The report has a great many recommendations which I think as a side issue should be of great interest to your committee, dealing with the matter of the "holder in due course" doctrine, "balloon" payments, referral sales, door-to-door solicitations, as well as the recommendations that I have cited to you about ceilings on interest rates and consumer credit. The CHAIRMAN. Thank you very much. Does that complete your statement, Mr. Hahn? Mr. HAHN. Yes, Mr. Chairman. The CHAIRMAN. Do I take it from your statement you believe the City Council should set all interest rates, or would you limit it just to interest rates with regard to banks specifically, or how much or how little? Mr. HAHN. We think it would be desirable that the City Council be given the power to increase ceilings on interest rates of all kinds as well as credit charges of all kinds. Actually, that is the critical power. The CHAIRMAN. Now, is that irrespective of the Uniform Consumer Credit Code? Mr. HAHN. In the case of the Uniform Consumer Credit Code, this report does have recommendations that have to do with other credit practices. We would also, of course, recommend that the recommendations of that report be implemented. The interest rates and consumer credit charges are a part of that report. As to that issue, the Commission had two parallel views. One is that those rates should continue to be fixed by Congress. Of course, in that sense, the bill before us is another form of the Congress setting interest rates. That is not inconsistent with the first recommendation. But the Council feels that it prefers the second view. It would like the power to set ceilings for FHA and VA loans, and with what I hope has been viewed by everybody as a good experience in that venture, that we should go to the major issue and give the entire power to the city government. The CHAIRMAN. Has the Council implemented that authority which Congress gave to it last year, and has it set rates? Mr. HAHN. What it had the power to do, actually, was for periods of time to remove the ceiling, and that is what it did in 1970 when the crisis required it. It permitted those loans to be granted at the rates which were then fixed by the FHA and the VA. The CHAIRMAN. Since the prime rate and other rates have dropped, is the ceiling now in effect? Mr. HAHN. The ceiling is not in effect, but the Council should, and probably will, restore the ceiling again. The CHAIRMAN. Are current FHA and VA loans below the 8 percent? Mr. HAHN. Yes. The CHAIRMAN. Thank you very much, Mr. Hahn. Mr. HAHN. Thank you, Mr. Chairman. The CHAIRMAN. The report to the City Council from the Commission on Interest Rates and Consumer Credit, and the documents from Mr. Tucker to the chairman of the Housing and Urban Development Committee, and such other documents as Mr. Hahn has submitted, will be made part of the record. (The documents follow:) PREPARED STATEMENT OF CITY COUNCIL CHAIRMAN GILBERT HAHN, JR. Good morning, Senator Eagleton and distinguished members of the Senate District Committee. Thank you for requesting the opinion of the District of Columbia City Council on this legislation. I am very intrigued by the bill which Senator Eagleton has introduced which basically provides that the ceiling on interest rates for banking shall be the lesser of applicable rates set either in the State of Maryland or the Commonwealth of Virginia. It would be our view that while this is an ingenious method of fixing rates competitive to those in the greater Washington metropolitan area, it has the weakness of the Congress delegating its power to fix interest rates and credit charges to the sovereign states of Virginia and Maryland. In our opinion, it would be preferable, either for the Congress itself to fix these rates suitably to the needs of the District of Columbia, or for the power to reside in the Mayor and Council to set them. As it happens, a blue ribbon panel, the District of Columbia Commission on Interest Rates and Consumer Credit, set up by the City Council pursuant to Resolution 70-12, rendered a report on September 22, 1970, on interest rates and consumer credit. A copy of this report and recommendation is attached. It was chaired by then attorney, and now Judge, Theodore R. Newman, Jr., of the Superior Court of the District of Columbia. It contained a distinguished panel of community leaders, representatives of consumer interest groups and businessmen of the District of Columbia. All of the recommendations of this panel were unanimous, with the exception of their recommendation on how to set ceilings on interest rates and consumer credit charges. In this respect, the Commission made two parallel recommendations: (1) That the rates should be set by the Congress of the United States. (2) That the rates should be set by the City Council, subject, of course, to the veto of the Mayor. From the point of view of Bill S. 1938, this bill would reject both of these recommendations. From the point of view of the City Council, the Council would recommend the second of the two views of the Commission, which is that the rates be set by the City Council after public hearing. As the Council has been increasing in its scope, authority and power, we believe that this is a power which should now be delegated to the City Council. Congress has the ability, if it makes such a delegation, either to remove the power or to veto actions of the Council. The Congress has, in fact, taken one small step in this direction already when it enacted legislation in 1970 to give the power to the City Council to remove the interest ceiling on FHA and VA guaranteed or insured loans. We submit for your information, as I have stated, the report of the Commission and also the regulation and report of the Council action removing the ceiling on FHA and VA loans. DISTRICT OF COLUMBIA COMMISSION ON INTEREST RATES AND CONSUMER CREDIT (Established by City Council Resolution 70-12) REPORT AND RECOMMENDATIONS TO THE CITY COUNCIL FROM COMMISSION ON INTEREST RATES AND CONSUMER CREDIT Joseph Beavers Albert Beveridge, III Maribeth Halloran Raymond A. Kennedy C. Robert McBrier Theodore R. Newman, Jr., Chairman Professor Jack Murphy Jeanus B. Parks Clarence A. Robinson Joseph F. Smith Arnold C. Sternberg John W. Stadtler Martin R. West, Jr. Benny L. Kass, Executive Director 1 Replaced Frances G. Addison, III Hon. GILBERT HAHN, DISTRICT OF COLUMBIA COMMISSION ON INTEREST RATES AND CONSUMER CREDIT, Chairman, District of Columbia City Council, DEAR MR. CHAIRMAN: As Chairman of the Commission on Interest Rates and Consumer Credit, it is an honor and a privilege to present to the City Council our final report. The accompanying material, which includes proposed legislative recommendations, represents the product of many, many hours of discussion and deliberation by consumers and industry, borrowers and bankers, buyers and sellers, poor and rich. Yet, as the fifteen Commissioners were meeting, it became quite clear that there were several goals to which nearly all subscribed. First, all were concerned with economic development for the District of Columbia. Whether in terms of competition, job opportunities, or the housing and construction market, it was generally agreed that we did not want to recommend legislation so onerous that business and industry would find no incentives for staying or moving into the District of Columbia. Second, there was full recognition that consumer credit legislation in the District of Columbia was either non-existent or sadly out of date. The small loan law, for example, enacted more than sixty years ago, has had, as its only practical effect an anti-competitive posture, insofar as there are no small loan companies operating within the geographical boundaries of the District. Third, there was general agreement that more credit must be made available to District of Columbia residents. Several approaches are suggested in our report, ranging from a reevaluation of the District's interest and usury laws to full encouragement and support of the nine low-income community credit unions that function here. And finally, we all recognized the value and impact of two-way communication. To our knowledge, this was the first time that citizens of all walks of life and shades of opinion sat down in formal organization to discuss consumer problems in the District of Columbia. If I can express a personal note, shared I am confident by all Commission members, it was a very worthwhile and educational experience. We all listened, and we all learned. The Commission's final recommendations are patterned after the Uniform Consumer Credit Code, and we are indeed grateful for the full cooperation given us by its sponsors, the National Conference of Commissioners on Uniform State Laws. But our proposed Code is not the Uniform Consumer Credit Code; we have both modified and changed it. Many of our amendments are local in origin, based on particular problems within our jurisdiction. Many of the changes, however, are taken from the proposed National Consumer Act, sponsored by the National Consumer Law Center at Boston College Law School, and we are most appreciative of their assistance. To our able Executive Director, Benny L. Kass, who put in many long and frustrating hours, we can only say "thank you". Mr. Chairman, I have been gratified by the deep concern and serious purpose of the members of this Commission in helping to find solutions to the problems raised by the widespread use of consumer credit. I am confident that the Commission's recommendations will make a real contribution in this area, and thus it has been a pleasure and a privilege to serve as Chairman. With kind personal regards, Sincerely, THEODORE R. NEWMAN, Jr., Chairman. SUMMARY OF MAJOR RECOMMENDATIONS I. INTEREST RATES We recommend that the existing District of Columbia interest rates and usury laws be changed to permit financial institutions and others extending credit in the District to be competitive with those in the surrounding jurisdictions of Maryland and Virginia. We strongly urge, in order to permit small loan companies to do business here, that interest rates be raised from existing levels. We have considered, but reject-perhaps only out of political reality—the concept that there be no rate ceilings at all, leaving the free money market to keep rates competitive. And we were in support of the regulation recently enacted by the City Council, which exempts FHA-VA transactions from the existing usury laws. Your commission is divided, however, on how to accomplish our recommendations. There was strong support for the rate ceilings proposed by the Uniform Consumer Credit Code, to be enacted by the Congress of the United States, recognizing that competition will set the actual rates. There was equally strong support for recommending that Congress grant authority to the City Council to set its own rates, based of course on the premises of our recommendations. Accordingly, we make no recommendations in this area. Or perhaps it is more accurate to state that we present two alternative recommendations for your consideration: (A) The City Council, after full hearings, recommend rates to the Congress to be enacted into law as part of the proposed District of Columbia Consumer Credit Code; (B) The City Council ask Congress for full authority to set rates after our proposed District of Columbia Consumer Credit Code has been enacted by Congress. We further recommend that business corporations and non-profit corporations be treated alike for purposes of the usury statute. As the law now stands, profit corporations cannot plead usury as a defense, but the law is silent on non-profit corporations. During the recent tight-money period, this inconsistency had the effect of denying needed capital to non-profit corporations engaged in housing or educational purposes. Accordingly, we recommend that no corporation in the District of Columba be permitted to plead the defense of usury. II. CONSUMER PROTECTIONS We recommend that the consumer protections incorporated in the accompanying proposed District of Columbia Consumer Credit Code be enacted by Congress. We fully recognize that the consumer credit laws governing the District of Columbia do not afford the full protection needed by consumers against that small minority who engage in unscrupulous, fraudulent or otherwise unconscionable practices. If our recommendations are incorporated into law, the following major protections would be operative: A. Holder in Due Course. This doctrine, fully explained in our report, would be severely restricted. In sales transactions, the buyer would be able to assert all claims and defenses he may have against the seller against any assignee that is collecting his money. And the same would apply in loan transactions where there is less than an arm's-length relationship between the lending institution and a seller of goods or services. B. Balloon Payments would be restricted to protect the consumer from having to face one payment so large that he ends up in default of the entire transaction. C. Referral Sales, Confessions of Judgment and Wage Assignments would be prohibited. D. Door-to-Door solicitations would be subject to a three-day "cooling-off" period. III. LIMITATIONS ON CREDITORS' REMEDIES We have exhaustively reviewed creditors' remedies which exist in the District of Columbia, including those which are permitted by law and those which are extralegal in nature. We believe that the judgment to extend credit to a consumer in the District of Columbia should be based not on potential creditors' remedies but on existing facts available at the time of the transaction: past credit history, present and future income, and employment, to name a few criteria. Accordingly, we recommend the following limitations on existing creditors' remedies: A. Repossession. Under our proposal, a debtor is given 30 days after default in the payment of money to cure said default. In other words, goods purchased cannot be repossessed just because the consumer is a few days late in his payments. Furthermore, the consumer has an opportunity to redeem his property within 15 days after repossession by paying the amount he owes. Repossession itself would be limited to either judicial authorization or to those situations where the taking can be accomplished without breach of the peace and without entry into the consumer's home. And, if the cash price of the goods in question is $2,000 or less, the creditor is limited to an election of his remedies: he can either sue for the amount of the deficiency owed, or repossess the goods-he cannot do both. B. Garnishment. We believe our proposals in this area go well beyond the new Federal law recently enacted. We recommend elimination of the procedure known as "attachment before judgment" (ABJ), severe limitations on the amount of a person's wages that can be attached, and--perhaps most significantly-no discharge from employment for garnishment. C. Debt Collection Practices. We are concerned with those debt collection practices which harass and intimidate the District consumer. These practices, we are told, are especially pernicious in many low-income areas of our City, and--although we have no specific language due to time limitations-we recommend that legislation or regulations be enacted to curtail such practices. D. Unconscionability. This is perhaps one of the strongest limitations on creditors' remedies. Our recommendation permits a court to void or otherwise limit a contract if, as a matter of law, it was unconscionable at the time it was made, induced or was subsequently enforced by unconscionable conduct. IV. CONSUMER CREDIT ADMINISTRATOR We recommend the creation, within the District of Columbia government, of the office of Consumer Credit Administrator, with full powers to investigate and curtail unconscionable or otherwise unsavory practices. We further recommend the establishment of a council of Advisors on Consumer Credit, to be composed of sixteen members who shall advise and consult with the Administrator concerning the exercise of his powers under this Act. Our own experience as a Commission supports the concept of consumers and industry representatives engaging in meaningful and constructive two-way communication. We urge that this Council be appointed as soon as possible, even before the legislative package is enacted by the Congress. I. INTEREST RATES On February 9, 1970, the District of Columbia City Council established a Commission on Interest Rates and Consumer Credit, authorizing it—among other items to make a comprehensive study of existing laws and regulations affecting interest rates. At the very first meeting of the Commission, the members directed the Executive Director to gather relevant statistical and other information for the purpose of preparing a comprehensive economic survey of the availability of housing and consumer money in the District of Columbia. Much of this statistical data was, in fact, collected. Unfortunately, the Commission was unable to raise the needed funds to enable us to hire an economist to analyze all the information. Accordingly, we have no economic report on which to base our recommendations in this area. We do urge, however, that the City Council give full consideration to hiring an economist to make the necessary studies. A. Existing Usury Laws and Exemptions Usury in the District of Columbia is governed by section 28-3303 of the D.C. Code, which prescribes a maximum rate of 8 percent per annum on all instruments in writing. In the absence of express contract, the maximum rate is 6 percent per annum. If a person or corporation contracts in the District to pay a higher rate, the code provides that "the creditor shall forfeit the whole of the interest so contracted to be received." Typical of most states, however, there are many exemptions from this usury statute: 1. Credit unions are governed by Federal law, and are permitted to charge not to exceed one percent per month-or 12% per annum. 2. Money lenders are covered under 26-601 through 26-611 of the D.C. Code. If properly licensed, small loan companies can charge up to 1% per month (12% per annum); the maximum loan size which can be made to any one person is $200. There are no small loan companies operating in the District of Columbia today. 3. FHA-VA transactions have just been exempted from the existing usury law by City Council Regulation, effective September 22, 1970. This Regulation permits FHA-VA loans in the District to be made at the maximum rate authorized for such loans by the Secretary of the Department of Housing and Urban Development. 4. Cooperative associations which loan money to members engaged in utility operations are exempt from the usury laws. This is a recent development, having been enacted by Congress on August 28, 1970 (Public Law 91-385). 5. Out-of-state contracts. The District Code permits interest to be recovered at a rate higher than is lawful in the District if the contract is made or to be performed in another jurisdiction where the contract rate is lawful. (15–110) |