the Council adopted a revised Consumer Credit Regulation meeting the principal substantive objections of the retailer-plaintiffs and incorporating-as to retail sales only-many of the consumer protection features found in the proposed D.C. Uniform Consumer Credit Code.

The lawsuit has now been dismissed as moot, but a substantial question remains as to whether or not the regulation is within the Council's authority and it is not unlikely that the issue will be litigated if and when the District government has cause to enforce the deregistration provision of the regulation.

In recent months several lawsuits have been commenced against retailers in the District attacking the traditional rule that a bona fide sale of goods on credit is not within the scope of a usury statute.

This controversy has apparently been resolved by a unanimous decision of the District of Columbia Court of Appeals in Mary C. Morris v. Capitol Furniture and Appliance Co., Inc., D.C.C.A. 5621, A. 2nd (August 16, 1971), holding in accordance with a long line of cases in the District and throughout the country, (that an) agreement providing for monthly instalments and including charges for . . . financing and other related services for the privilege of buying on time rather than by cash is not violative of the usury statute.'

66

The retail industry is not, therefore, seeking any increase in the present level of retail credit charges in the District. Rather, we join with those who have urged that the Congress act to insure that consumers in the District are assured of adequate protection from overreaching and of an adequate supply of all forms of credit.

Congress has taken such action as to motor vehicles, providing a schedule of rates ranging from 16% to 32% a year depending on the age of the car. Almost every state has taken similar action as to all retail sales.

The principle of tying District of Columbia finance charge rates directly to rates for similar transactions in the adjoining states is sound and constructive. It would provide a common standard within the marketing area and encourage the competitive pricing of goods and services. It would provide a method for assuring that consumers received adequate protection and that adequate capital would always be available. It would relieve Congress of the burden of continuously making minor adjustments to specific rates.

We, therefore, urge the Committee to extend S. 1938 to retail credit sales so as to establish ceiling rates on finance charges comparable to the rates on similar transactions in Maryland and Virginia.

For the reasons given in our testimony at the Hearing (Transcript, pp. 55-56), we adhere to the view that the better method is to tie D.C. rates directly to the lower of the comparable Maryland and Virginia rates. However, if the Committee concludes that it would prefer to establish specific maximums not below the lower prevailing rate in Maryland and Virginia, this alternative will also have our full support.

The establishment of consumer credit rates can be accomplished either within the framework of the Uniform Consumer Credit Code or in the form of more limited amendments to S. 1938.

The retail industry throughout the United States has endorsed the Uniform Consumer Credit Code as an orderly, comprehensive and up-to-date codification of the varied and conflicting statutes adopted by many different legislative bodies over the last half century.

However, we will also give our full support to a more limited approach dealing exclusively with rates and the closely related issues discussed during the hearings. The Board of Trade appreciates this opportunity to augment its statement so to reflect the views of the Retail Bureau.

Very truly yours,

JOSEPH B. DANZANSKY,

President.

(Whereupon, at 1:40 p.m., the committee recessed, subject to call

of the Chair.)