SUPPLEMENTARY STATEMENT OF COMMISSIONERS BURKE, KENNEDY, MCBRIER, STADTLER, AND WEST To fully inform the Council, and to aid future Commissions, we respectfully set forth our views to supplement the principal report. At the outset, however, each of us wishes to express our personal appreciation to the Council for being extended the honor and privilege of serving on the Commission. Substantial progress was made by the Commission in developing recommended legislation which would consolidate and modernize the consumer credit laws of the District of Columbia, but we can not stress too strongly that the product of our efforts is incomplete. Our recommendations should not be implemented until the gaps we left regarding interest rates and credit charges are adequately filled. To achieve the progress that the citizens of the District need, our work will have to be completed at some other time by some other body. It has been recognized for many years that community requirements for credit in the District of Columbia were not being met. The lack of sufficient capital for the credit financing of real estate purchases and consumer products, as well as business enterprise, is suppressing economic progress particularly of lower and middle income individuals and small business. The lack of wide-spread credit availability may contribute to social ills as well. Piecemeal efforts to improve particular segments of the multi-faceted credit market have failed. Mortgage loans and consumer goods financing are highly restricted. This situation is partially a reflection of the credit squeeze affecting the total economy, but nonetheless, it is apparent that credit conditions are tighter in the District than they are in surrounding states within the single metropolitan marketing area. One reason for the disparity is that the market rate for mortgage and consumer loan financing exceeds the usury law in the District. Whereas Virginia, for example, quickly reacted and exempted from its usury laws all mortgage financing in response to market conditions the District has not. The recent temporary exemption of federally insured mortgages in the District of Columbia may give some partial relief, but it points out the incongruous situation in which conventional, uninsured mortgage loans yield a lesser return than F.H.A. and V.A. mortgage loans which are virtually risk free. As a result, home ownership is unattainable to a very broad segment of the community. Clearly, the interest rate ceiling for housing loans must be raised to assure the smooth flow of mortgage funds adequate to serve the needs of the District. Moreover, most states, including Maryland and Virginia, provide an interest rate structure which can support small loans, but the District does not. The lack of small loan availability is directly attributable to economically unreasonable interest rate ceilings, a further demonstration of the fact that credit availability is materially governed by the level of credit rates. It was in this context that the Council in February of this year adopted Resolution No. 70-12. The Resolution created this Commission for the purpose of implementing the Council's earlier commitment "to undertake a comprehensive study of interest rates and consumer credit." Section 1 of the Resolution states that the Council established the Commission "to study interest rates, usury laws and consumer credit problems, and to make recommendations, including specific suggested regulations and legislation to the Council." Section 3 of the Resolution states that the Commission shall undertake a comprehensive study * * * including laws affecting interest rates and consumer credit," and "ways of stimulating availability of consumer credit in low income areas.' (Emphasis added) We set out these portions of the Resolution to support our understanding of why the Council convened this Commission. The breadth of the study areas requested by the Council indicated a recognition that consumer credit problems must be dealt with as a whole if a successful program is to be formulated. The scope of the Resolution wisely acknowledged the economic inter-relationship between credit rates and credit availability and between debtors' rights and creditors' remedies. The Resolution directed us to study all these factors, report the facts as we found them and recommend remedial measures. We further emphasize the language of the Council's Resolution to define the nature and role of the Commission. By calling for a "comprehensive study" of interest rates and other issues, it seemed clear that the Commission was established to gather facts, draw conclusions, report findings and recommendations on all issues specified by the Council. The draft legislation we submit is modeled with significant modifications upon the Uniform Consumer Credit Code (U.C.C.C.). There are two major differences. The first is that our proposal substantially strengthens the provisions of the Code dealing with consumer remedies and debtors' rights, and correspondingly limits the rights and remedies of creditors. The second major difference is that our draft does not provide for a system of credit service charges. The basic question of consumer credit and mortgage rate ceilings is left for resolution by either the Council or the Congress. This Commission should have done it and could have done it. In drafting the U.C.C.C. after six years of study, the special committee of the National Conference of Commissioners on Uniform State Laws explicitly recognized and acted on two critical points which a majority of this Commission has declined to examine, endorse or refute: "(a) a combination of too low ceiling rates, too substantial restrictions on creditors' rights and remedies, or too great enhancements of debtors' rights or remedies, might deprive the less credit-worthy of lawful sources of credit and drive them to loan sharks' and other illegal credit grantors in whose hands they will enjoy no legal protections; it was to remedy the 'loan shark' evil that the Russell Sage Foundation proposed its uniform Small Loan Laws; and "(b) the provisions governing ease of entry into the market, uniform disclosure of costs and terms, rate ceilings, restriction of creditors' rights and remedies, enlargement of debtors' rights and remedies, and powers granted to the Administrator are so inextricably interrelated that any substantial change in one area requires a major review of the balance struck in all other areas." These two points go to the heart of the issues we were requested to study. The numerous meetings held between February and September were almost totally devoted to the subjects of debtors' rights and creditors' remedies. These are admittedly important subjects. However, no real effort was made to study credit charge rates, an equally important subject which bears directly on the availability of credit. This Commission's failure to study and to make recommendations with respect to credit charges, so as to supply a background for Council or other legislative action, will, we fear, substantially delay remedial steps as well as impose a heavy burden on the Council. In the world of commerce duties and obligations are not assumed without cost nor are benefits bestowed without price This is a simple economic truth. Economically realistic rates must be set to bring about increased availability of credit. It follows too that a shift in the present balance between borrowers' and buyers' rights and remedies, and lenders' and sellers' duties and obligations, which this Commission deems desirable, must be accompanied by a credit charge structure which will support the changes and fairly apportion costs. In a real sense credit rates cannot be separated from other changes in our credit laws. They are inextricably intertwined. If fair and compensatory rate ceilings are not established, credit will be further restricted for the same economic reasons the District of Columbia has not attracted small loan financing. The Commission's failure to supply the vital ingredient of rate ceilings in the debtor-creditor mix is a serious omission, and, in our opinion, is unresponsive to the request and needs of the Council. In our view, a recommended schedule of consumer credit and mortgage rate ceilings is a distinct issue quite apart from the question of what body should have the power to prescribe them. It is our position that the Commission should have recommended realistic ceilings to the Council which then would have been in a position to take whatever steps it deemed advisable in the way of review, revision and implementation. But, because we did not, the Council is now confronted with the task of gathering basic facts, evaluating evidence, drawing conclusions and making findings on the complicated, but most fundamental issue of interest rate ceilings. Clearly the Commission passed up its opportunity to complete its work for the Council and for all citizens of the District. The Commission's failure to differentiate the economic question of consumer credit and mortgage rate ceilings from other considerations prevented a full and adequate response to the Council. As businessmen thoroughly committed and involved in the District of Columbia, we share a deep concern for the economic development of the city. We share further the conviction that a healthy business environment requires that the law must protect all citizens from abuses and exploitation and must at the same time provide incentives to attract business investment and to maintain growth. The Commission's recommended reforms relating primarily to the rights of buyers and borrowers goes only half way to our goal. An adequate schedule of consumer credit and mortgage rate ceilings must be provided to reach it. VINCENT C. BURKE. SEPARATE REPORT FROM MEMBERS OF THE D.C. COMMISSION ON INTEREST RATES AND CONSUMER CREDIT The Council's mandate to this Commission was to study and make recommendations pertinent to (a) existing laws and regulations affecting interest rates and consumer credit; (b) means of stimulating availability of consumer credit and competition in low-income areas; (c) general consumer credit problems existing within the District; (d) extortinate loan operations within the District; and (e) other matters related to consumer credit and consumer affairs. That mandate offered exciting possibilities for both full investigation of problems and imaginative designs for remedying those problems. For example, in the area of FHA-VA interest rates, an issue that precipitated the establishment of the Commission, the Council's mandate would have allowed the Commission to study not only industry and consumer needs, but to identify sources of money not currently committed to mortgage financing in the District, and to design the means necessary to make those sources available to bring sanity to the mortgage market. But that task requires more than basic authorization. The task requires the means to perform it-an experienced staff and the money to hire expertise and imagination. This Commission had neither staff nor money. Sixteen already busy and fully committed commission members were no substitute for that need. As the result, the Commission added little new knowledge or advice to mortgage financing issues. The interest rates were raised, in spite of our knowledge that "higher rates may be ineffective at least as often as they are effective in attracting either a large total of funds or a larger share of the funds available to all borrowers." The interest rates were raised in spite of our knowledge that interest increases have the affect of pricing poor people out of the FHA-VA market. By mid-1967, when FHA interest rates were lower than they are now, less than half of all American families could afford to maintain the average FHA-financed new home. The triple increase of FHA rates in 1966 resulted in approximately 40% fewer FHA financing arrangements for families with incomes under $5,000. The Commission was, however, able to fruitfully discuss some of the major problems existing in retail credit sales and small loans. It has made a valuable contribution by making the basic recommendations that holder in due course status should be abolished; creditors should be required to elect between repossession and a suit on the unpaid contract balance, with the resulting abolition of the deficiency judgment; garnishment law should be rewritten to reserve a larger portion of very small pay checks for subsistence; and attachment before judgment should be outlawed. And, of course, we can only agree with the Commission recommendations codifying existing statutory and case law declaring illegal certain practices like referral sales, confessions of judgment, wage assignments and false advertising. But, because the Commission was pressed by staff and time limitations it appears to us that it is now accepting by default a revised version of the Uniform Consumer Credit Code that still retains many of the defects that have caused opposition to the Code from consumers across the country. Among the Code's deficiencies that in fairness must be examined before it is approved or accepted are the following: 1. INTEREST RATES The UCCC proceeds on the premise that it is fair to allow market competition, rather than legislation, to fix interest rates. That premise is unfounded in fact. The historical reason for usury ceiling is that competition is lacking in some segments of the loan market and that the necessitous borrower must be protected from exploitation. We believe that proposition still pertains to the loan market 1 Report of the Commission on Mortgage Interest Rates to the President of the United States and to Congress, August 1969, Dissent by Congresswoman Sullivan and Congressman Patman, p. 128. available to District residents and that the District of Columbia has a duty to protect especially poor borrowers from the greed now evinced in the market. The interest rates now recommended by the UCCC (up to 36% for loans under $300) are much too high to accept without a throughgoing analysis of the loan market, its needs, and alternatives for making cheaper money available. Finally, it must be realized that the UCCC sets general usury statutes for consumer related transactions including those secured by real estate, like home improvement sales, that have been subject to an 8% limitation. We believe that the legislative body setting interest rates, whether Congress or the Council, should be required to differentiate between the types of security in setting new ceilings a distinction that is nowhere referred to in the revised UCCC as it is presented to vou. The proposal presented to you by the Commission contains broad authorization for charges additional to the maximum interest that literally fit within the classic definition of interest as all costs incident to the extension of credit. Independent justification for each of these charges was not shown the Commission, and should be required before the charges are accepted. 2. SCOPE The UCCC and the revised version presented to you applies only to those creditors and lenders "regularly engaged" in their respective businesses (See, e.g., Sections 1.301(8), (11), (30). Because the recommended legislation is not a licensing law, we recommend that this restriction be dropped to the end that every consumer is afforded some basic protection before he ventures into the market. 3. FINE PRINT WAIVERS AND DISCLAIMERS Disclaimers of implied or express warranties, "as is" clauses, for example, exist in fine print clauses in universal use in the District and present recurring problems of consumer abuse. We believe such clauses, presenting as they do one of the principal sources for exploitation, should be totally prohibited. The Commission did not study this problem. The UCCC does not deal with it; its failings are repeated the revised version presented to you. 4. FALSE AND MISLEADING ADVERTISING The Commission's recommendation relating to false advertising adds little, if anything, to existing law. The truth-in-Lending Act restricts some forms of false advertising relating to consumer credit. The provisions of Regulation Z are rather precise in further defining these restrictions. The provisions of Truth-in Lending are not subject to exemption from Federal enforcement. §22-1411, D.C. Code, now prohibits the use of "any false, untrue, or misleading statement, representation, or advertisement with intent to sell . . . any goods, . . . or anything of value. . . ." The UCCC does little more than repeat existing provisions of Truth-in-Lending and does not go as far as the District's criminal law because it limits its provisions to "false or misleading advertising . . . concerning the terms or conditions of credit." § 22-1411 extends to all sales. The revised UCCC presented to the Council continues the mistake. Why make any effort if the new law is not going to advance consumer protection? The defects of existing laws are that consumers are often required to prove an intent to deceive and cannot carry the heavy burden of proof, that the failure to disclose material facts is not generally considered fraudulent, and that the law has little real teeth because consumers have difficulty proving damages and establishing their right to a remedy. Because we believe that a new law should ameliorate these problems, we recommend a provision that (1) extends to all sales of goods and services, as well as credit sale and loan transactions; (2) prohibits any representation that omits material information necessary to make the statement not false, misleading, or deceptive; and (3) permits the consumer to rescind the resulting transaction upon discovery of the fraud or deception. 5. HOLDER IN DUE COURSE The Commission made the commendable commitment to outlaw the holder in due course sanctuary used by finance companies to isolate themselves from consumer defenses. However, section 4.112 of the revised UCCC recommended by the Commission still continues remnants of that law that we now agree is no 66-583-71—3 longer justifiable, in restricting the consumer's ability to assert his defenses against the seller's assignee. We believe that the restrictions are inconsistent with the Commission's commitment. Further, we think the restrictions are unnecessary, because the existing law pertaining to assignments protects the ordinary assignee from liability that exceeds his investment. 6. INSURANCE The Commission gave no special consideration to the many problems caused by consumer insurance, its price, its coverage, and its being imposed regardless of need. Many consumers have taken the position that the UCCC provisions on insurance do nothing to advance the effort to deal with the problems. Because Article 6 of the revised legislation presented to the Council by the Commission only repeats the UCCC provisions, we believe that a new effort to examine insurance problems and remedies should precede any approval of the UCCC provisions. 7. REPOSSESSION The Commission version of the UCCC proposes banning deficiency judgments for contracts and loans not exceeding $2000. Again, the Commission did not go far enough in our opinion. The Commission version requires the creditor to resell repossessed collateral that is not the subject of the sale, but secures a loan or sale, in order to assure that proper credit be given a buyer in the situation where the collateral's value exceeds the unpaid balance of the obligation. But, it does not extend the same protection when a creditor repossesses collateral that is the subject of the sale and provides for compulsory resale only where the buyer has paid over 60% of his obligation. We believe that serious consideration sould be given to requiring compulsory resale in all cases. 8. REMEDIES The remedies provided by the UCCC are too weak to effect substantial deterrents to violations of the new law. The Commission's proposal continues that weakness. In some instances, the remedies are so weak that they provide positive incentives to violate the law. For example, Sec. 7.202 provides that the ultimate civil penalty for charging excessive interest rates on supervised loans is the greater of either the finance charge or ten times the amount of the excess charge. But to claim that penalty, the borrower must first demand a refund of the excess charge from the creditor, the creditor must refuse to make the refund, and the debtor must prove that the excess charge was made "in deliberate violation of or in reckless disregard for this Act." This penalty system allows a creditor to take excess charges, refund only when he is caught in the act, and then, only to the extent of the excess, and escape penalty altogether. 9. CREDITOR HARASSMENT We believe that insofar as the UCCC and this revised version attempt to present compreensive overhauling of consumer credit law, the law should also deal with the problems of creditor harassment. Much needs to be accomplished to protect District residents from the kind of extortion and haranguing accompanying present collection tactics. Some proposals have been accepted or are being considered in other jurisidctions that would serve as a sufficient basis from which to design remedies for District problems, to fill the substantial omission in the package of laws presented by the Commission to the Council. 10. STRUCTURE OF THE LAW The Commission's proposal is a series of laws intended to be enacted by Congress, with specific authorization to be granted to the Council to regulate interest and other facets of consumer problems. This structure merely continues the existing bifurcated legislative power in the District that has fractured District law relating to consumer protection to the point that the laws appears in small pieces in the D.C. Code and D.C. regulations. Of course, the fracturing of District law, has been caused in part by the retention by Congress of some of the power to legislate in areas pertinent to consumer protection, like interest rates and insurance requirements. Many problems of consumer abuse are purely local in nature and require flexibility in attempting to design remedies-a flexibility that makes action by the Council more appropriate than action by Congress. |