SETBACK FOR CONSUMERS

...A typist in the Justice Department who became deeply involved with personal loans from bank and finance companies because of family illness, ultimately reached the end of her ability to pay...

...For example, a consumer who desires to obtain credit for a $100 purchase to be repaid in monthly installments is usually confronted with one of these situations: No quoted rate: The borrower is told that the charges will be $10 down and $10 a month...

...The simple annual rate is twelve times the quoted figure, or twelve, eighteen, twenty-four, thirty, thirty-six, and forty-two per cent...

...Wallace F. Bennett, Utah...

...This bill would not in any way "control" credit or regulate the terms of credit...

...it is the kind of thing which gives the Russians ammunition against our private enterprise system, saying that all we are interested in is building up the volume, and anything for the buck...

...More than two years ago I introduced in the United States Senate a bill providing that the American consumer be given full and accurate information concerning the interest rates and financial charges he is asked to pay when he borrows money or buys an article on the installment plan...

...The advertised five per cent rate on home improvement loans is not less than a six per cent first mortgage loan but nearly twice as much, about ten per cent yer year...

...Why are such a variety of techniques utilized to minimize the apparent interest or finance rate...

...This written statement should include the total amount of the finance charge, expressed in dollars and cents, and the percentage that this charge bears to the total amount financed, expressed as a simple annual interest rate on the unpaid balance...

...He had been personally responsible for Sears' credit operations and, therefore, he was intimately familiar with the mechanics of the credit business as well as the problem the consumer faces...

...It consists of loading onto the contract all sorts of extraneous fees and charges, such as exorbitant premiums for life insurance covering the amount of the loan, excessive fees for credit investigations, and miscellaneous and obscure types of "handling" or "processing" charges...

...The actual rate is almost twelve per cent, or nearly double the stated rate, because the borrower, over the period of a year, has the use of only approximately $50 credit rather than the $100 face amount...

...William Prox-mire, Wisconsin...

...For instance, when the consumer sought a one-year $500 loan from a small loan company payable in monthly installments of $53.33, the lender would be required to tell the borrower that the total finance charge is $140 and that the true interest rate, therefore, is fifty-two per cent...

...He said the average borrower is caught in " 'a wonderland of credit' where percentages multiply and divide at will, where finance charges materialize on command and fees are collected on the way out . . . [where] sharp practices and rackets not only inflate the costs of credit, but also impose enormous financial hardships on the debtor, particularly those who can least afford it...

...and one Democrat, A. Willis Robertson, Virginia...

...The bill was rescued by the dramatic disclosure of an immediate threat to human life which shocked even the most complacent legislators...

...Indeed, even lenders in the finance industry admit that consumers are not adequately informed by lenders about the cost of credit...

...American families annually pay interest and finance charges of at least $16 billion on their personal debts...

...When they do this, they not only hurt themselves, but they reduce the efficiency with which the economy provides goods and services in accordance with consumer tastes...

...A credit union manager with many years experience in the lending field vividly described the dilemma of the consumer today...

...All we ask is that the consumer be told the truth, the whole truth, and nothing but the truth about the interest rates and finance charges he is asked to pay when he borrows money or buys an article on the installment plan...

...It involves the translation into law of a long-standing tradition of American ethical values: the consumer, instead of being treated as a dupe, is entitled to the truth...

...This would enable the consumer to compare accurately the costs of alternative credit plans and to shop as PAUL H. DOUGLAS, U.S...

...The true annual rate of interest is not just twelve times the three per cent monthly rate but may be anything above thirty-six per cent that the lender wishes or various state laws permit it to be...

...There is much evidence, on the contrary, suggesting that lower income groups are better informed about the general costs of consumer credit than are the better educated and higher income consumers...

...The President said: "Excessive and untimely use of credit arising out of ignorance of its true cost is harmful both to the stability of the economy and to the welfare of the public...

...This Congressional investigation of current consumer credit practices has conclusively demonstrated that the average consumer is unaware or at best badly misinformed about the credit charges and interest rates he pays for various types of credit...

...And yet, adequate consumer protection is not only "a pocketbook" problem...

...On carefully rechecking the figures, he was amazed to find the true cost of credit was more than twenty per cent...

...f The cost of teenage credit now being promoted by some retailers as only "pennies per week" is sometimes as high as eighty per cent on an annual basis...

...Moreover, they do not have the communications media to keep them informed on a day-by-day basis about all of those matters which directly affect their pocketbook...

...Those of us who believe in legislation requiring truth-in-lending will have to start anew in the next session of the Congress to seek this reform...

...Furthermore, there seems to be little or no correlation between education and knowledge about interest rates and credit costs...

...A credit union manager, for instance, told the Subcommittee of an experienced FBI agent who was certain the proposed financing of his automobile would cost him four per cent...

...The answer is that different lenders and credit extenders do not even use the same techniques of understating the cost of credit...

...Thus, if this bill were enacted, every borrower would know in advance, before signing a note or a contract, the two indispensable measures of the price of credit—the dollar cost, and the interest or finance rate...

...The President pointed out this was not merely a matter of protecting the American family but that the whole issue of national economic growth and stability was also at stake...

...However, so far there has been little, if any, recognition of the enunciated principles which ought to govern the attitude of the government towards the American consumer...

...A number of cases presented in Subcommittee hearings revealed how harsh these sharp practices can be...

...No mention of the interest or finance charge was made, either verbally or in writing, and even the number of months the customer would have to pay was not mentioned in the contract...

...This is not merely a matter effecting the individual or the family...

...The President, in his special message to Congress, outlined a basic bill of rights for the American consumer...

...The add-on rate: The borrower is told that the finance charge will be $6 on the $100 loan...

...To enact this type of legislation will require equally determined efforts by everyone who believes that the consumer has the right to know the truth about the costs of credit...

...The truth-in-lending bill would contribute to that end...

...After faithfully paying, on time, a total of $147.30, the customer discovered that to pay off the balance would cost him $206.22...

...Last spring, President Kennedy, in a message to Congress, stated that the truth-in-lending bill is "essential to advance and protect the consumer interest...

...The discount rate: This is a variation of the add-on rate...

...However, few people realize the true magnitude of the problem...

...The finance charge again is $6 and is often represented as six per cent...

...What is your credit IQ...

...These circumstances rather than the intrinsic merits of the bill seem responsible for clearing Congressional roadblocks for the measure...

...In his statement before the Committee he eloquently summed up the arguments, for truth in lending: "The Department of Commerce," said Gudeman, "urges enactment of the truth-in-lending bill for the following reasons: "It will arm consumers with the basic price information necessary for rational decisions among alternatives...

...For example, a woman with four children to support, on $55 a week, was persuaded through appeal to parental pride to purchase, on time, a $600 accordion for her daughter, whom the local "conservatory" of music insisted had great talent...

...The three per cent per month plan of small loan companies is actually thirty-six per cent per year...

...It might appear that the whole question of the role of consumer credit and the right of the borrower or installment buyer to know what he is paying is a rather minor matter...

...Unfortunately,, such a conclusion is not warranted by the facts...

...Again, the actual rate is almost twelve per cent, or twice the quoted rate...

...The typical consumer is faced with a bewildering variety of rates and charges when he borrows money or buys an article on the installment plan...

...SETBACK FOR CONSUMERS by SENATOR PAUL H. DOUGLAS Tn the first flush of victory follow-ing passage of the Kefauver drug legislation, there is a temptation to conclude that the plight of the lonely consumer has finally been recognized by Congress, and that similar consumer legislation will meet with equal success in the future...

...For the past two years, the Production and Stabilization Subcommittee of the Senate Banking and Currency Committee has held extensive hearings on the truth-in-lending bill...

...One of the strongest statements on behalf of the truth-in-lending bill was made by Undersecretary of Commerce Edward Gudeman, former executive vice president and a member of the board of directors of Sears, Roebuck and Company...

...Often the consumer does not know that he has been misinformed about the price of credit—particularly the interest rate on his loan or installment contract...

...It is certainly no secret that the truth-in-lending program is opposed by some of the most powerful interests in the credit industry...

...The lender represents this to the borrower as being a six per cent rate...

...they do not have powerful and well-financed lobbies in Washington to represent their views before Congress...

...The Federal Reserve Bank of Philadelphia stated recently'in its Business Review that it constitutes a burden on the economy "because consumers often buy on time in an uninformed way without knowing the cost of the money they are borrowing...

...However, American consumers are not well organized...

...He said: "Teen-age credit is something like teaching the youngsters to use narcotics . . . merchants and merchants' associations ought to repudiate this sort of thing...

...The carrying charges alone came to $400, a simple interest rate of twenty per cent...

...Federal Reserve officials are suggesting that the economic growth of our country is jeopardized when consumers are misled about the price of credit...

...Actually, consumers must ultimately realize that other than on mortgage loans, a six per cent credit charge is not sufficient to afford a lender any profit on an installment obligation...

...Senator from Illinois, is chairman of the Production and Stabilization Subcommittee of the Senate Banking and Currency Committee which conducted extensive public hearings on the truth-in-lending legislation...

...The result is that the true rate of interest is not just twice the six per cent add-on or discount rate but may be as high as eighteen per cent...

...The reason is that no lender, if he can possibly avoid it, ever "quotes" a rate of charge higher than six per cent—the traditional "fair" credit price...

...The cost of this massive debt is immense...

...The objective is merely to strip away the disguises which frequently hide or distort the true cost of credit...

...and Harrison A. Williams, Jr., New Jersey...

...Chairman William McChesney Martin of the Federal Reserve Board, a former Assistant Secretary of the Treasury and a former president of the New York Stock Exchange, in supporting the proposed legislation requiring full disclosure of interest costs, admitted during the public hearings that he was confused by the practices now used by lenders and vendors in stating their interest or financial rates on credit transactions...

...Until there is a widespread re-awakening of interest in the dilemma of the consumer in a modern economic system, meaningful consumer protection legislation will not be forthcoming...

...In the case of the add-on, the borrower receives $100 in cash or goods and must' pay back $106...

...In the case of the discount technique the borrower receives $94 but repays $100...

...Legislation should therefore be enacted requiring lenders and vendors to disclose to borrowers in advance the actual amounts and rates which they will be paying for credit...

...and, "Lastly, it will, like the Securities and Exchange Act, eliminate the possibility of deception and near fraud from a major sector of the economy...

...So he actually paid $67.97 in credit charges, or more than thirty-three per cent per annum simple interest...

...Today, personal credit has reached $240 billion—$147 billion in mortgage debt and $57 billion in short-term or consumer debt...

...I am afraid that the success of the drug legislation rested on highly unusual circumstances, not likely to be duplicated soon...

...A simple monthly rate: This is the rate usually quoted by small loan companies, and by retailers using revolving credit plans...

...In other words, the interest is charged on the original amount of the debt and not on the outstanding balance, which with regular installment payments will amount on the average to only one-half the initial obligation...

...For example, a documented case was presented to the Subcommittee in which a customer had purchased a television set for $285.55, to be paid at the rate of "about $14 per month...

...Voting for the bill were four Democratic Senators: Paul H. Douglas, Illinois...

...For instance, are you aware that: The service charge of one and one-half per cent per month on department store charge accounts is usually a true annual interest rate of eighteen per cent...

...Joseph S. Clark, Pennsylvania...

...Test yourself...

...The so-called six per cent rate for financing used cars offered by some dealers is almost twelve per cent per year and sometimes higher—as much as eighteen to thirty per cent...

...Or, if a consumer wished to finance the balance of $2,400 due on his new car over two years, with monthly payments of $113.33, the dealer would be required to tell the customer the total finance charge would be $320, and the interest rate would therefore be thirteen per cent...

...wisely for credit as he does for other items in the family budget...

...The measure requires simply that anyone engaged in the business of extending credit at the retail level fully disclose in writing the true cost of credit to the borrower before the lending transaction is signed...

...Few newspapers have a "consumer's page"—although most have a business page to report on those matters which might interest the business subscriber...

...How well do you understand what you are paying for the use of credit in our modern "buy-now, pay-later" system...

...Neither the total finance charge nor the interest rate is disclosed...

...When finally the poor woman reached the edge of bankruptcy, she discovered she could have bought the $1800 instrument elsewhere for only $400, and at half the rate of interest...

...In reviewing all the special loan charges, the refinancing costs, the required insurance, and the original high—but unstated—finance charges, the young lady found she had been paying more than forty per cent in simple interest...

...Success for legislation designed to protect consumers comes seldom enough, and perhaps we should not examine the causes too closely...

...The story of the "truth-in-lending" bill is a vivid illustration of the more likely fate of consumer legislation...

...Prescott Bush, Connecticut...

...Credit unions, labor unions, savings and loan associations, as well as individual lawyers, economists, and bankers have all endorsed the truth-in-lending bill...

...Yet, in spite of the overwhelming evidence offered in behalf of the truth-in-lending bill, the Senate Banking and Currency Committee's Subcommittee on Production and Stabilization voted against it by a vote of five to four...

...A normal representation is that the finance rate is one per cent, one and one-half per cent, two per cent, two and one-half per cent, three per cent, and in some cases three and one-half per cent per month...

...Within months, the conservatory reported the daughter had "such exceptional talent" an $1800 instrument would be necessary...

...Sometimes lenders compound this confusion by a process known in the money trade as "loading"—an apt term...

...I hope that the Congress can complete action on this important matter before it adjourns...

...It will invigorate competition in the consumer credit market and reward the more efficient credit supplier...

...What we need today is a carefully articulated philosophy concerning the relationship among the consumer, the government, and the business system...

...The president of the Bowery Savings Bank of New York, one of the largest banks in the world, in testifying before the Committee in support of the bill addressed himself to one of the newest phenomena in "credit selling" —the battle for the teen-age pocket-book...

...Arrayed against the bill were four Republicans, Homer E. Capehart, Indiana...

...These are not unusual cases but, rather, typical examples of inaccurate or misleading interest rate information...

...The four and one-half per cent new car financing plan of some commercial banks is really nine per cent per year...

...She finally settled for a loss of $383...

...There is a genuine need for consumer education concerning the costs of using credit...

...J. Glenn Bcall, Maryland...

...By rendering consumer credit charges more cyclically sensitive it will contribute to the overall stability of our economy...

...However, those who believe that this victory signifies a fundamental change in the political fortunes of the Administration's consumer protection program are in for bitter disappointment...