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signment of contracts is a method of transferring the costs and, in many cases, the risk of handling installment contracts from the retailer to the finance company. There is a variety of contractual arrangements between retailers and finance companies or banks for the assignment of contracts. The nature of these arrangements is an important factor in determining finance charges. Contracts that are unassigned often have different risk characteristics than those that are assigned. Thus, finance charges may vary depending on whether or not retailers assign their contracts.

Finance Charges on Assigned Installment Credit Contracts. Sixtyeight percent of the value of all assigned contracts carried finance charges yielding an effective annual rate of 22 percent or more. For low-income market retailers this proportion was 98 percent. Sixty-two percent of all assigned contracts had rates ranging between 22 and 24 percent (table III-6 and figure III-1). Contracts assigned at these rates were, for the most part, entered into by general market appliance retailers. Practically all of the assignments at 17 percent or less were by general market furniture stores and, as noted below, usually involved, recourse arrangements with banks.

TABLE III-6.-Assigned installment contracts distributed by effective annual rate of finance charge

Recourse Arrangements on Assigned Contracts. Most commonly, finance companies, in accepting assignment of installment credit contracts from retailers, reimburse the retailer for an amount equivalent to the unpaid cash balance indicated on the contract. In the simplest type of transaction, the finance company's income from providing credit is equivalent to the stated financing charge and is designed to cover all costs of credit, collection, and risks of default.

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In fact, however, there are many possible variations on this type of transaction. A number of these variations were uncovered in the course of our survey. The first and simplest relates to the question of recourse. Typically, contracts assigned to finance companies are on a nonrecourse basis. In such circumstances the finance company assumes all risks associated with default and is solely responsible for any proceedings to enforce satisfaction of the debt.

Assignment, however, may be on a recourse basis, in which case the retailer assigning the contract in effect guarantees it in the event of customer default. In terms of total value, almost all contracts on a recourse basis involved banks serving general market furniture retailers.5

More than 50 percent of total assignments [and 73 percent of assignments to finance companies] were at rates yielding effective annual finance charges of 23 to 24 percent (table III-6 and appendix table A). The highest yielding nonrecourse assignments to finance companies were by low-income market retailers. Fifty-five percent of such assignments yielded 26 to 29 percent. Assignments with the lowest finance charges (17 percent or less) involved, for the most part, banks who took paper on a recourse basis (appendix table A). The latter's activity, however, was limited almost entirely to contracts involving sales by general market furniture retailers.

Participation and Holdback Arrangements. In addition to recourse considerations, agreements between finance companies and retailers may specify participation or holdback fees. A participation arrangement, frequently referred to as a kickback, is a bonus given by a finance company to a retailer assigning a contract. This bonus involves some percentage return over and above the initial unpaid balance of the contract. It is the equivalent of the retailer and finance company splitting finance charges. Twenty-nine of the forty-nine retailers in our sample reporting installment contract assignments had a participation arrangement with one or more finance companies (table III-7). These returns to the retailer ranged between 0.5 and 5 percent of the amount of the unpaid cash balance.

Holdback arrangements may be viewed as the reverse of kickbacks. There were nine retailers who reported a holdback requirement by finance companies. This is a restrictive provision assessed upon retailers who are in a poor bargaining position and have generally poorrisk paper that they want to assign. Finance companies and banks in these cases are reluctant to take the contracts unless the retailer is willing to take less than the full amount of the initial unpaid cash

There were instances, however, when finance companies took assigned installment contracts only on a recourse basis. These were usually on contracts assigned by low-income market retailers.

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balance. In other words, the retailer must literally "pay" the finance company or bank to take the assignment. This is a payment over and above the finance charges paid by the customer originally signing the contract. Holdbacks, which ranged from 3 to 30 percent, were reported primarily by low-income market retailers. These payments are held in reserve by the financer until all contracts are liquidated. Losses are charged against this reserve and holdback payments are returned to the retailer only if the losses do not exceed the amount held back. Lowincome market retailers were unable to assign a significant volume of installment contracts at less than 26 percent (effective annual rate) without some form of holdback arrangement. Other retailers assigning large quantities of paper, usually at 23 to 24 percent, for the most part, had no holdbacks charged against them.

TABLE III-7.—Special provisions included in contractual arrangements between retailers and finance companies or banks

FINANCE CHARGES ON UNASSIGNED CONTRACTS Sixty-five percent of reported installment credit was unassigned (table III-2). The volume of unassigned contracts on which finance charges were made ($27.2 million) was heavily weighted by department stores who accounted for $18.9 million or over two-thirds of the total (table III-4). Department stores were alone among retailers assigning no contracts. Installment sales amounted to 20 percent of their total sales.

Other unassigned installment credit was supplied by general market furniture stores and low-income market retailers. General market furniture retailers held $4.6 million in contracts, equal to 43 percent of their credit sales and about 17 percent of total sales. Low-income market retailers held unassigned contracts of $5.9 million, equivalent to 80 percent of all their credit sales and nearly the same percent of their total sales. For those low-income market retailers imposing separate finance charges on installment credit, the value of unassigned

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contracts was $3.6 million, equal to 64 percent of this group's total sales, virtually all of which were on an installment credit basis.

Ninety-three percent of the total value of unassigned installment contracts carried finance charges yielding an effective annual rate of 20 percent or less (table III-8 and figure III-1). This was heavily affected by the relatively low rates on unassigned contracts financed by general market department stores and furniture stores.

Finance charges on unassigned contracts of department stores ranged from 17 to 20 percent. Our survey indicated that most contracts (89 percent) were at the 20 percent rate (appendix table B). Finance charges by general market furniture stores for the most part (98 percent) ranged between 15 and 17 percent.

Finance charges by low-income market retailers were more variable. Among this group of retailers one large company, which sold entirely on installment credit, made no finance charges on its unassigned installment contracts, preferring instead to price its merchandise to cover installment costs. Other low-income market retailers charged an average effective annual rate of 23 percent on unassigned installment contracts. The highest effective annual rates of finance charges made were 33 percent and 27 percent. Total contracts at these rates accounted for about 40 percent of the total value of contracts held by those lowincome market retailers making finance charges. The other predominant effective annual rate was 18 percent and accounted for 43 percent of the total value of contracts (table III-8 and figure III-1).

TABLE III-8.-Unassigned installment contracts distributed by effective annual rate of finance charge 1

! Includes all installment contracts for which separate finance charges were specified.

2 Less than 0.1 percent.

Source: FTC Survey.

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JUDGMENTS, GARNISHMENTS, AND REPOSSESSIONS BY RETAILERS

When an account under an installment sales contract becomes delinquent, the holder of that contract can proceed to collect by several legal means. A judgment can be obtained that will permit repossession of the merchandise or garnishment of the wages of the purchaser. If the retailer has assigned the contract without recourse, the finance company or bank takes the risk of loss and proceeds to exercise its legal rights. Consequently, retailers are not involved in the collection process if they assign without recourse. If a delinquent account comes back to the retailer who has assigned with recourse or if an account originally financed by the retailer himself becomes delinquent, the retailer does not become involved in legal processes if he turns the account over to a collection agency. For these reasons, many retailers in this survey had no records on this volume of judgments, garnishments, or repossessions.

Eleven low-income market retailers obtained 2,690 judgments in 1966. Their legal actions resulted in 1,568 garnishments and 306 repossessions (table III-9). In contrast, general market retailers reported very few judgments. The 8 furniture and home-furnishings stores providing such data reported only 70 judgments for the year 1966. Low-income market retailers obtained almost that number of judgments in an average week. One large department store, whose 1966 sales far exceeded the total for the entire low-income market group, reported only 29 judgments.

TABLE III-9.—Judgments, garnishments, and repossessions on delinquent installment contracts reported by District of Columbia retailers, 1966

To gain additional perspective on the extent to which the courts are being used as a collection agency, the number of suits filed in 1966

• Repossession can be accomplished without court action by the holder of the installment conditional sales contract. In such instances, if the proceeds of a public sale of the repossessed item does not cover the unpaid balance plus fees, the holder can still sue on the contract and get a judgment for the deficiency.