BATON ROUGE

BAL ON CAR

36 MO. INSURANCE 229.32

FINANCE CHARGE 488.68

(APPROX. 18%

718.00

1730°°°

there very often is nothing but token fire and theft insurance involved. The Baton Rouge Better Business Bureau reports that the finance company in this instance was very belligerent and finally refused to consider an adjustment, simply shrugged its shoulders and said, "This is legal." More aptly, it should be termed a "legal con game," in which the law protects the swindler instead of the swindled.

I think at this point we should explore the legalistic fiction whereby such situations are possible. Generally, we understand that when people borrow money they pay interest for its use and most States have long regulated very rigidly the amounts of interest which could be charged on given amounts. This, of course, they have done after bitter experiences with the loan sharks, salary buyers, and other such evils which were rampant a generation ago. People having learned

through long custom simply are prone to assume that when they buy an automobile or other article on time that they are paying interest for the use of the money. Legally they are not, the dealer, in effect, offers to his customer a cash price for which he will part with the article immediately for cash in hand, and a time price for which he will spread the cost over a number of months, this differs from the cash price by the amount of the finance charge and any additional insurance and other costs which may be required in the complex document which we have earlier reviewed. The total amount on this document is the time price and the dealer may simply sell that through what the law terms an "innocent third party" at any time upon which they may mutually agree.

Now, I cannot believe as a member of the public who has been looking at these things for 18 years that there are very many innocent third parties in these transactions. The finance companies in these situations provide the dealer with the note and mortgage that we have reviewed. It generally has the name of the finance company upon it. They provide the dealer with various kinds of rate books, and so forth, with which to estimate the charges. Very often the finance company has already assisted the dealer in purchasing the cars from the manufacturer. I cannot therefore believe that by providing the dealer with the tools of this scheme, or the tools of this method of financing, if it turns out not to be a scheme, they can be considered in other than a legalistic financial way innocent purchasers in due course. Therefore, when a finance company has bought a customer's note, and mortgage, at the agreed upon discount and the dealer may already have included in this note and mortgage a substantial number of dollars for himself known as "the pack," there is a relatively small margin on which the finance company may operate and an even smaller margin after it has set up its books, etc., from which it may give the customer a rebate for prepayment of the contract, and as bitter experience has shown, where laws do not compel it, few companies finding themselves in this situation will give more than just the bare token of this rebate.

Of course, the misclassification of insurance overcharges reviewed in this room yesterday have helped soften some of the blows in what the companies had to refund to dealers in finance charges, because they had some other kinds of games through insurance contracts through which it appears they may not have been entitled.

In other words, the crux of the unsatisfactory rebate problem is simply this: Finance companies cannot give back to their customers the pack which they have already paid to their dealers.

This prepayment sabotage was one of the very first evils which most State laws, including the one in Ohio, sought to correct. As a matter of fact, our recent experience in Ohio with the regulated prepayment as provided by our law has been such that as a bureau operator I was simply amazed to read the multitude of examples of the type just cited above which have victimized people in other States.

Ohio has in effect incorporated into its law a formula commonly known as "the bankers rule of 78." This is a formula which is derived from the digits 1 to 12 added up to their total of 78, and this becomes a fractional method whereby refunds may be computed. For instance, in a contract where less than 1 month of the service charge is consumed, the financial institution may retain 128 of the

total finance charge; in the case of 2 months, 248, etc. These fractions have commonly been reduced to a decimal equivalent in tables which are in almost uniform use throughout the State at the present time.

I give to you, Senator, a copy of one of these tables. It is a rather complex thing.

Senator MONRONEY. I believe I have it here.

(The material referred to is as follows:)

Thus under this formula our Baton Rouge friend above who financed the $830 for 24 months at a total cost of $294, or a note of $1,128, and paid them off in 13 days for a price of $198 would have under Ohio law paid only $24.12 for the 13 days which he had the

money as opposed to the $198 as above. Of course, as these contracts run for a longer time the rule of 78 does not appear so generous, but at least it is a uniform mathematical formula in common use administered under the law.

While we are discussing the Ohio law I must say also that it is to my knowledge one of the few States which has not only undertaken to limit the maximum amount of finance charge at the rate of $8 per $100 of the amount financed plus some additional charges in units of 25 cents and 50 cents per month for each unit of $50 finance known as "service charge," but Ohio also has undertaken to limit the amount of reserve which a finance company may rebate to a dealer. This limit has been set at 2 percent of the total amount of the note.

This has served to force competition under a ceiling and in many instances through this competition the rates are lower than the ceiling for the amount of reserve which the dealer may hope to obtain is limited to this 2 percent. And I have a chart illustrating that rather graphically.

Again, we have acquired some charts we will touch on later on from the State of Georgia. And we have the charts from Ohio with which we are familiar. The Ohio law provides that the top rate you may pay in finance charge is $8 per hundred. That, as we have reviewed, is actually a 16 percent simple interest rate. The Ohio law, likewise, provides a dealer legal reserve of 2 percent of the gross amount of the contract, or about $2 a hundred, that is this gray area here. The finance company then operates on the $6 or in this competitive situation where this is being charged at a rate of 62, the finance company is working on $4.50 per hundred, that is all the finance company gets out of this. It pays to the dealer $2 for getting them the business.

Now, take a hypothetical case in Georgia, because I have no actuality other than the rate chart. Assuming a finance company can operate as economically in Georgia as it can in Ohio, and they have a $7 discount rate, if they were paying the $2 normal dealer reserve with which we aren't going to quarrel, they have $5 on which to operate, but I will show you a chart later where a dealer can add $163 per thousand for his own purposes, to do with as he sees fit. That shows what happens where you put a legal limit not only on the finance chart but on the reserve. It still brings about competition.

The dotted line represents the legal possibility. The actual line represents the going rate on new cars in Ohio today. On used cars it generally goes up to the full 8 percent, or $8. The net effect of these provisions of Ohio law, and I am sure that this is true of every other effective State law, has been to completely eliminate the simplest if most insidious form of the pack, which is the use of a multiplicity of complex rate charts with which the dealer, through official and confusing-looking charting, can simply bamboozle the customer into almost any amount of finance charge which he may choose. I have here a time-payment-plan booklet sent to us from Shreveport, La. Apparently it was published by the Commercial Credit Co., one of the national financial firms for this particular area, and is in use by an automobile dealer in that city. It contains certain information about how to figure insurance coverages on various kinds of cars, and, as is customary, indicates by alphabetical designation a classification based