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Federal Reserve Bank of St. Louis
H E A R I N G S
(53) . . . Subcommittee on Production and
Stabilization, Senate Banking and
Currency Committee (Paul Douglas,
Chairman)
S. 1740, "Truth in
Lending" Bill . . . .
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Federal Reserve Bank of St. Louis
1961
(Folder 2,
Page
1)
7/19/61
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Federal Reserve Bank of St. Louis
CHAIRMAN MARTIN
(
For Information Only
C O P Y
August 16, 196l
Honorable Wright Patman, Chairman
Joint Committee on the Economic Report
United States Congress
Washington, D. C.
Dear Mr. Patman:
I regret that I could not accept your invitation to appear at the
current hearings of the Joint Committee on the Economic Report, to testify
regarding the recommendations of the Commission on Money and Credit concerning
the structure of the Federal Reserve System. I realize that a memorandum of
views is not a wholly satisfactory substitute for an appearance before the
Committee, with its opportunity for questioning by interested Committee members.
Nevertheless, since the subject is one in which I have a keen interest, and a
degree of knowledge based on thirty-six years spent in the Federal Reserve
System, I have thought it worthwhile to use this means of placing my views
before the Joint Committee.
To identify myself in the manner which has become customary at
hearings of the Committee, my name is Allan Sproul, I am a director of the
Wells Fargo Bank and American Trust Company of San Francisco and of the Kaiser
Aluminum and Chemical Corporation of Oakland, California, and I was president
of the Federal Reserve Bank of New York and vice chairman of the Federal Open
Market Committee for fifteen years from 1941 to 1956. In presenting my views,
however, I represent no one but myself; neither the private business community,
the commercial banks, nor my former associates in the Federal Reserve System.
I should also mention, I think, that I was named as a member of the
Commission on Money and Credit when it was first being organized in February,
1958- In preceding years I had been among those who had advocated a study of
our financial system by a national monetary commission established by the
government, and composed of a small number of men competent in the field,
experienced in economic matters, and with a reputation for objectivity. This
official or government commission did not come to pass. As a second choice,
the private commission sponsored by the Committee for Economic Development
seemed to offer a partially satisfactory means of bringing our financial
machinery under scrutiny and suggesting possible ways of improving it. When
I accepted appointment to the Commission in February, 1958 it was to be a
Commission of fifteen members "chosen for their individual qualities, not as
representatives of organizations or sections of the community" with a "balanced
representation of philosophies and approaches." In mid-April 1958 I was advised
that it had been decided that "for more ideal balance the Commission should be
expanded to a minimum of twenty-five, bringing about representation of areas,
points of view and interests which were not adequately provided for in the
Commission of fifteen as originally planned." I learned of the membership of
the enlarged Commission by way of a press release on May 29, 1958. On June 12,
1958 I withdrew from the Commission. My resignation was announced in a press
release of the Commission on January 22, 1959«
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Federal Reserve Bank of St. Louis
Honorable Wright Patman, Chairman
Joint Committee on the Economic Report
United States Congress
Washington, D. C.
2
August 16, 196l
So much for identification. As you requested, I now address myself
to that part of the recently published report of the Commission on Money and
Credit (CMC), which has to do directly with the structure of the Federal Reserve
System. In this area, at least, I suggest that the CMC, in its efforts to compromise the various points of view and interests of its members, produced a
doubtful package of recommendations. Some of them are good but, in the aggregate, they represent an attempt to pacify those who would "nationalize"* the
Federal Reserve System by destroying its federal character, and they tend to
water down the symbols of support of the System by the private financial community to the point of poisoning rather than preserving a relationship which
has made successful evolutionary progress for half a century. I directly
challenge, therefore, so far as the structure of the Federal Reserve System
is concerned, the statement of the CMC in the introduction to its report, that
it has tried to "confine its recommendations and suggestions for change only
to situations where the present structure has not worked well."
What are the recommendations and suggestions of the CMC for changes
in the structure of the Federal Reserve System?
1. The FRB (Board of Governors of the Federal Reserve System)
Chairman and Vice Chairman should be designated by the President
from among the Board's membership, to serve for four year terms
coterminous with the President's.
2. The FRB should consist of five members with overlapping ten year
terms, one expiring each odd-numbered year; members should be
eligible for reappointment.
3«
The FRB Chairman should be the chief executive officer of the
Board, empowered to handle administrative matters. The law
should be clarified to authorize the Board to delegate to Board
Committees or to Board members individually, or to senior staff
officers of the Board, any of its functions in the administration of its powers in regard to the supervision of the banking
structure, etc. Any actions so delegated should be subject to
review in the Board's discretion.
4. Occupational and geographical qualifications for Board members
should be eliminated. Instead, the statute should stipulate
that members should be positively qualified by experience or
education, competence, independence and objectivity commensurate
with the increased responsibilities recommended for them in the
achievement of low levels of unemployment, an adequate rate of
economic growth, and reasonable stability of price levels in
the economy. Salaries of top officials throughout the government should be sharply increased and, in view of the gravity of
their responsibilities, FRB members should be compensated at the
highest salary level available for appointive offices in the
government.
A vague general term used to frighten conservatives.
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Federal Reserve Bank of St. Louis
Honorable Wright Patman, Chairman
Joint Committee on the Economic Report
United States Congress
Washington, D. C.
3
5•
August l6, 1961
The present statutory Federal Advisory Council should "be
replaced by an advisory council of twelve members appointed
by the Board from nominees presented by the "boards of directors
of" the Federal Reserve Banks, etc.
6. The law should formally constitute the twelve Federal Reserve
Bank presidents as a conference of Federal Reserve Bank presidents, to meet at least four times a year with the Board, and
oftener as the Board finds necessary.
7«
The determination of open market policies should be vested in
the Board. In establishing its open 'market policy, the Board
should "be required to consult with the twelve Federal Reserve
Bank presidents. The determination of the rediscount rate (the
same for all Reserve banks) should "be vested with the Board.
In establishing this rate the Board should "be required to consult with the twelve Federal Reserve Bank presidents. The
determination of reserve requirements should continue to be
vested in the Board, In establishing these requirements, the
Board should be required to consult with the twelve Federal
Reserve Bank presidents.*
The first five of these recommendations, which I would characterize
as the trimmings of this section of the report of the CMC, might be accepted,
I think, as moves in the right direction.
The suggestion that the terms of office of the Chairman and Vice
Chairman of the Board be made coterminus with the term of office of the
President has "been attacked by those who see this as an attempt to introduce
partisan politics into the functioning of the Board, which is a sin we all
deplore. The facts of the matter as I have observed them, however, are that
the Chairman of the Board really serves largely at the will or pleasure of the
President now. The Chairman of the Board is the chief point of contact between
the Board and the President, the Secretary of the Treasury, the Council of
Economic Advisers, and all of the most important officers of the executive
"branch of the government, and only to a slightly lesser degree with the Congress
If he is persona non grata at the White House, his ability to carry out the
duties of his office is so gravely damaged as to make it impractical and unwise
for him to continue as Chairman. The present wording of the law concerning the
term of office of the Chairman seems to me merely to mask this fact of life. I
do not mean, however, that the Chairman of the Board must become a subservient
political appointee; he retains the right and the duty to represent the Board
fairly and forcefully in expounding its views and methods, and preserves the
individual right of resignation without disloyalty to the President, or party,
if he decides that his service as Chairman is no longer compatible with the
economic policies being followed by the government.
In veering toward centralized control within the Federal Reserve System the
CMC, quite rightly I think, avoided the recommendation sometimes put forward
that the Board as well as the Federal Open Market Committee be abolished,
and our monetary affairs placed in the hands of a single executive. This
country has shown a healthy aversion to "czars", and a continued liking for
checks and balances.
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Federal Reserve Bank of St. Louis
Honorable Wright Patman, Chairman
Joint Committee on the Economic Report
United States Congress
Washington, D. C.
4
A reduction in the number of members of the Board from seven to five,
and in the terms of office from fourteen to ten years, with eligibility for
reappcintment, should make a modest contribution to improving the quality of
the Board membership. And, as the report of the CMC says, it is a suggestion
which retains stability of membership, protects independence in expressing views
and advocating policies which may not be popular, and provides some safeguard
against superannuation.
The recommendation that a means be sought to make clear that the
Board, as a whole, is not to be enmeshed with routine administrative matters,
to conserve its members' time, and to arrange for the more expeditious disposition of its case-load of business, has merit. The success of the suggestion is
bound up, however, with questions of the qualifications for Board membership,
the size of the Board, and the extent to which the individual members participate with the Chairman in working out coordination of monetary policy with the
general economic policies of the government. One reason for the implied
"congestion of detailed business at the top" at the Board, is the drug-like
attraction of such business when sitting in your office pondering the broad
issues of monetary policy becomes tedious.
There is no question in my mind that the present occupational and
geographical qualifications for Board members have outlived whatever sound
purpose they ever had. They represent an embryonic phase of thinking concerning the role of a central banking system in this country. The general
statement of qualifications suggested by the CMC is much more in tune with
the responsibilities of the Federal Reserve System, present or proposed, and
with the need to abandon ideas of finding effective national monetary policies
in an atmosphere of representation of special interests. The companion recommendation of increased salaries for Board members has become a standard item
in all considerations of the membership of the Board. The insistency with
which this recommendation has been ignored by the executive and legislative
branches of the government suggests that there is a roadblock to its acceptance which does not have to do with the specific merits of the recommendation.l/
The suggestion of the CMC concerning the Federal Advisory Council
appears to be an attempt to rescue from possible eventual extinction a body
which was established in the early days of the Federal Reserve System as a
sop to the bankers who had been ruled off the Board on the theory that you
don't make game wardens out of poachers. Although the Board can seek advice
from whatever individuals or groups it chooses under its general powers, there
is some merit in retaining a statutory body, outside the government and the
Federal Reserve System, with which the Board must consult from time to time,
and which has statutory authority to ask questions, seek information and
proffer advice. I do not think, however, that it is necessary or desirable
to change the method of election of members of the Federal Advisory Council.
What is necessary and desirable is to smash the tradition, growing out of the
early history of the System, that the members of the Council elected by the
boards of directors of the Federal Reserve Banks should be commercial bankers.
Relieved of this anachronism, the boards of directors of the district banks
are much better able to select representatives of their districts than is a
Board at Washington, and the privilege is a desirable one in the relations
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Federal Reserve Bank of St. Louis
Honorable Wright Pat-man, Chairman
Joint Committee on the Economic Report
United States Congress
Washington, D. C.
5
August l6, 1961
between the Board and the districts. Turning the present election process
around, so as to make the Board the final appointing authority, seems to me to
"be a picayune obeisance to an obsession with what the CMC calls the influence
of the "primte-base" of the System,
Now we begin to get down to the meat in the coconut. The recommendation that the law should formally constitute the twelve Federal Reserve Bank
presidents as a conference, to meet at least four times a year with the Board,
is an unnecessary and spurious attempt to seem to increase the stature of the
presidents of the Federal Reserve Banks, who are to be deprived of their most
important function by the next recommendation of the Commission. The conference
of presidents of Federal Reserve Banks has "been in existence for years; it meets
regularly to discuss matters of credit policy and Federal Reserve administration;
it consults with the Board as a necessary corollary of their joint responsibilities
The sanctions of tradition and long practice have given it a place and stature in
the working of the Federal Reserve System, to which statutory recognition can
neither add nor detract.
Having paid a left hand compliment to the presidents of the Federal
Reserve Banks in this recommendation, the CMC in its next recommendation relegates them to the role of branch managers by proposing that all of the main
powers of the System in the field of monetary policy should be lodged in the
Board, with only advisory participation by the presidents of the Reserve Banks.
It does this, first, on the ground that these powers - determining rediscount
rates, deciding open market policy and fixing reserve requirements - "should be
complementary and governed by the same considerations, that is by the same people
in the same forum." And, second, the CMC says that the exercise of these powers
belongs exclusively in the hands of public officials, that is the Board, and
that there should be no ambiguity about where this responsibility lies.
The Commission is right, of course, in saying that these powers should
be and are complementary, and it is right in saying that they should be exercised
by public officials, but the fog of compromise evidently concealed from the
Commission the logical suggestion, based on successful experience, that the place
to lodge these complementary powers is in the Federal Open Market Committee (as
it would be constituted by the present formula, if the size of the Board were
reduced from seven to five members)» The Federal Open Market Committee has
become the heart of the Federal Reserve System; cut it out and you have a skeleton. It is a unique development in central banking which has evolved out of the
experience of the System with the needs of a country of the size and character
of the United States.* It is made up of men having statutory responsibilities,
who serve on the Committee as individuals under law, and who are public officials
and public servants in every real sense. Finally, the present constitution of
the Federal Open Market Committee observes the cardinal principle of central
banking that those who determine monetary policy should not only coordinate
This argument should not be confused with ideas which were prevalent in the
early days of the Reserve System concerning regional differences in monetary
policy. Monetary policy must now be national, except in minor degree, but
the whole is still the sum of its parts and regional conditions are important
in formulating national policies.
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Federal Reserve Bank of St. Louis
Honorable Wright Patman, Chairman
Joint Committee on the Economic Report
United States Congress
Washington, D. C.
6
August l6, 1961
their actions with the general economic policies of the government, but should
also have a direct contact with the private money market - a contact which comes
from living in the market, operating in the market, knowing the people in the
market, and being able to feel the pulse of the market by hand from day to day,
and not by random telephone calls or by reviewing cold statistics.
Here, I think, is a tender point with some members of the Joint
Committee and indeed of the whole Congress, and with some people in the Federal
Reserve, but it cannot be avoided. The first and most direct point of contact
between the policies of the monetary authorities and our national and international monetary systems is the New York money market. This is no device of
greedy men and no accident of geography which can be changed by legislative fiat.
It reflects the necessity, in a money economy such as ours, of having a market
place where the final and balancing transactions of our national and international
accounts can be carried out by a variety of delicately constructed financial institutions. And the operating arm of the Federal Reserve System in the principal
money market of the nation, and of the world, is the Federal Reserve Bank of New
York. The Banking Act of 1935 recognized that inescapable fact, and the need
for a living link between monetary policy and the money market, by requiring that
the president of the Federal Reserve Bank of New York must be a continuing member
of the Federal Open Market Committee. All Federal Reserve Banks are equal, but
the Federal Reserve Bank of New York is first among equals.
I can only surmise why the CMC decided that the Federal Open Market
Committee should be dismantled. The statement that the "distinction between the
Board and the Federal Open Market Committee has outlived its usefulness" raises
questions, but answers none. From the language of other sections of the report,
I would guess that those members of the CMC, who might have argued for the retention of the Federal Open Market Committee if they had known more about it, were
lulled into acceptance of its abandonment as a "package deal" by those who were
united in promoting the idea that private influence still permeates the Federal
Reserve System, and must be eliminated if the System is to discharge its public
functions properly and merit the complete confidence of the government and the
nation.
The report first constructs a neat word-pattern to describe the
structure of the Federal Reserve System, and it then states that a basic issue
concerning the System is the "degree of independence of the Federal Reserve
from the banking community which it both serves and regulates."
It is my view that the word-pattern - a System with a regulated private
base, a mixed middle component, and a controlling public apex - is neat, but
inaccurate. In all of its operations in the area of monetary policy I assert
that the Federal Reserve System (Board and Reserve Banks) is a public institution, as it must be to discharge the public functions vested in it by the
Congress. Clearly, the Board is a public body. It is equally clear to me
that the Federal Open Market Committee, on which the presidents of the Federal
Reserve Banks serve, as individuals, by statutory appointment, is a public body
and not a "mixed middle component." The report of the CMC seems to rest its
contrary view on the statement that the presidents of the Federal Reserve Banks
are not government appointees, but are elected by and have their compensation
fixed by the boards of directors of their banks, subject to the approval of the
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Federal Reserve Bank of St. Louis
Honorable Wright Patman, Chairman
Joint Committee on the Economic Report
United States Congress
Washington, D. C.
7
August l6, 1961
Federal Reserve Board. If the Commission had pursued this lead further, it
would have known that approval "by the Board of appointments and salaries of
presidents of Reserve Banks is not a perfunctory power. The Board has demonstrated on numerous occasions that it is an active veto power, so that there is
final public control. But this is more quibbling with words than meeting the
real issue. The real answer is that you do not achieve honesty and integrity
and unswerving devotion to the public interest "by way of appointment procedures,
tout "by charging competent men with an undivided responsibility for public service.
That is the case with respect to the presidents of the Federal Reserve Banks as
they serve "by statutory appointment on the Federal Open Market Committee. They
have no allegiance to private "business in these matters, except as they try to
contribute to the attainment of high level production and employment, sustainable
economic growth and a stable price level by monetary means.
The report of the CMC goes on to fill out its pattern of the "public private category" within the Federal Reserve System with a brief discussion of
the Federal Reserve Banks, but it quickly admits that "very tangibly as well as
legally the Reserve Banks are public service institutions, and that their private
'ownership' is a highly attenuated right." In a rather odd "on the other hand"
the report goes on to say, however, that the salaries of Reserve Bank presidents
and their staff salary scales are set at going market rates rather than government
levels; "the Reserve Bank presidents are not public servants in the usual sense."
In my book this is no more than pandering to confused public ideas about conflict
of interest. The salaries of Federal Reserve Bank officials and staffs are set
at going market rates so that the banks can attract the quality of administrators
and personnel needed to assure the qualities and services necessary for constructive participation in determining monetary policy, and efficient operation in the
communities in which they live. I would say that it is fortunate and in the
public interest that they are able to do this, so that numbers of capable, competent men can make a career of service in the Federal Reserve System, away from
the hazards of political appointment, without the support of family or personal
wealth, and without engaging in outside activities of any kind to supplement
their regular compensation. There is no entering wedge for conflict of interest
here.
The only specific suggestion which the Commission makes concerning
the Federal Reserve Banks is that the present form of stock ownership of the
banks should be retired, and that membership in the System be continued by a
non-earning certificate of, say $500, the same for each member bank. This seems
to me to be knocking down an already "attenuated" straw man, in so far as it
represents a belief or a suspicion that somehow private interests have a nefarious influence in, or derive special benefits from, the Federal Reserve System.
As my previous remarks have indicated, however, I would be concerned if insistence upon the present form of stock "ownership" were to be interpreted as
supporting such belief or suspicion. I would rather have the stock subscription
changed to a certificate of membership than to have any cloud over the character
of the Reserve Banks as public institutions.
There is one other point here that is worth mentioning, however. I
have referred to the statement in the report of the CMC that a basic issue with
respect to the Federal Reserve System is its degree of independence from the
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Federal Reserve Bank of St. Louis
Honorable Wright Patman, Chairman
Joint Committee on the Economic Report
United States Congress
Washington, D. C.
8
August l6, 1961
"banking community which it both serves and regulates. This statement tends to
confuse the monetary powers of the Federal Reserve System and its bank supervisory powers. In discharging its duties as a bank supervisor the Federal
Reserve System may be a government agency with an agency-clientele relationship
with the business concerns it both serves and regulates, in the words of the
Commission, but in the vastly more important realm of monetary policy the
Federal Reserve has no agency-clientele relationship with anyone but the
American people as a whole. If the bank supervisory powers of the Federal
Reserve System are the reason for concern about the "ownership" of the stock
of the Federal Reserve Banks by the member banks, consideration should be given
to consolidating the regulatory functions of Federal banking authorities outside the Federal Reserve System, as suggested in a footnote by some members of
the CMC. The "regulated private base" of the System (the commercial banking
system), in the word pattern of the Commission, is not the base of the System
as a monetary authority. It is the private monetary mechanism which serves as
a channel through which the monetary actions of the System spread out through
the whole community, pervasively but without unnecessary intrusion upon private
transactions between citizen and citizen.
Now let me close by coming back to the question of the Federal Open
Market Committee, which is by far the most important question to which the CMC
addressed itself in the section of its report on the structure of the Federal
Reserve System. I do not believe that many of the members of the Commission
realized the full import of what they were doing when, actively or passively,
they acquiesced in recommending that the Federal Open Market Committee be
abolished. I have said it is the heart of the Federal Reserve System as it
has evolved over the years, and it is. It is the forum where representatives
of the constituent parts of the System - the Reserve Board and the Reserve
Banks - meet as individuals and equals, bearing identical responsibilities
under law to decide questions of high monetary policy. It is the group within
the System which brings to the consideration of policy, knowledge of what is
going on in government, in the money market, and in commerce, industry and
agriculture throughout the country.* Its members take back to the government,
to the money market, and to the country, an understanding of what has been
decided which is an essential ingredient of effective monetary policy.
I have said that if you remove the presidents of the Federal Reserve
Banks from continuous (in the case of New York) or periodic (in the case of the
others) participation in this high function you will tear down the spirit and
morale of the twelve Banks, and I believe it. The men who are the most capable
and imaginative officers of Federal Reserve Banks, and who staff their outstanding economic research departments, are not primarily interested in counting
coin and currency, in sorting checks, and in examining member banks. They and
their successors won't be attracted to jobs in which these operating chores are
their only direct and primary responsibility; jobs in which they are only called
upon as consultants and advisers in matters of monetary policy. Participation
This form of words does not exclude labor, or consumers, or any other group
within the body economic, although organized labor has ordinarily been suspicious of the Federal Reserve and has generally refused to become better
acquainted, even when asked to do so.
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Federal Reserve Bank of St. Louis
Honorable Wright Patman, Chairman
Joint Committee on the Economic Report
United States Congress
Washington, D. C.
9
August l6, 1961
in the work of the Federal Open Market Committee, with authority and responsibility - the right to vote as well as to talk - is what attracts the best men
to the chief offices of the Federal Reserve Banks, and it is this contact which
fills their official staffs with a sense of dedication and high purpose.
I sincerely hope that the Congress of the United States will never
reverse itself on this important matter. I sincerely hope that it will go
forward to complete the ingenious work of the Banking Act of 1935> "by combining
in law in the Federal Open Market Committee the complementary powers of the
Federal Reserve System with respect to open market operations, rediscount rates,
and reserve requirements.
Thank you for giving me this opportunity to present my views to your
Committee.
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Federal Reserve Bank of St. Louis
Sincerely,
Allan Sproul
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Federal Reserve Bank of St. Louis
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Federal Reserve Bank of St. Louis
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Federal Reserve Bank of St. Louis
Subcommittee on Production and Stabilization
Senate Banking and Currency Committee
Paul Douglas, Chairman
Willis Robertson ( V a . )
Joseph Clark ( P a . )
William Proxmire ( W i s e . )
Harrison Williams, J r . ( N . J . )
Edmund S. Muskie ( M e . )
Wallace Bennett (Utah)
Homer Capehart (Indiana)
Prescott Bush (Conn.)
J. Glenn Beall ( M d . )
June 28, 1961.
To:
Chairman Martin
From: Jerome ¥. Shay
Subject: Hearings on Federal Reserve
branch, truth-in-lending, and certain
other bills*
Senator Robertson has announced that the Senate Banking and
Currency Committee will hold hearings on July 10, 1961, beginning at
10 a.m., on four bills, one of which is S«»100f>, to remove the statutory
ceiling on the cost of Federal Reserve bank branch buildings.
The. other three bills are:
Solb86, to authorize the Comptroller of the Currency to establish
maximum service charges which may be levied on dormant accounts by national
banks. The Board reported to the Committee on this bill on May U, 1961,
"lat the Board had no objection to the bill;
S.1771* to amend section 25 of the Federal Reserve Act to permit
the Board to authorize foreign branches of national banks to compete on a
more equal basis with institutions in the countries in which the branches
are located. The Board filed a favorable report on this bill on May 12,
1961,S.2130, an Administration bill to repeal certain obsolete provisions
of law relating to the mints and assay offices.
Senator Douglas, Chairman of the Subcommittee on Production and
Stabilization of the Senate Committee on Banking
and Currency, has announced
hearings on his bill, S.17UO, known as the ntruth-and-lending" bill, to
begin on July 17, 196l« Senator Douglas said that the hearings would run
through at least tJuly 20 and suggested the likoidhood that four days
would not be sufficient time in which to complete the hearings.
No announcements have yet been made as to who will be called to
testify at either set of hearings, and it is understood that committee and
subcommittee intentions in this respect have not yet crystallized fully.
cc: Each Board Member
Messrs. Thomas, Young, Molony, Fauver,
Sherman, Hackley, Farrell and Koyes«
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Federal Reserve Bank of St. Louis
87TH CONGEESS
IST SESSION
1
IN THE SENATE OF THE UNITED STATES
APRIL 27,1961
Mr. DOUGLAS (for himself, Mr. PROXMIRE, Mrs. NEUBERGER, Mr. CLARK, Mr.
LATJSCHE, Mr. CASE of New Jersey, Mr. MAGNTJSON, Mr. JACKSON, Mr.
YARBOROUGH, Mr. YOUNG of Ohio, Mr. MC^AMARA, Mr. CHURCH, Mr.
MORSE, Mr. GRUENING, Mr. McGEE, Mr. CANNON, Mr. HART, Mr. BARTLETT, Mr. LONG of Hawaii, Mr. BURDICK, Mr. SMITH of Massachusetts,
and Mr. LONG of Louisiana) introduced the following bill; which was
read twice and referred to the Committee on Banking and Currency
A BILL
To assist in the promotion of economic stabilization by requiring
the disclosure of finance charges in connection with extensions of credit.
1
Be it enacted by the Senate and House of Representa-
2 tives of the United States of America in Congress assembled,
3 That this Act may be cited as the "Truth in Lending Act".
4
DECLARATION OF PUEPOSE
5
SEC. 2. The Congress finds and declares that economic
6 stabilization is threatened when credit is used excessively for
7 the acquisition of property and services. The excessive use
8 of credit results frequently from a lack of awareness of the
I
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Federal Reserve Bank of St. Louis
2
1
cost thereof to the user. It is the purpose of this Act to
2 assure a full disclosure of such cost with a view to preventing
3 the uninformed use of credit to the detriment of the national
4
economy.
5
6
7
DEFINITIONS
SEC. 3. As used in this Act, the term—
(1) "Board" means the Board of Governors of the Fed-
8 era! Eeserve System.
(2) "Credit" means any loan, mortgage, deed of trust,
10 advance, or discount; any conditional sales contract; any
11 contract to sell, or sale, or contract of sale of property or
12 services, either for present or future delivery, under which
13 part or all of the price is payable subsequent to the making
14 of such sale or contract; any rental-purchase contract; any
15 contract or arrangement for the hire, bailment, or leasing of
16 property; any option, demand, lien, pledge, or other claim
17 against, or for the delivery of, property or money; any
18 purchase, or other acquisition of, or any credit upon the se19 curity of, any obligation or claim arising out of any of the
20 foregoing; and any transaction or series of transactions hav21 ing a similar purpose or effect.
22
(3) "Finance charge" includes interest, fees, service
23 charges, discounts, and such other charges incident to the
24 extension of credit as the Board may by regulation prescribe.
25
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Federal Reserve Bank of St. Louis
(4) "Creditor" means any person engaged in the bus-
3
1
iness of extending credit (including any person who as a
2 regular business practice makes loans or sells or rents prop3 erty or services on a time, credit, or installment basis, either
4 as principal or as agent) who requires, as an incident to the
5 extension of credit, the payment of a finance charge.
6
(5) "Person" means any individual, corporation, part-
7 nership, association, or other organized group of persons,
8 or the legal successor or representative of the foregoing, and
9 includes the United States or any agency thereof, or any
10 other government, or any of its political subdivisions, or
11 any agency of the foregoing.
12
DISCLOSTJEE OP FINANCE CHAEGES
13
SEC. 4. Any creditor shall furnish to each person to
M whom credit is extended, prior to the consummation of the
1^ transaction, a clear statement in writing setting forth, to
1" the extent applicable and in accordance with rules and regu1'
lations prescribed by the Board, the following information—
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Federal Reserve Bank of St. Louis
(1) the cash price or delivered price of the property
or service to be acquired;
(2) the amounts, if any, to be credited as downpayment and/or trade-in;
(3) the difference between the amounts set forth
under clauses (1) and (2) ;
(4) the charges, individually itemized, which are
paid or to be paid by such person in connection with the
4
1
transaction but which are not incident to the extension
2
of credit;
3
(5) the total amount to be financed;
4
(6) the finance charge expressed in terms of dol-
5
lars and cents; and
6
(7) the percentage that the finance charge bears
7
to the total amount to be financed expressed as a simple
8
annual rate on the outstanding unpaid balance of the
obligation.
1°
REGULATIONS
SEC. 5. (a) The Board shall prescribe such rules and
12 regulations as may be necessary or proper in carrying out
13 the provisions of this Act. Any rule or regulation prescribed
14 hereunder may contain such classifications and differentia15 tions, and may provide for such adjustments and exceptions
1" as in the judgment of the Board are necessary or proper to
17 effectuate the purposes of this Act or to prevent circum1° vention or evasion, or to facilitate the enforcement of this
19 Act, or any. rule or regulation issued thereunder. In pre2® scribing any exceptions hereunder with respect to any par21 ticular type of credit transaction, the Board shall consider
22 whether in such transactions compliance with the disclosure
23 requirements of this Act is being achieved under any other
24 Act of Congress.
The Board shall exempt those credit
2^ transactions between business firms as to which it deter
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5
1 mines adherence to the disclosure requirements of this Act
2
is not necessary to carry out the purpose of this Act.
3
(b) In the exercise of its powers under this section,
4 the Board shall request the views of other Federal agencies
5 exercising regulatory functions with respect to creditors, or
6 any class of creditors, which are subject to the provisions of
7 this Act, and such agencies shall furnish such views upon
8 request of the Board.
9
EFFECT ON STATE LAWS
SEC. 6. (a) This Act shall not be construed to annul,
H
or to exempt any creditor from complying with, the laws of
12 any State relating to the disclosure of information in con13 nection with credit transactions, except to the extent that
14 such laws are directly inconsistent with the provisions of
15
this Act.
16
(b) The Board shall by regulation except from the re-
17 quirements of this Act any credit transactions or class of
18 transactions which it determines are effectively regulated
19 under the laws of any State so as to require the disclosure
2® by the creditor of the same information as is required under
21 section 4 of this Act.
22
PENALTIES
SEC. 7. (a) Any creditor who in connection with any
24 credit transaction fails to disclose to any person any infor25
mation in violation of this Act or any regulation issued
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Federal Reserve Bank of St. Louis
6
1
thereunder shall be liable to such person in the amount of
2 $100, or in an amount equal to twice the finance charge
3 required by such creditor in connection with such transac4 tion, whichever is the greater, except that such liability
5 shall not exceed $2,000 on any credit transaction.
Action
6 to recover such penalty may be brought by such person
7 within one year from the date of the occurrence of the viola8 tion, in any court of competent jurisdiction. In any action
9 under this subsection in which any person is entitled to a
10 recovery, the creditor shall be liable for reasonable attorneys'
W fees and court costs as determined by the court. As used in
12 this subsection, the term "court of competent jurisdiction"
13 means either any Federal court of competent jurisdiction
14 regardless of the amount in controversy or any State court
15 of competent jurisdiction.
16
(b) Except as specified in subsection (a) of this sec-
17 tion, nothing contained in this Act or any regulation there18 under shall affect the validity or enforceability of any con19 tract or transaction.
20
(c) Any person who willfully violates any provision of
21 this Act or any regulation issued thereunder shall be fined
22 not more than $5,000 or imprisoned not more than one
23 year, or both.
24
(d) ISTo punishment or penalty provided by this Act
25 shall apply to the United States, or any agency thereof, or
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7
1
to any State, any political subdivision thereof, or any agency
2 of any State or political subdivision.
3
(e) A final judgment hereafter rendered in any criminal
4 proceeding brought by or on behalf of the United States
5 under this Act to the effect that a defendant has willfully
6 violated this Act shall be prima facie evidence against such
7 defendant in an action or proceeding brought by any other
8 party against such defendant under this Act or by the
9 United States under this Act as to all matters respecting
10 which said judgment would be an estoppel as between the
11 parties thereto.
12
13
14
EFFECTIVE DATE
SEC. 8. This Act shall become effective on January 1,
1963.
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Federal Reserve Bank of St. Louis
87TH CONGRESS
IST SESSTON
S. 1740
A BILL
To assist in the promotion of economic stabilization by requiring the disclosure of finance
charges in connection with extensions of
credit.
By Mr. DOUGLAS, Mr. PROXMIKE, Mrs. NEUBERGEE, Mr.
CLARK, Mr. LAUSCHE, Mr. CASE of New Jersey, Mr.
MAGNUSON, Mr. JACKSON, Mr. YARBOROUGH, Mr.
YOUNG of Ohio, Mr. MCNAMARA, Mr. CHURCH, Mr.
MORSE, Mr. GRUENING, Mr. McGEE, Mr. CANNON,
Mr. HART, Mr. BARTLETT, Mr. LONG of Hawaii, Mr.
BURDICK, Mr. SMITH of Massachusetts, and Mr.
LONG of Louisiana
APRIL 27, 1961
Read twice and referred to the Committee on
Banking and Currency
•vM^M •. C L *
"H.
• M rwexMiwi
••». *
L. MIMWO •
Wll.l i
IACOB K
MUSKIC, MAiMr
COWAND V. I.OM*. MO
WM A. «LAMi.r
v - T f e e ON BANKIN<S AND
July 5, 1961
Hon. William McChesney Martin, Jr.
Chairman, Board of Governors
Federal Reserve System
Washington 25, D. C.
My dear Mr. Chairman:
Hearings on S. 17^0, the "Truth in Lending"
bill, will begin on July lj. Your appearance to present
the views of the Board of Governors of the Federal Reserve System would be an Important part of the hearing
record.
juiderstand that the staff of the Banking and
Committee has conferred with Mr. Shay and that
you would be able to testify before the Production and
Stabilization Subcommittee on Wednesday, July 19, at
10:00 A.M.
It would be most helpful if one of your staff
sirts in the field of consumer credit would appear
with you to answer more detailed and technical questions
which might arise during the presentation of the Boardfs
views.
:.ncerely yours,
\
xV^T"
Paul H. Douglas
Chairman, Subcommittee on
Production and Stabilization
PHD:lc
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Federal Reserve Bank of St. Louis
I
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Federal Reserve Bank of St. Louis
July 6, 1961.
Dear Wallace:
Thank you for tending me the
interesting statement you made oa the floor
of the Senate on the Truth la Lending
S am very glad to have this and
I also got oat of oar Library Robert Johnson's
'Methods of Stating Consumer Finance Charges,1*
and found it very interesting indeed. We will
do our best with this matter and appreciate
your bringing the problems to our attention.
With all good wishes,
Sincerely yours,
Vcilyl2d)
Bill
Wa». McC. Martin, Jhr.
The Honorable Wallace F. Bennett,
United States Senate,
Washington £§, 0.C*
WALLACE F. BENNETT
COMM,TTEES:
FINANCE
BANKING AND CURRENCY
ADMINISTRATIVE ASSISTANT
WASHINGTON
DC
DEFENSE PRODUCTION
June 2.7 , 1961
Honorable William McC. Martin, Jr.
Board of Governors
Federal Reserve System
Washington 25, D. C.
Dear Bill:
Confirming our telephone conversation last night,
I am enclosing a copy of the statement I made about
the Douglas "Truth in Lending" bill, S. 1740,
frankly in the hope that you will express a somewhat similar attitude toward this bill in the state^
ment that you have been called upon to make for the
Committee.
I realize you have to be professional and objective
and I don't, but I think this bill represents a
very serious problem.
It was good to talk to you.A
sincerely,
A
WPB:sq
Enc.
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Federal Reserve Bank of St. Louis
SPEECH DELIVERED BY SENATOR WALLACE F. BENNETT (R-UTAH)
SENATE FLOOR
MAY 3, 1961
FOR RELEASE ON DELIVERY
THE TRUTH ABOUT THE "TRUTH IN LENDING BILL"
Last Thursday the Senior Senator from Illinois,
Mr. Douglas, introduced what he called the "Truth in Lending"
£4/^-~bill, and he and Senators Proxmire of Reetts^i¥€Haia
and Neuberger
of Oregon spoke in support of it.
Those who embark on a crusade in the name of truth take
on themselves a great moral obligation.
truth diligently with open minds
They must search for
minds that are not so
prejudiced that they reject, oppose, or ignore all facts that
do not fit into their conceived goal or purpose.
That is
certainly required of us in Congress; and if we are to find
truth in anything, including truth in lending, we must maintain truth in legislation.
Is this bill, S. 17^0, conceived and supported in the
clear spirit of truth?
objectives?
Do its requirements meet its stated
Are the examples used and the arguments made to
support it clearly relevant, internally consistent, and free
from concealed purpose?
Speaking as a member of the Sub-
committee on Banking and Currency, which heard a similar bill
last year, my answer to all of these questions would be an
unqualified "No."
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Federal Reserve Bank of St. Louis
It will take many hours of testimony and
- 2 -
questioning in the Committee to bring out all the evils buried
in this bill; but from last year's hearings, this year's text
and last Thursday's opening statements, we can easily discern
what to look for.
Last year its author called it the Finance Charge Disclosure Act. This year, with a flourish, he rechristened it
the "Truth in Lending Bill."
I could suggest a few other
titles which seem to me to be more appropriate.
For instance,
if Perry Mason were naming it, he might very well call it
"The Case of the Cross-Eyed Credit Controls" because its
stated objective looks toward one goal and its key provisions
toward another.
Another phrase that suggests itself is
"Nonsense and Non Sequitur" because the bill would not affect
most of the evils described in the "horrible examples" used
to arouse emotional support for it, and its key provisions
are, in my opinion, incapable of being understood, complied
with or enforced.
Resorting to a bad pun, I have called this
whole procedure the Hidden Bill Trick.
That this designation
fits is evident all through the bill.
First,
the language which describes the stated
objective of the bill conceals the true purpose.
Second, it also may conceal an anti-business bias,
including an apparent belief that businessmen must be immoral, ipso facto.
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Federal Reserve Bank of St. Louis
- 3 Third, the lurid exampless presented in the testimony,
actually involve fraud and other crimes which are already
punishable by local law.
Fourth, the language of the bill hides a hoax, because the bill as it is written cannot be enforced without
also setting up and using vast new Federal powers to change
the whole pattern of our present system of using credit in
retail distribution, and to fix prices on every commodity
and service in every town in the United States.
Fifth, our search for truth should lead us to try to
discover whether there is any justification for legislation
in this field at the Federal level. Have the states been
asleep to the desirability of accurate, workable laws to
provide truth in lending?
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Federal Reserve Bank of St. Louis
- 4Sixth, and finally - we come to the question, which should have basic and
ultimate concern for all of us, who, as I said at the beginning, should
be dedicated to truth in legislation.
Is the bill constitutional?
Let's start at the beginning with the objective.
Does it state great
truth - or, in fact - is it true at all? Let me read again - It claims
that the Congress finds and declares that
"economic stabilization is threatened when credit is
used excessively for the acquisition of property and
service. The excessive use of credit results frequently
from a lack of awareness of the cost thereof to the user.
It is the purpose of this Act to assure a full disclosure of such cost with a view to preventing the uninformed use of credit to the detriment of the national
economy."
This premise is at best highly debatable. Not a single line of testimony
was presented to support this proposition at hearings on a similar bill
last year.
On the contrary there was opposite testimony by Professor
Theodore N. Beckman, Professor of Marketing at Ohio State University.
He
presented official statistics demonstrating that consumer debt had shown
a very stable relationship to Gross National Product and Personal Disposable Income during the preceding four years.
His data also showed that
rates of repayment had maintained a sensible relationship to new extensions
of credit during the same period.
His testimony was uncontradicted.
Furthermore, Federal Reserve Board officials concerned with consumer credit
have flatly refused to commit themselves to any specification of a safe or
unsafe ratio of consumer debt in relation to personal income or any other
economic yardstick.
So far as the record shows, consumers are better
managers of their own credit problems than the sponsors of this bill would
have the Congress believe.
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Certainly I have seen nothing to warrant a
5
congressional endorsement of the first bland assumption made in the
Declaration of Purpose of this bill.
Now let's look at the bill's stated objective again in terms of its
proposed solution - are the two inherently related - or is this a great
non sequitur?
In the first line it says Congress finds and declares that economic
stabilization is threatened when credit is used excessively for the
acquisition of property and services.
Have we found that?
Is our Gross
National Product, which is the total of goods and services, too high?
Should we be working to cut it down?
say specifically.
great is it?
The bill suggests this, but doesn't
If there is an excess of credit in this country, how
And if this excess threatens economic stabilization, how
shall we eliminate it?
The bill doesn't attempt to set standards for
proper credit volume, but says "this frequently results from a lack of
awareness of the cost thereof to the user."
If so, is it the only reason?
Is this a valid reason?
Or, the chief one?
If the bill is passed,
could we expect to have greater economic stability?
Or would we have economic chaos?
The plain inference of the bill is that there is now excessive credit
in our distribution system which must be taken out.
given point to durable goods such as automobiles.
automobile credit excessive?
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Federal Reserve Bank of St. Louis
Where?
Exanples
By how much is
If we take this excess out - by how much
(
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("
will we'add "to the unemployment in Michigan?
The same question can
be asked for any industry whose products are bought on credit„
Underlying this bill is an ancient myth which assumes there is a
limit of virtue in interest rates, and that this is set at 6%.
The
corresponding inference is that every finance charge above 6% is
immoral.
Could we apply this yardstick to all credit transactions
and improve the stabilization of the economy?
The truth is that
if all consumer credit transactions above 6% were considered excessive, and therefore had to be eliminated, our whole present
economic system of mass distribution, instead of being stabilized,
would collapse.
The truth is that most, if not all, of our retail
transactions involving delayed time payments include other factors,
the total cost of all of which far exceeds a 6% simple annual rate.
S. 2755, introduced in the last Congress, required that all charges
for credit be totaled and stated as "simple annual interest".
To
have done this would be to require a statement that is patently untrue? since
interest,"
the cost of the use of money, is only one
part of the cost of retail credit, which is usually unsecured.
In
order to provide credit to his customers, the retailer must himself
borrow money at prevailing interest rates.
In addition, he must
incur other costs, including the expense of checking credit, keeping records, cost of making collections, and the burden of bad
debt losses, to name only a few - of a myriad of small transactions
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- 7-
Actually the sum of other costs which are required to provide "on-thespot" time payment credit service for retail purchases is several times
greater than the cost of the interest component.
A fundamental "Truth in Lending," which the sponsors of this bill seem
incapable of learning, is that the cost of providing retail merchandise
credit, repayable in small installments at the customer's convenience,
ranges from 12 to 18 percent per annum -- the actual prevailing charges
of reputable merchants.
The real cost of providing consumer credit is of course reflected by the
numerous state small loan laxvs.
per month.
They authorize rates of 2 to 3 percent
In passing, it is significant to note that these laws require
only disclosure of the applicable monthly rates, not the annual rates of
24 to 36 percent per year.
I believe this, too, traces to the 6 percent
myth, which would drive consumers to unlicensed loan sharks operating on
a larcenous lump sum basis, in the mistaken belief that it was cheaper
than interest at 24 percent per year.
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(
""
The reasonableness of an 18% annual finance rate for retail merchandise credit, in the light of related costs, was affirmed by a
proponent of the bill, former Congressman Voorhis.
He is Executive
Director of the Cooperative League of the United States of America.
This is what he testified, and I quote:
11
. . . I know that retail stores have to charge
monthly charges on credit accounts probably because it is a costly proposition, I also expect
they do not maybe even cover that cost and that
the people who pay cash are subsidizing the people
who are getting the credit in many cases."
* **
"And I want to try to make it clear that I am
not blaming the retail stores for charging 1-1/2
percent." (per month)
A banker witness, who testified for the bill, said the same thing.
Speaking of retail credit charges, Mr. Herbert E. Cheever, Vice
President of the First National Bank of Brookings, South Dakota,
said:
"...There are transactions certainly where 1-1/2
percent per month would not be exorbitant, depending
upon the risk and the amount of the transaction".
Official statistics prove that he is right and undermine any contention that retail merchants are using credit charges as a device
to exploit consumers.
According to Internal Revenue Service figures
included in the record of last year's hearings, the retail industry's
after-tax earnings in 1957-1958 were only 2% of sales and 6.2% of
assets.
Comparable figures for manufacturing industries during the
same period were 7% and 10.1%
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respectively.
- 9The prevelance of the 6% notion was affirmed by credit union
representative Donald J. MacKinnon of the Ford Dearborn Federal
Credit Union, who testified, and I quote;
11
.. .We have even been accused of usurious practices
when we tell a member that we charge 12 percent per
annum..."
Now lets see what the bill will do in the light of these facts.
The irrelevant "horrible examples" contained in last year's
hearings, and the uninformed editorials they inspired, some of
which were put in the Record last Thursday, reveal an unwarranted
attempt to besmirch the image of all retailers, big and little,
who sell on credit.
In his speech on Thursday, on page 6415 of
the Record, Senator Douglas says he is not trying to indict the
American business community, but he also says the consumer does
not get true and accurate information from them (businessmen)
about credit.
Ke then implies that they can't be expected to have
any morals because they "have fallen into a business jungle where
survival seems to have depended on camouflaging, hiding, or understating the real price of credit."
them from that bondage.
I claim that there is no such jungle now,
but that this bill would create one.
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This bill is supposed to release
Where is the truth?
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Let me put this problem in the framework of the bill before us,
S, 1740.
Let's assume that the Douglas Bill is enacted and the
reputable retail merchants advertise credit charges of 15 to 18%
on the basis of simple annual rates.
What will be the reaction of
the credit exploiter who is the assumed target of the bill?
I can
envision the ads now.
"WHY PAY 15% OR 18% FOR CREDIT? BUY HERE AND
GET 24 MONTHS TO PAY WITHOUT ANY CREDIT CHARGE."
The very enactment of this bill and the attendant publicity on
the importance of percentage rates would put a premium on such
advertising.
Nothing in the bill could stop such advertising
because every merchant is free to absorb his credit costs in price,
if he so chooses.
And what will the legitimate merchant do in the
face of such competition?
follow suit.
The answer is plain.
He will have to
For the average consumer will mistakenly assume that
the merchant who advertises the true annual cost of credit —
to 18% —
15%
is the exploiter while his benefactor is the merchant
who provides credit without charge.
Precisely those consumers
who are presently susceptible to exploitation by way of excessive
credit charges will be the first to patronize the merchant who
advertises no charge for credit.
The unfortunate fact is that because of public conditioning, the
communication to consumers of an 18% annual rate would penalize
the merchant who gave the message.
Let me quote a witness who
appeared at the behest of the Senator from Illinois.
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I refer to
-11 Professor Morse of Kansas State University.
These are his words;
"Yes, this seems to be the market truth.
That is, one would be at a competitive
disadvantage to state the truth, the true
rate of interest under prevailing conditions."
*
* *
"It would appear to be quite disastrous to be
quoted at 12 percent or 18 percent et cetera".
You can't escape the plain answer that in a competitive economy
such as ours no merchants can afford to state actual annual rates
unless all merchants do so.
And I repeat there is nothing in
this bill that can require all merchants to do so.
On the con-
trary, adoption of this bill would encourage the very thing at
which it is aimed.
It would put a pr<gnium on deceptive pricing
and advertising practices by the small group of unscrupulous
credit merchants and in the long run force such practices on
the great body of legitimate business.
So passage of this bill will not affect the exploiters? less, not
more, credit information will be furnished the public; and beyond
this, cash customers will be saddled with hidden credit costs.
Let there be no mistake about these inevitable consequences of
this bill.
They are bourne out by the testimony of witnesses
favoring the legislation at last year's hearings.
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- 12Let there be no mistake either about the decency of the credit practices
of the overwhelming majority of American businessmen. The record of last
year's hearings is equally clear on this. Again I refer to the testimony
of witnesses who supported the bill.
Mr. MacKinnon of the Ford Credit
Union said:
". • .1 simply do not agree with those who
believe that a large proportion of the people
who charge rates of interest in excess of our
own, are guilty of usurious practices, or in any
way deliberately attempting to defraud "the public.
It is my experience that the vast majority of
those in the personal credit business are honest
and upright citizens. Of course, there are the
fringe operators who bring disrepute to any
business but they operate largely outside or
without benefit of legal control and are in no
way representative of the great majority of
ethical firms doing business in this country."
Mr. MacKinnon was not alone in commending the vast body of American
merchants for their ethical credit practices.
Other witnesses for the
bill affirmed the same thing. President Buckmaster of the United Rubber
Workers stated:
"The overwhelming majority of our business
establishments are dedicated to the good
economics of fair and honest dealings. This
bill strikes only at the unscrupulous few
who give business in general a bad name."
Mrs. Alice Thorpe, representing the American Home Economics Association,
testified similarly and criticized only
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Federal Reserve Bank of St. Louis
"... the few who, in one disguise or another,
cloak excessive charges and advertise in glowing
terms so that the uninformed person is not able to
distinguish between the legitimate costs and
padding, so to speak."
Even the distinguished Senator from Wisconsin, a co-sponsor of the
bill, recognizes the unfairness of comparing the credit charges of
retail merchants or commercial lenders with those of cost-free and
tax-exempt credit unions.
He said during last year's hearings:
"Of course, I am a great advocate and supporter of
credit unions. They have their national headquarters in
Wisconsin. But in all fairness, we have to recognize they
do not operate on the same basis as the commercial loaning
operation."
"They do not have the same charges at all, have all kinds
of privileges that the commercial operation does not have.
And the competition, therefore, is really not very fair."
Apart from everything else I have said, the fact is the bill wouldn't
help consumers in the slightest, even if it were feasible and
enforceable.
The truth is that consumers are uninterested in
annual percentage rates and could not use the information if it
were provided.
In this connection, I cite the following testimony
of the President of the National Association of Better Business
Bureaus, who appeared at the invitation of the Subcommittee Chairman:
"I have a great deal of doubt in my own mind from talking
to thousands of customers over the years that they are particularly interested in what the so-called interest rate is
in the installment contract. They are interested in what
the dollar cost is and how much it is going to cost them
per month to pay the balance which they have obligated
themselves for *"
Of course, he is right.
Consumers are interested in how their dollar
expenditures will fit within their budgets, not in abstract annual
rate concepts which may be of importance to bankers and large investors.
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On the uselessness of percentage rate information to customers, let me
refer you to the statement of Duncan Holthausen at last year's hearings.
He is a former credit official of the Federal Reserve Board and is now
the operator of a small family department store in Union City, New Jersey..
Addressing himself to the claim that percentage information would enable
consumers to compare credit costs, he demonstrated that this idea was
illusory, even in the case of identical merchandise.
Again I quote:
"Of course, basic to this whole discussion,
is the assumption that consumers can tell which
is the 'better buy1 if given price and interest
rate. Is a 1960 Brand X car for $3,200 at 18
percent simple annual interest with 24 months
to pay a 'better buy1 than the same 1960 Brand
X car for $3,300 at 15 percent simple interest
with 24 months to pay? I am sure few consumers
could give this answer. Professor Morse, in a
college level family finance course, finds it
necessary to spend '2 weeks' dealing with 'minute
calculations' of consumer credit arithmetic —
in other words, the problems of relating credit
costs to simple annual interest. How can we
expect the average consumer to relate simple
annual interest to dollars, if it takes 2
weeks of intensive study on the part of college
students?"
How many members of this body could make the computations required to
answer the question posed by Mr. Holthausen and how long would it take?
Having shown my great doubt that there is any truth in the relationship
between the stated objective of the bill and its requirements, and my
feeling that the evil image of the American retailer which the bill
projects is not accepted by the public, as evidenced by those witnesses
who supported the bill in last year's hearings, let us turn now to
consider the problem of complaince and enforcement with their inevitable
effects on our whole retail distribution system.
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Federal Reserve Bank of St. Louis
- 15 Anyone with even meagre experience in retailing can easily see why the
bill is so misleading and deceptive.
Its major provision is a require-
ment that no merchant can regularly sell goods on credit unless he informs
each customer in advance of the credit charge expressed in terms of a
simple annual percentage rate.
The claim is that this will insure the
disclosure to the public of the real cost of consumer credit. This claim
is deception itself. The bill will not and, as I have already said,
cannot accomplish any such purpose.
It would lead instead to suppression
of the cost of credit.
The reason is that as the bill is written, the annual rate requirement
can neither be enforced, nor observed, except upon two intolerable
conditions.
The first is federal regulation of the methods and procedures by which
merchants may extend credit. Even the author of the bill denies this
purpose.
The second is the establishment of a full-blown federal price control
agency to fix maximum cash ceiling prices for every merchant and on
every item in every corner of the United States, and to compel the separate statement of the percentage credit rate.
The proponents of the bill have maintained a discreet silence on these
points, and although price control may ix>t be the ultimate objective of
the bill, it is meaningless without such control. This silence is
understandable because it Hides the unpalatable truth.
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Federal Reserve Bank of St. Louis
(
-IS-
(
I can't conceive that any member of the Congress dedicated to a
free enterprise economy would support nationawide credit and price
controls in peacetime.
Too many of us remember the huge price
control agencies of World War II and the Korean War and the burdens
they imposed on business and the consuming public alike.
The futility of the bill as it stands needs no intricate explanation
The point is simply that without such supporting credit and price
control regulation, no merchant in the land would have to suffer
the burden of stating credit charges in terms of annual rates.
He would be free to fix his prices at levels which would take care
of his credit costs and could remain free to advertise to consumers
that he made no charge for credit, no matter how long the period of
payment was extended.
This is no figment of my imagination.
The point has never been
denied, although it was raised during last year's hearings by the
General Counsel for the National Small Business Men's Association.
This is what he told the Subcommittees
"If we embark on this course we can fully expect to pay
the penalty of Federal price control."
"The whole concept of our economy, particularly the antitrust laws, is aimed at preserving the freedom of each
businessman to fix his own prices. This is basic to our
economic system. Consequently, any merchant would be
free to fix whatever cash price he chose and to advertise
whatever credit costs for time payment he saw fit. The
only way this inherent weakness of the bill could be overcome is by adding to it provisions which either fixed
maximum cash prices, and compelled a separate statement
of the charges for time sales, or ivhich compelled the disclosure, in addition to credit charges, of the merchant's
wholesale costs and his selling expenses for the goods he
retails. I do not think anyone here would want to see the
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Federal Reserve Bank of St. Louis
-17-
kind of national agency which would be needed to
administer a bill of that kind."
As a matter of fact, if this bill were passed, every merchant in
the land would be under heavy pressure to set his prices so as to
avoid any separate credit charges.
And this could easily be done.
As I have said, it would only be necessary to absorb credit costs
in base price in the same way as other overhead costs, such as
advertising, rent and labor costs, are now so absorbed.
In fact, the bill
will force this result for at least three reasons
First, it is actually impossible to comply with the simple annual
rate requirement in the light of commercial realities.
In the
vast majority of merchandise credit transactions, it is impossible
to know in advance what the simple annual credit rate will be.
This is true of the most popular form of retail credit in use
today known as the revolving charge account.
It is also true of
the familiar kind of retail installment account known as the add-on
account.
In these, as well as other types of retail credit procedures, a
simple annual rate cannot be forecast because it is not known at
the time of the original transaction how long*/the customer will
use his credit and how much credit he will use over any defined
period.
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Federal Reserve Bank of St. Louis
-18This failure of the bill to recognize the realities of commercial
life was attested by an expert federal agency during last year's
hearings.
With reference to similar problems encountered in the
home loan field, the Chairman of the Federal Home Loan Bank Board
wrote the Chairman of this Committee as follows:
". . . it is not apparent how it would be possible
to comply with the terms of the bill requiring a
statement of the total amount of the finance charges
and the percentage that such amount bears to the
balance, expressed in terms of simple annual interest."
S. 17^0 asks the Congress to ignore these elementary commercial
facts.
This is legislative irresponsibility.
It departs from
the experience and action of the numerous state legislatures which
have already acted in this field.
In fact, at least 31 states
have passed laws dealing with various types of merchandise credit,
including measures establishing maximum rates and compelling comprehensive disclosure of consumer credit charges, but in dollars
or monthly rates of service charge.
They have acted responsibly.
They have known better than to saddle the merchants of America with
the impossible liability inherent in the simple annual requirement
of this bill.
In the second place, if simple annual rates could be somehow calculated, the requirement would be intolerably onerous,
burdensome, and expensive.
There would be laborious paper work
every time a credit sale was made.
"Simple" sounds simple, but it
isn't. It would be, if all contracts were to run for an even year,
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Federal Reserve Bank of St. Louis
-19with payments to be made in equal installments at equal time
intervals. But few contracts are written that way.
They are
generally written for periods shorter or longer than a year, with
payments weekly, bi-weekly or monthly, often with no payment for
uhe first month or two of the contract, or with smaller payments
at first and larger payments at the end, or with a provision for
skipped payments or with many other variations, all of which affect
the interest rate, and make the computation of that rate extremely
complex.
To illustrate, consider an example presented at the previous
hearings by one witness.
A man, caught in an emergency, wants to
buy a $20 battery at a gas station, and wants to pay for it on
time.
The carrying charge is $2. He buys the battery on a Monday,
and wants to begin payments on the following Friday, which is his
payday.
He is paid every other week, so he makes four bi-weekly
payments of $5 each, with a final payment two weeks later of $2.
How much "simple annual interest" does the $2 represent?
I took this problem home that evening, and after a couple
of hours came up with three different answers, 94 per cent, 101
per cent, and 104 per cent, depending upon what assumptions are
made about the proportion of each payment going to principal and
interest.
Next day, I asked a member of my staff, an economist,
to compute it. He spent half an hour on it, but didn't have the
formula he needed, so he referred it to the Library of Congress.
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Federal Reserve Bank of St. Louis
-20-
After an hour's delay, the Library came up with an answer of
129.5 per cent. One of the Committee witnesses, a professor of
marketing, worked on the problem for half an hour and came up with
an answer of 118.9 per cent.
The man who posed the problem in the
first place couldn't figure it closer than "between 110 and 130
per cent."
A Newsweek article on the hearings and on the problem
prompted a few letters to me.
Three of these contained new and
different answers to the problem.
One by a statistical expert
for Beneficial Management Corporation brought an elaborate twopage computed solution of 125.33 per cent.
The other responses
I received were 117-7 per cent and 80 per cent.
In light of this
variation among the experts as to the correct answer, how can an
ordinary retail clerk possibly be expected to find the correct
answer?
I hope the sponsors of this bill love truth enough to
learn it by trying to figure one of these "simple11 problems for
themselves as I did last year.
Let me point out also that rate books offer no solution.
Because of the infinite variety of retail prices and credit terms,
such books would have to assume the proportions of the New York
City Telephone Directory.
Their accurate use would require the
services of trained experts and hours of time, and there would
still be more than two-thirds of the retail credit transactions
which such books could not cover.
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Federal Reserve Bank of St. Louis
- 21 The impact of this bill is not confined to professional
financial institutions or even to large retail institutions. It
would reach credit transactions in every town and crossroads of
America.
It would cover the credit transactions between the grocer
and the housewife; between the corner filling-station operator and
the local motorist.
Control Acts.
It is as broad in its sweep as the wartime Price
Imagine a rural hardware dealer on a busy Saturday
afternoon taking time to make the required calculations and to fill
out voluminous forms every time he made a sale on credit to a
farmer.
Imagine a housewife making five separate purchases in
five sections of a department store and having to wait for a credit
rate calculation from each sales girl who waited on her.
Yet this
is exactly what the bill would require.
Prom what I have said, it is apparent that the bill is of
unprecedented scope for Federal legislation.
In this connection
I remind the Senate of the widespread concern about the intrusion
into local affairs contemplated by the recently passed Senate
amendment to the Fair Labor Standards Act. This bill goes much
further. If verification is needed, I cite the statement of the
Chairman of the Federal Trade Commission during last year's hearing on the bill.
In his words
"the bill goes far beyond the scope of Commission jurisdiction in that it contains no
interstate or foreign commerce limitation."
The impossible enforcement and compliance problems were
enough to cause the Chairman of the Federal Reserve Board to back
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Federal Reserve Bank of St. Louis
- 22 -
away from the administrative responsibility. He advised the
Chairman:
"Extension of the Board's duties into the
field of fair trade practices as contemplated by this bill would be foreign to
the Board's present responsibilities."
It is no wonder that the Federal agencies suggested as the
possible enforcement agency at last year's hearings politely declined the honor. Even the distinguished Senator from PennsyT
whose name appears on the bill, is aware of the dismaying enforcement problems. During last year's hearings, he said
"I would like to say I can see why the
Federal Reserve does not want this administrative job. It is the job I do not think
anybody would want."
Let us now consider whether the emotional supporting testimony presented at last year's hearing was either relevant to this
bill, or indicative of any need for Federal legislation to control consumer credit. During those hearings, a parade of "horror
stories" of consumer exploitation was presented to the Subcommittee. Heart-rending tales of episodes in which unscrupulous
salesmen made exhorbitant credit charges or palmed off shoddy
merchandise on people of low income, some of them illiterate,
were told on the record presumably to give a surcharged dramatic
background to the proposal.
However, most, if not all, of these
were cases of plain fraud and deception which would not be covered
or controlled by this proposal and should better be left to the
states and local communities. This kind of consumer exploitation
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Federal Reserve Bank of St. Louis
- 23 -
by a few unscrupulous merchants does not justify the extension of
Federal dominion over the millions and millions of transactions
that occur everyday in the market place. State and local enforcement agencies already have the power to cope with this problem
and deal severely with this type of fraud. The Federal Reserve
Board, the Federal Trade Commission or any other Federal agency
should not be required to exercise police power over the billions
of local retail transactions in our economy.
Is there any justification for Federal legislation of any
kind in this area?
Have the states ignored their responsibility?
The record is clearly the opposite. The truth is that many states
have already dealt realistically and effectively with various
phases of this problem, including maximum rates and disclosure,
and others can be expected to follow.
Let's take another look
at the record of last year's hearings. This is what President
Nyborg of the Association For Better Business Bureaus told the
Committee:
"There is no question about the fact that
many of the States have moved and others
are considering moving in various ways to
afford protection at the State level.11
He is absolutely right.
All states have laws covering
the lending activities of banks.
In addition, forty-two states
have laws requiring the disclosure of credit charges on small
loans; thirty-one states regulate automobile installment sales;
and eighteen states cover installment
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Federal Reserve Bank of St. Louis
sales of other types of goods as well as automobiles.
And in
the new area of revolving charge accounts, seven states have
already passed laws, while such legislation is under active study
in a number of other states.
All indications demonstrate that
the state governments are alert to the needs in this area and are
going ahead with adequate legislation.
To me, this evidence is conclusive.
been enacted in recent years.
Most state laws hav-e
In other words, the current trend
is for more and more states to meet the problem, thus making federal
regulation unnecessary.
Before 1940 only three states (Indiana,
Michigan and Wisconsin) had special legislation covering installment
credit.
Three more joined this group between 1941 and 19^5 (Cali-
fornia, Maine and Maryland).
SfS*
In the 1946-3^60 period, Michigan
basically changed its statutes and four new states passed installment
credit laws (Connecticut, New Jersey, Ohio and Pennsylvania).
Between 1951 and 1955* Colorado, Nevada and Utah were added in the
installment statute goup.
Then in the four-year period of 1956-1959,
seventeen states passed their first special installment credit laws.
In 1959 alone nine states either passed their first statutes in this
area or amended old ones.
In total, there were about one thousand
legislative proposals made in state legislatures during that year.
In fact state laws protect consumers today in the nation's heaviest
population areas.
In addition, the states of Iowa, Maryland,
Massachusetts, and Pennsylvania have established commissions to
study installment selling.
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Federal Reserve Bank of St. Louis
There is an impressive record of
- 25 performance on the state level.
And it cannot be suggested that
the state laws are dead letters.
effective.
On the contrary, these laws are
The President of the National Association of Better
Business Bureaus, Mr. Nyborg, affirmed this in answer to a pointed
question from Senator Bush,
Let me read you their exchange:
Senator Bush: "You think then that the consumer
and the average citizen is getting all the legal
protection that he needs in connection with this
matter of disclosure in the State of New York?11
Mr. Nyborg:
yes. "
"It seems to me that this is the case,
And his testimony was corroborated by Mr. William Kirk, representing
the Union Settlement House of New York, who told the Committee:
"I think it is very clear that where people in
our community go down to established stores
they are given complete information in every
way that conforms with the law."
There is in short no reasonable basis for disregarding the advice
of the Federal Deposit Insurance Corporation to Chairman Robertson
that
". . .this is a field of activity that should be
appropriated by theState and local governments to
govern and police." ..
We come now to the last and ultimate question.
I am not a
lawyer and thus have not attempted any analysis of the legality
or constitutionality of the bill.
But I would point out that it
contains criminal as well as civil sanctions.
Speaking as a layman,
I will only say that from a purely common-sense standpoint, it
seems to me that the Congress ought not inflict the business community of America with any legal liability on the basis of a
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Federal Reserve Bank of St. Louis
- 26 -
measure so unrealistic, so unnecessary, and so uncertain in its
application and requirements.
If this proposal is based on the
interstate commerce clause of the Constitution, it extends this
clause far beyond its present limits, including the recent extension
of the Pair Labor Standards Act to the retail trade.
For all of these reasons I have considered it my duty to urge
the Congress to be especially watchful of this legislation.
Its
alleged banner of truth is a tempting one to follow. But this truth
label is a deceptive cover for a misleading package -- a hidden bill
trick.
The bill will not lead to "Truth in Lending".
exactly the opposite result.
It will produce
The Congress is being asked to enact a
bill which is absolutely unenforceable as it stands and which, however,
amended, could not be enforced except with the aid of a vast army of
federal price control bureaucrats.
Its adoption could only lead to
widespread evasion and disrespect of law like the late and unlamented
NRA of the early 1930»s.
If rigid enforcement of S. 1740 were
attempted it would burden the taxpayer with the heavy cost of a
super-snooper agency, bring both weakness and chaos to our creditbased system of retail distribution, and lessen, rather than increase,
the consumer's knowledge of "Truth in Lending".
On these issues I
hope Senators Douglas, Proxmire and Neuberger will join me in the
search for truth at the forthcoming hearings.
sincerely, I have no doubt of the outcome.
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Federal Reserve Bank of St. Louis
If they do so
196!
the Honorable A. Willis Robertson,
Chairman,
Coi«»itt€*e en Banking and Currency,
United States Senate,
Washington 2$, 0. C.
Dear Hr« Chairasjtt
fliis is la response to your request of April 26, 1961,
fur a report on S. 1?U0, a bill *fo assist in the promotion of
eeonoKLe stabilisation by requiring the disclosure of finance
charges in connection with extensions of credit."
The bill would require a person engaged is the extension of credit to famish to the person ta when credit is extended,
prior to the coasasaaation of the transaction, a stateaeat in writing
setting forth, to tbe extent applicable and in accordance vith rules
and regulations prescribed by the Board of Oortrnora of the Federal
iteeerve System, among other iteais, (1) the finance charge ejcpressed
in dollars and cents, and (2) the percentage that the finance charge
bears to the total aa^aat to be financed expressed as a siaple annual rate on the outstanding unpaid b&Unce of the obligation,
As stated in oar report on S, 275S* & similar bill iatrodueed in the Congress last year, the Board is in full accord with
the objective of requiring lenders and Tenders to tell the truth
about interest rates and finance charges* the regulation of trade
practices in stating credit charges, where necessary to prevent
deception of borrowers, surely is a desirable social objective.
Me also pointed oat, in our report last year, that extension of the Board*s duties into the field of trade practices as
contemplated by the bill would be foreign to the Board* s present
responsibilities, which are principally in the field of monetary
sad credit regulation through the banfciag systea. we reaffirm the
position we took last year that the adsdnistration of such legislation would not constitute an appropriate activity for the Federal
ftestrve System*
Regarding the effect of disclosure of finance charges in
preventing excessive and mntiasly use of credit by consumers, the
Board's studies indicate that moderation of the cyclical expansion and
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Federal Reserve Bank of St. Louis
contraction of consrumsr instalment credit reflects in large part
changes ia the availability of credit to consumer leaders. Such
changes in availability are responsive to general monetary policy
and are reflected primarily la t&e application of HOTS or less
restrictive standards or terms rather than ia higher or lower
finance charges*
Finance charges on consumer credit have not changed
greatly over the course of recent business cycles, and consumer
borrowers have not appeared particularly responsive to such variations as have taken place, fais is not to say that greater consumer
awareness of interest rates may not influence the over-all pattern
of their spending, but this effect would seem to be wore in the
nature of a loag-rua rather than a cyclical change. Greater con*
suawor awareness of interest rates charged by various lenders) aay
also, of course, enable them to *ak» a More rational choice among
lenders.
In mm) the Board endorses the objective of requiring
adequate disclosure of finance charges, but it feels that it would
not be appropriate for the Monetary authority to administer what
would be, essentially, a trade practices statute.
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Federal Reserve Bank of St. Louis
Sinoerely yours,
(Signed) Wm. McC. Martin, Jr.
MoC. Martin, Jr.
JUL 1 11961
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Federal Reserve Bank of St. Louis
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Federal Reserve Bank of St. Louis
^^^f t
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This article is protected by copyright and has been removed.
Author:
George Shea
Article Title:
The Outlook: Appraisal of Current Trends in Business and
Finance
Journal Title:
Wall Street Journal
Date:
July 10, 1961
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Federal Reserve Bank of St. Louis
July 17, 1961*
To;
Board of Governors
From: Jerome W. Shay
Subject: Further testimony on
"Truth in lending"
bill, S. 17UO,
The witnesses before Senator Douglas* Subcommittee this afternoon
were Hillel Black, a free-lance writer and author of the recent book,
"Buy Now, Pay Later", and Captain Ralph B. Terrill, President, Navy
Federal Credit Union .
Most of the questioning of Mr, Hillel was by Senator Bennett, whose
objective clearly was to discredit Mr. Hillel* In his testimony, as he
did in his book, Mr. Hillel urged enactment of S. 171*0. The introduction
to the book was written by Senator Douglas, and Senator Proxmire's favorable review of the book appeared in some net-jspgp ers. Senator Bennett, I
thought, was fairly successful in his efforts to demonstrate that Mr.
Hillel is not particularly knowledgeable on the subject covered by S. 17iiO,
and that "Buy Now, Pay Later" is a writing of the "sensational" type,
Captain Terrillf s testimony, largely repetitive of his testimony
last year on the Douglas bill similar to S. 17ltO, strongly favored the
objective of the bill.
As he did during the morning session of the hearings when James
Tobin testified, Senator Bush wanted to know if restoration of consumer
credit controls of the Regulation W type would be acceptable as an alternative to S. 171*0. The answers this afternoon, as was true this morning,
were negative.
Senator Capehart asked whether enactment of S. 17UO might decrease
sales or possibly contribute to unemployment if, as was intended, the
bill would make consumers more discriminate. The answers seemed to be
pure guesswork, i.e., "perhaps" , 'maybe" , "conceivably", etc.
Comments by Senators Proxmire and Clark indicated that they would
regard S. 17UO as a measure that would "increase competition" and "foster
our free enterprise system."
It was learned this afternoon that, in its report on S. 17i*0, the
Department of Justice has recommended that the protection of interstate
commerce be made an explicit basis for the bill. Since that is not the
case with the present bill, Justice seriously questioned the constitutionality of S. 171*0, although it favored the bill's objective *
Last year the Commerce Department, in reporting on the then current
Douglas bill, opposed the measure largely on the ground that it would nullify progress being made in the field by the various States. It is understood
that Commerce now "favors the principle" of S. 171*0, but, at the same time,
makes many so-called "technical" suggestions and qualifications,
cc; Each Board Member and Messrs. Thomas, Knipe, Molony, Fauver, Young,
Sherman, Koch, Williams, Hackley, Solomon and Masters,
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
July 17, 1961.
To:
Board of Governors
From: Jerome W. Shay
Subject: Information concerning
S, 1710, the "Truth in
lending" bill*
Attached is a background statement on the "truth in
lending" proposals that have been introduced in the Congress,
together with a summary of the current Douglas bill, S, 17hO»
While the Board will recall much of this information,
it was thought that a brief review—as well as a summary of
the bill—might be of interest at this time*
Hearings on S. 17^0 begin this morning before Senator
Douglas' subcommittee. The Council of Economic Advisers will
be the first to testify.
cc: Each Board member, Mr, Thomas, Mr, Knipe, Mr, Molony,
Mr« Fauver, Mr, Young, Mr. Sherman, Mr0 Koch, Mr, Williams,
Mr0 Hackley, Mr, Solomon and Mr, Masters,,
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Federal Reserve Bank of St. Louis
SOME BACKGROUND CONCERNING
AND
SUMMARY OF
S« 17UO, THE "TRUTH IN LENDING" BILL
Democratic Platform 196 Off The Democratic Platform adopted
last August endorsed legislation such as S. 17^0 in the following
words:
"The consumer,, . , has a right to know the cost of
credit when he borrows money. We shall enact Federal
legislation requiring the vendors of credit to provide
a statement of specific credit charges and what these
charges cost in terms of true annual interest*11
Earlier proposals* In January I960, Senator Douglas and 17
cosponsors, all Democrats except one, Senator Bush, introduced the
first bill in Congress on this subject (Se 275f>)» Following 8 days
on hearings on the bill, Senator Douglas' Production and Stabilization
Subcommittee of the Senate Banking and Currency Committee favorably
reported S, 2755* with minor amendments, by a vote of U to J>9 the
vote being on party lines. Senator Douglas, however, did not press
for action on the bill by the full Senate Banking and Currency Committee because he felt that he lacked the necessary votes for Committee
approval.
In its report and testimony on S. 275>£, the Board, in effect,
favored "truth in lending" as a social and economic objective, but
opposed the requirement that the Board administer the bill. Briefly,
the Board*s opposition was based on the view that the bill regulated
"trade practices" and was not a credit control measure.
On the House side last year, Congressman Reuss introduced
H» R, 9^15, a bill virtually identical with the Douglas bill. Aside
from requesting reports from interested Government agencies, however,
the House Committee on Banking and Currency gave no consideration to
the Reuss bill.
Also on the House side last year, Congressman Oliver (defeated
in I960 for reelection) introduced H. R. 11867, a bill similar to the
Douglas-Reuss bills, except that it placed administrative responsibility
in the Federal Trade Commission, Because of this latter fact, the
Oliver bill was referred to the House Committee on Interstate and
Foreign Commerce, which, however, gave the bill no consideration, except to ask for reports from interested Government agencies.
The Board, in effect, submitted an unqualified report favorable to the Oliver billc
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Federal Reserve Bank of St. Louis
"Truth in lending" bills in the present Congress, Senator
Douglas* current bill, S. 17UO, is cosponsored by 22 other Senators,
all Democrats. Except for slight changes, S« 17UO is identical with
Senator Douglas' bill of last year as reported favorably by his Production and Stabilization Subcommittee,
In his statements concerning his current bill, Senator Douglas
has emphasized the economic stabilization feature of the measure,
whereas this received virtually no emphasis in his statements last
year concerning S0 2755 j which he repeatedly characterized as not
being a credit control measure. Perhaps a main cause for this shift
in emphasis is last yearns criticisms of S. 2755 as being of doubtful
constitutionality.
On the House side, bills identical with Senator Douglas'
current bill have been introduced try Congressmen Multer, Reuss, and
Halpern, all members of the House Banking and Currency Committee
(H. R. 6725, H. R, 6763, and H. R. 7013)* However, except to ask for
reports from interested Government agencies on the Multer bill, the
House Committee on Banking and Currency has thus far given no consideration to such bills. So far as we know, that Committee has no
further plans for the "truth in lending" proposals.
SUMMARY OF DOUGLAS BILL, S. 17UO
Purpose 9 S« 171$, a bill "To assist in the promotion of
economic stabilization by requiring the disclosure of finance charges
in connection with extensions of credit," would be cited as the "Truth
in Lending Act."
At the onset, the bill states (1) that the excessive use of
credit (a) threatens economic stabilization, and (b) frequently results
from a lack of awareness of the cost of credit to the userj and (2)
that the bill's purpose is "to assure a full disclosure of such costs
with a view to preventing the uninformed use of credit to the detriment
of the national economy*"
Disclosure requirement., The bill would require any person engaged in the business of extending credit to furnish to each of his
credit customers, prior to consummation of the transaction, a written
statement setting forth "in accordance with rules and regulations
prescribed by" the Board of Governors of the Federal Reserve System,
detailed information explaining the transaction, including (1) "the
finance charge expressed in terms of dollars and cents," and (2)
"the percentage that the finance charge bears to the total amount
to be financed expressed as a simple annual rate on the outstanding
unpaid balance of the obligation*"
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—3—
Coverage* As indicated above, the bill would apply to any
person engaged in the business of extending credit; and "credit"
is defined very broadly to include both loan and sale credit. It
would also cover both real estate and consumer credit, and the discount or purchase of credit obligations«
However, the Board would be required to provide exemption for
credit transactions between business firms, and credit transactions
in States having laws requiring creditors to disclose information of
the same kinds required to be disclosed by the bill. In addition,
the Board would be expected to exempt transactions subject to Federal
law under which the disclosure requirements of the bill were being
achieved-.
The bill defines "finance charges" to include "interest,* fees,
service charges, discounts, and such other charges incident to the
extension of credit as the Board may by regulation prescribeo"
Regulations«, The Board would be given broad authority, in
addition to the foregoing, to prescribe such regulations as it deemed
necessary or proper to carry out the bill and to prevent evasions,
including the making of classifications, differentiations, and exceptions o
Consultation with other agencies* In administering the bill,
the Board would be required to request the views of other Federal
agencies with regulatory authority over creditors, and such agencies
would be required to comply with the Board's requests«
Penalties« Transactions in violation of the bill or the
Board's rules and regulations would not be made unenforceable* However, a violating creditor would be subject to a civil penalty at the
suit of the customer for $100, or an amount equal to twice the total
finance charge on the transaction, whichever would be the greater,
but in no event could the penalty exceed $2,000 on any credit transaction,, In addition, willful violations would be subject to criminal
penalties (misdemeanors), The penalty provisions, of course, would
not be applicable against any Government agency0
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Tos
Board of Governors
Subject:
Tobin testimony on "Truth
in Lending" bill> S* 17UO*
From: Jerome ¥• Shay
This morning James Tobin testified in behalf of the Council of
Economic Advisers at the first session of
hearings on S0 17l|0, the "truth
in lending" bill before Senator Douglas1 Production and Stabilization Subcommittee of the Senate Committee on Banking and Currency <> His testimony
was favorable to the bill.
At the outset of the hearing both Chairman Douglas and Senator
Bennett made fairly long opening statements which, in effect, summarized
the extended remarks that each has made previously on the floor of the
Senate concerning the bill,, These floor speeches were circulated among
the members of the Board at the time they appeared in the Congressional
Record, In short, Senator Douglas argued that "enactment of the bill would
reduce the uninformed use of credit that contributes to economic instability,
help borrowers choose more wisely among sources of credit, but in no way
would regulate credit or the cost of credit*" Senator Douglas also pointed
out that all the Government agencies who had been asked to report on the
bill favored its purposes and objectives although some of the reporting
agencies made suggestions as to various aspects of the bill.
Senator Bennett's opening remarks referred to the Board's report on
S. 17UO as supporting his view that the bill would not have a stabilizing
effect on the economy. His remarks also included his view that the only
way the bill could work Tfould be if the Government imposed a broad schedule
of cash retail selling prices so as to prevent compensating price increases
which merchants would in his judgment make in order to permit quotations
of lower credit costs.
It is particularly significant as the following quotations from Mr.
Tobin1s formal statement indicate that he believes the bill would have a
counter-cyclical effect* ,
"I feel that the contribution of this bill to economic stabilization lies in making credit buying more timely, not in whatever
small effect it may have on the average level of consumer credit,
I do not think that the overall level of consumer credit in the
economy is at issue here. Overall household debt, although not an
excessive burden on normal incomes, may be troublesome when incomes
decline in recession0 If debt has been over-expanded in a boom, the
continuing necessity to make payments in recession may depress consumer demand just when the economy needs stimulus. From the point
of view of counter-cyclical policy, it would be desirable to restrain
excessive expansion of credit purchases in booms and to encourage
the use of credit in recessionsd
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—2—
"Actually, the cost of credit is a natural counter-cyclical
influence on the timing of credit purchases and repayments, and
the purpose of the bill is to increase the dTficacy of this mechanism. The cost of credit normally rises in periods of boom and
inflation and falls in periods of recession. This natural cycle
in credit charges, reinforced by monetary and credit policy, is
a stabilizing force in the economy. High credit costs in boom
periods restrain credit purchases; low costs in periods of slack
encourage credit buying. These variations in credit costs help
to dampen the business cycle0
"However, the stabilizing effect of changes in credit costs
depends on awareness by consumers that the changes have occurred.
If buyers are ignorant of the true costs of credit, they are less
subject to influence by cost changes. By increasing consumer
awareness, this bill will help to make the cyclical fluctuation
of credit costs a more stabilizing influence on the economy,. In
times of boom, rises in finance charges will be more evident to
borrowers, while in periods of relative recession, borrowers will
be made aware of the more favorable terms on which credit is then
available.
"Increased information available to prospective credit buyers
will also help to make monetary policy more effective. The Federal
Reserve and Treasury try to moderate economic fluctuations through
changes in credit conditions, easing credit in recessions and tightening money in booms. The degree to which consumer demand reacts to
changes in credit costs and terms is difficult to estimate. But if
consumers are better informed about credit costs, they will surely
be more sensitive to variations in credit conditions, and consumer
demand will be more responsive to basic monetary policy."
Mr. Tobin»s concluding remarks in his formal statement before the
committee were as follows:
"Credit purchases make a higfaly significant contribution to
the welfare of American consumers and to the functioning of our
economy. This bill, S. 17i*0, can only increase this contribution*
Consumers will buy and borrow with better information concerning
the choices available to thenu No seller of good merchandise need
fear to provide potential customers with accurate information. Consumer loans and the goods whose purchase they finance are generally
good merchandise. Consumers will use credit with more intelligence
and discrimination under the provisions of this bill; but I do not
think they will use it Iess0"
Points of further significance so far as the Board is concerned arose
during questioning with Senator Douglas and Senator Bennett. In reply to
questions by Senator Douglas Mr. Tobias answers seemed to indicate that
the cost of banks? loans to businesses including, for example, sales finance
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Federal Reserve Bank of St. Louis
-3companies, were almost always quoted and handled on a simple annual rate
basis. During questioning by Senator Bennett Mr. Tobin agreed that seme
business loans were on a discount basis. These colloquys would suggest
that the practice of banks in this connection would be a matter which the
committee will want to pursue further.
Senator Bennett asked Mr. Tobin if the Council had any statistics
that would relate changes in finance charges on consumer credit to changes
in the cost of money generally over the last three business cycles. Mr.
Tobin replied in effect that they did not have any statistics although the
inference of his remarks and also those of Senator Bennett was that this
would be a matter on which the Federal Reserve would have inf ormationc In
this connection Senator Bennett referred to the Board's report on S0 17UO
as supporting his view that interest rates on consumer credit do not vary
cyclically.
In reply to a question by Senator Bush Mr. Tobin rejected the enactment o f a bill giving the Board standby authority over consumer
credit as an alternative to enactment of S. 17UO. Mr. Tobin indicated
that consumer credit controls of the Regulation VI type would be much more
rigorous. He also seemed to be of the view that consumer credit regulation
did not lend itself to being turned on or off on a cyclical basis because of
the administrative problems that would be involved and tiiat it should be
saved for emergency situations.
In reply to a further question by Senator Bush as to the ability or
competence of the Federal Reserve to administer S. 17UO, Mr. Tobin replied
that ttperhaps the Federal Reserve is not the most appropriate agency," It
"does not necessarily have to be the Federal Reserve rather than possibly
the Federal Trade Commission or even some other agency."
As was true during the hearings on legislation of this kind last
year much questioning resolved around the existence or adequacy of state
laws dealing with the subject. This, of course, is regarded as relevant
by those who argue against enactment of a measure such as S. 17^0, On the
other hand, the proponents of the legislation argue that the bill does not
necessarily oust itself from this field of legislation since in its present
form the bill exempts credit in those states which have laws requiring
disclosure of the same type of information in credit transactions as that
required by S* l?UOe The question of the laws of the various states may
well be a matter in which the committee will seek further information.
While there was fairly good attendance by members of the subcommittee,
most of the questioning was by Chairman Douglas and Senators Bennett and
Bush. Press coverage was fair.
cc: Each Board member, Mr. Thomas, Mr. Knipe, Mr. Molony, Mr. Fauver, Mr,
Young, Mr. Sherman, Mr. Koch, Mr. Williams, Mr. Hackley, Mr. Solomon
and Mr. Masters.
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Federal Reserve Bank of St. Louis
7/18
:
Mr
Martin
M r . Masters wanted to point out that the
underscored portion on the second page of his
memo is the only significant point you need keep
in mind with respect to the probability of the
Committee's asking you again this year a question
re applicability to national banks of State laws
affecting disclosure practices.
mnm
F E D E R A L R E S E R V E SYSTEM
Office Correspondence
Date July 17, 1961
Subject:.
G« Masters
When Chairman Martin testified on S-2755, the Consumer
Credit Labeling Bill, before the Subcommittee on Production and Stabilization of the Senate Banking and Currency Committee on April 5, I960, he
was questioned concerning the scope of inquiry of Federal Reserve Bank
examiners into practices of State member banks concerned with their
consumer installment lending operations. Specifically, the questions dealt
with whether the credit terms were being improperly concealed and whether
borrowers were acquainted with the true rate of interest applicable to
such borrowingso
In further elaboration of the Chairman1s responses, the following
statement was prepared and submitted to the Subcommittee for inclusion in
the record of the hearings:
"Federal Reserve examiners are interested in the soundness
and solvency of the State member banks they examine, and the
compliance by those banks particularly with applicable provisions
of Federal banking laws. They review loans for the purpose of
determining their authenticity, soundness, and conformance with
law, but would have no means of ascertaining the extent of disclosure of terms to borrowers except as the notes or loan agreements in the bankfs records revealed those terms. If a State
law requires disclosure of credit terms by a bank, investigation
of loans subject to the law will normally be made by the State
examiners who customarily examine State member banks in cooperation with the Federal Reserve examiners*
"In the circumstances, it would be unusual for Federal
Reserve examiners to have occasion to report on whether not
borrowers are notified of credit terms. An exhaustive review
of examination reports has not been made since it could not
be expected to add appreciably to the information outlined above."
This response factually states the situation concerning the
activities of Federal Reserve Bank examiners with respect to this phase
of the consumer lending operations of banks. There might also be added
to the statement the fact that bank examiners would have no way of knowing
to what extent, if any, borrowers were advised orally by lending officers
of the true percentage rate of interest as a conversion of the dollar
charges added to the face of a note. The only insight examiners could
gain with respect to such a matter would be through discussion with bank
management of their general disclosure practices in discussions with
prospective borrowers.
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Federal Reserve Bank of St. Louis
To: Mr* Shay
- 2-
Chairman Martin was also questioned during the I960 Hearings
as to the applicability to national banks of State laws affecting disclosure practices relative to service charges, interest rates, etc.
As similar questions may again be raised on July 19, when the Chairman
appears to testify on the new bill (S-1^,0) the following, which was
submitted to the record during the I960 Hearings, may be helpful on this
point:
"It is understood that the Comptroller of the Currency, who
examines and supervises national banks, has taken the position
that national banks must comply with the substantive provisions
of Stai'e^Taws"dealing witli the forms used in connection with the
sale of motor vehicles and similar transactions, the interest or
finance charges or other charges that may be made, insurance overettarges, rebates, return of contracts, repossession notes, and so
on. It is the view of the Comptroller that national banks may not
Be compelled to secure State licenses to engage in business that
they are authorized to engage in by Federal law; but the Comptroller's
Office has not objected to national banks voluntarily securing
licenses under State laws and paying the prescribed license fee
therefor. However, the Comptroller takes the position that State
laws may not validly provide that submission to an examination is
a prerequisite to a national bank's engaging in such businesses,
and that a State may not interfere with the legitimate business of
national banks if they do not submit to examination by State authorities with respect to these matters. This position is based on section
5240 of the Revised Statutes (12 U.S.C. 484), which provides that fno
bank shall be subject to any visitatorial powers other than such as
are authorized by law, or vested in the courts of justice or such as
shall be or shall have been exercised or directed by Congress, or by
either House thereof or by any committee of Congress or of either
House duly authorized.1"
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Federal Reserve Bank of St. Louis
July 18, 1961.
To:
Chairman Martin
Subject: re hearings on S. 171*0,
truth in lending bill.
From: Jerry Shay
I am not sure bit Senator Douglas might be critical of us
for not being more helpful in determining what the various state
laws provide with respect to disclosure of finance charges. You
will recall that last year we did check some information on this
subject published by commercial sources. This year it was understood that the committee would not ask us for further work in
this field unless they failed to obtain assistance earlier, and
we heard nothing further from the committee. There is attached
a statement which Howard Hackley has prepared explaining the
complicated nature of explorations into the state laws.
Also attached is a memorandum to me from Mr. Masters reviewing two other matters which are likely to come up at the
hearing on S. 171*0, i.e., the scope of the inquiry of Federal
Reserve examiners into the practices of State member banks concerning their consumer installment lending operations,and the applicability to national banks of state laws affecting disclosure
practices relative to finance charges.
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It would be possible, of course, for the Board1s Legal
Division to undertake a compilation of State laws relating to
disclosure of finance charges. However, this is a subject^ completely
foreign to the scope of the Board's present functions and our lawyers
have no special knowledge or experience in this field. They do not,
for example, have the familiarity with the subject that presumably
would be possessed by lawyers for nationwide finance companies.
Consequently, a careful compilation of State laws on this subject,
if undertaken by the Board's attorneys, would undoubtedly require
considerable time, perhaps several months. Such a project would,
of course, substantially impair the ability of the Board's legal
staff, which is relatively small, to discharge promptly its functions
in connection with the Board's present statutory responsibilities.
7-18-61
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B O A R D OF G O V E R N O R S
OF THE
F E D E R A L R E S E R V E SYSTEM
Office Correspondence
TO
r.ha-irman Martin
Frpm
Jerome* W- Shay
Date
juiy is,
Subject:
Attached is a so-called "quick credit cost computer" which has
been prepared by the Savings Bank Association of the State of New York
and distributed by the Bowery Savings Bank, Recently one of these
computers was given to me by Jonathan Lindley, the Senate Banking and
Currency staff man working for Senator Douglas on S. 17UO, the truth
in lending bill.
Mr. Lindley attached a note saying that the computer might be
of interest to you. This was an obvious reference to Senator Douglas»
often repeated observation following the hearing last year that "even
the Chairman of the Federal Reserve Board testified that he found the
computation of installment credit costs to be confusing." I should
think it almost a certainty that Senator Douglas will question you in
some way concerning this "quick credit cost computer."
The main witness at this morning1 s session at the hearings on
S. 17i|0 was Morris D. Crawford, Jr., Executive Vice President of the
Bowery Savings Bank and Chairman of the Committee on Public Information
of the Savings Bank Association of New York and also Chairman of the
Committee on Federal Legislation of the National Association of Mutual
Savings Banksc Alinost the entire morning was taken up discussing and
demonstrating the "quick credit cost computer." Mr. Crawford made it
very clear that the computer was not designed for use by sellers or
vendors in complying with the disclosure requirements of 3. 17UO. He
explained that the purpose 'of the computer was to serve as a guide or
yardstick for use by customers in order to determine the approximate
cost of credit from various sources. Pursuant to questioning by Senator
Bennett, it was made abundantly clear that the computer had obvious
limitations, for example, it does not cover installment contracts with
irregular payments or terms, nor does it cover the very frequent installment sale "add-on" transaction.
Mr. Crawford and his associates at the hearing explained that the
computer was based on a formula used by the Federal Reserve System for
computing rates on installment loans in its Consumer Credit Study of
1957* They explained further that this formula was the one known as
the "constant ratio formula."
As I have indicated, Senator Douglas is almost sure to ask you
about the "quick credit cost computer" and ask you to use it on certain
hypothetical transactions.
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Federal Reserve Bank of St. Louis
Chairman Martin
-2-
This morning1s witnesses seemed fairly certain that rate books
could be prepared far use by lenders and vendors in determining simple
annual interest rates for the purpose of S. 17UO and that these rate
books would cover almost all of the various types of transactions, say
95> per cent* Their feeling was that in the neighborhood of 5 PST cent
all installment contracts involved such irregularities or unusual
situations as to make the use of a rate book impracticable for those
cases*
In addition to questions with respect to the "quick credit cost
computer" you might be asked to calculate the simple annual interest
rate on a given installment credit transaction using no more than "a
pencil, paper and a calendar." James Tobin was asked to do this. The
object seems to be to prove that different people arrive at different
answers or find the process so complicated as to make errors.
ccj Mr, Ralph Young
Mona Dingle
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Federal Reserve Bank of St. Louis
CHAIRMAN MARTIN
F6r Information Only
July 19, 1961.
Board of Governors
Subject:
Mr, Hackley
bill
"Truth in lending"
For the Board*s information, there is attached a copy of a
letter received this morning from the Bureau of the Budget enclosing
a copy of a letter dated July 12, 1961, addressed by the Bureau of the
Budget to the Chairman of the Federal Trade Commission with respect
to the proposed report of that Commission on S. l?l±0, the so-called
"truth in lending" bill. It is of interest that the Budget Bureau*s
letter to the Trade Commission expresses the view that it would be
appropriate to assign administrative responsibility to the Federal
Trade Commission.
Attachment
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EXECUTIVE OFFICE OF THE PRESIDENT
BUREAU OF THE BUDGET
WASHINGTON 25, B.C.
July 18, 1961,
Honorable Willian McC. Martin, Jr,
Chairman, Board of Governors of the
Federal Reserve Systen
Washington 25, D. C.
Attention: Howard H. Hackley
10U6 Federal Reserve Building
Dear Mr* Chairmani
For your information, a copy is enclosed of a letter of advice sent
by the Bureau of the Budget to the Chairnan
of the Federal Trade
Connission regarding the Conriissionts proposed report on S, 17UO,
e bill "To assist in the promotion of economic stabilization by
requiring the disclosure of finance charges in connection with
extensions of credit."
Sincerely yours,
(Signed) Phillip S. Hughes
Phillip S. Hughes
Assistant Director for
Legislative Reference
Enclosure
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Federal Reserve Bank of St. Louis
July 12, 1961
Honorable Paul R. Dixon
Chairman, Federal Trade Commission
Washington 25, D. C.
Attention: Joseph W. Shea
k26 Federal Trade Building
Dear Mr. Chairman:
This will acknowledge receipt of your letter of June 27, 19&1, transmitting copies of the report that the Federal Trade Commission proposes
to present with respect to S. 17^0, a bill "To assist in the promotion
of economic stabilization by requiring the disclosure of finance charges
in connection with extensions of credit."
The Board of Governors of the Federal Reserve System, in the report which
it has already submitted to the Committee, concludes that it would be
inappropriate for the Board to administer a statute dealing essentially
with trade practices. In the circumstances, it would appear appropriate
to assign administrative responsibility for the proposed program to the
Federal Trade Commission. We understand that the Commission probably
would be willing to administer such a program if the bill were suitably
amended so as to enable the Commission to administer it efficiently in
conjunction with other comparable responsibilities.
In reply, you are advised that there is no objection to the presentation
of your proposed report and that enactment of legislation requiring adequate
disclosure of finance charges would be consistent with the Administration's
objectives. It would be appreciated if you would submit a copy of this
advice to the Committee.
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Sincerely yours,
(Signed) PHILLIP S. HUGHES
Assistant Director for
Legislative Reference
This article is protected by copyright and has been removed.
Article Title:
Martin Voices Reservation on 'Truth in Lending' Bill
Journal Title:
American Banker
Date:
July 20, 1961
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Miss Muehlhaus
August 2, 1961
Mr. W. Maxey Jar man
Chairman
Genesco
Nashville 3, Tennessee.
Dear Mr. Jarrnan:
Thank you for your letter of July 28, commenting on my statement to the Senate Banking Committee on S. 1740, a bill to require
disclosure of finance charges in connection with extensions of
credit.
.
Tou will, of course, be able to see my full testimony before
the Committee when its Record of Hearings is printed but, in
view of your comments on the practical problems involved and
on State laws, you may have some interest meanwhile in these
pertinent passages from the transcript after my statement had been
read:
Senator Douglas: Mr, Martin, you say you support
the objectives of the bill. Do you favor the enactment of
this bill apart from the question of its administration?
•
Mr. Martin: I do not know whether I do or not.
Senator. There have been some questions raised in my
mind. It depends on how it is administered, and X
would assume -Senator Douglas:
Waiving the question of administration.
Mr. Martin: Waiving the question of administration, I do.
* • * *
Senator Proxmire: . . . Senator Bush has asked... about
the possibility of requiring only the finance charges and not
the simple rate. In other words, the charges would be
disclosed in advance, not the rate. Many States do not
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Federal Reserve Bank of St. Louis
Mr. Jar man
- 2-
require this.. .Is it your feeling that if you required only the
finance charges in this kind of bill that it would be meaningful?
Mr. Martin: Well, I think that would have to be tested a
bit too. I believe the administration of this type of thing is a
very difficult thing for the agency administering it as a trade
practice to determine -- what is the value to the customer and
what he will use. If the use of the simple interest is not going
to be really helpful to him and just determining what the finance
charge is as against what the cost is would be helpful, that is
something the administering agency would want to study and work
out. I have a little bit of a query in my mind with respect to
specifying in a bill of this type exactly what information should
be supplied, because I think it requires a good bit of experience
and a good bit of testing.
Senator Proxmire: Certainly if it can be done, the simple
annual interest rate would be more meaningful?
Mr. Martin: I would think so.
difficulties in that.
*
*
But I also realise there are
*
Senator Bennett; Since this is a trade practice, would you
not think that this is a problem that might appropriately be handled
at the State level rather than requiring uniform Federal law?
Mr. Martin: I suggested that that ought to be investigated by
the committee carefully a year ago, when I was up (before the
committee)....
Senator Bush: Well, I take it that you still feel as you did a
year ago that we should thoroughly explore the State activity in
this field. Can I assume from what you said that you would lean
toward the view that this is a field in which the States should continue to have jurisdiction exclusive of Federal jurisdiction?
Mr. Martin: I would want to be very certain the States are
not able to handle it before I would want to go to Federal
legislation.
•
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Federal Reserve Bank of St. Louis
*
*
*
*
Mr. Jarman
-3
Perhaps these passages will give you a fuller under
standing of my position regarding the pending proposal.
•
X do not however see how, in good conscience, the
Board or I could do otherwise than, as I said in the statement
you read, "look with favor on the general principle of the bill
of requiring disclosure of finance charges. "
Sincerely yours,
Wm. McC. Martin, Jr.
CM: ok
cc: Miss Muehlha.us
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c o p y
GENESCO
Nashville 3, Tennessee
W . Maxey Jarman
Chairman of the Corporation
28 July 1961
Mr. William McC. Martin, Jr.
Chairman, Board of Governors
Federal Reserve System
Washington, D. C.
Dear Mr. Martin:
May I comment on the copy of the statement that I've just received that
you made to the Senate Committee on the question of Bill S. 1740.
1 could certainly agree that the Federal Reserve System should not be
charged with enforcing such a bill, but 1 was sorry to see that you w e r e
in favor of the bill otherwise. Would you also recommend that each bank,
when they loan money to a business, figure out exactly what the interest
charges are on the unpaid balance? Banks have various ways of figuring
this, as you of course know, and it's not always the rate that it seems
to be.
Every state has laws governing interest charges and to add a Federal bill
with all of j.ts complications, extra expense to the government, extra
expense to every person in business, seems to be very unnecessary.
Apparently, Senator Douglas considers the American people a bunch of
nincompoops and at the same time ,that he considers American business
is out to gouge the public. We have a wonderful competitive system in
this country if the government does not destroy it. That competitive
system is a far better regulator than any Senate bill.
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Sincerely.
(Signed) W. Maxey Jarman
Chairman of the corporation.
A. WILLIS ROBERTSON, VA., CHAIRMA*
JOHN SPARKMAN. ALA.
PAUL H. DOUGLAS, ILL.
JOSEPH S. CLARK, PA.
WILLIAM PROXMIRE. WIS.
HOMER E. CAPt....«T, IND.
WALLACE F. BENNETT, UTAH
PRESCOTT BUSH, CONN.
J. GLENN BEALL, MD.
HARRISON A. WILLIAMS, JR., N.J.
JACOB K. JAVITS, N.Y.
EDMUND S. MUSKIE, MAINE
EDWARD V. LONG, MO.
JOHN G. TOWER, TEX.
MAURINE B. NEUBGRGER, OREG.
MATTHEW HALE, CH.EF OF STAFF ,x
/
COMMITTEE ON BANKING AND CURRENCY
August 1, 1961
Hon. William McC. Martin, Jr.
Chairman, Board of Governors
of the Federal Reserve System
Washington 25, D. C.
Dear Mr. Chairman:
During the recent hearings on S. 17^0, several
questions arose in regard to various aspects of the Truth
in Lending Bill, which the Federal Reserve might be competent
to answer.
On Monday, July 17, during the questions of one of
the witnesses there was some disagreement as to what the
total per annum dollar amount of interest payments had been
in the last few years. It would be very helpful to the Committee if your research staff would.submit for the record on
S. 17^0 estimates on the total dollar amounts of interest
payments on the consumer debt for the last few years. It
would also be helpful if the same figures could be supplied
for residential mortgage debt and personal debt in total.
On Wednesday, July 26, another question arose
which the Federal Reserve might be able to comment on. The
text of the transcript reads as follows:
"Now, there is one other point that I would
.
like to clear up and that was the statement of
c? 4;
Dr. Johnson, that 73 percent of the cases that he
examined could not be subject to quantitative
handling and, therefore, had to be rejected. I am
going to ask Mr. Lindley to take the testimony of
Dr. Johnson, put it in a letter to the Federal
Reserve System, a copy going to Senator Bennett,
and ask the Federal Reserve Board and the experts
who testified, the experts who handled this consumer
finance study, to reply whether this statement of
Dr. Johnson's is correct, and make such comment as
they wish."
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Federal Reserve Bank of St. Louis
Hon. William McC. Martin, Jr.
-2-
August 1, 1961
I am enclosing a copy of the statement by Robert
W. Johnson, which might be helpful to your staff in researching
this question.
Thank you for your courtesy.
Faithfully}
Paul m Douglas
Chairman, Subcommittee on
Production and Stabilization
PHD: jib
Enclosure
cc: Senator Bennett
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STATEMENT OF ROBERT W. JOHNSON, PROFESSOR OF FINANCIAL ADMINISTRATION,
GRADUATE SCHOOL OF BUSINESS ADMINISTRATION, MICHIGAN STATE UNIVERSITY,
BEFORE THE SUBCOMMITTEE ON PRODUCTION AND STABILIZATION OF THE COMMITTEE
ON BANKING AND CURRENCY, JULY 18, 1961.
The proposed bill, S. 1740, or the "Truth in Lending Act" requires "the
disclosure of finance charges in connection with extensions of credit." Most
of the problems associated with the bill center on the meaning of "disclosure",
and, parenthetically, the meaning of "truth." We should recognize that at the
present time most finance charges are disclosed to consumers.
Over the past
half century there has developed in association with each segment of the credit
market a particular method of stating the finance charge. It is true that
sometimes the finance charge is buried in the selling price of the merchandise.
This is exemplified by charge accounts in retail stores and by most credit
card arrangements. In other instances, the finance charge is included in the
monthly payments, and consumers must subtract the balance of the loan received
or the unpaid balance on goods financed to determine the dollar finance charge.
However, in the great bulk of cases, the credit charge is disclosed in some
manner -- sometimes as a percentage per month or per year, sometimes as a
dollar amount.
Credit unions, consumer finance companies, banks with revolv-
ing check-credit plans, and retailers offering revolving-credit accounts state
their finance charges as monthly percentages.
In part this method developed
through legal decree; in part it is the method best suited to the nature of
the business. Mortgage lenders present the major portion of their finance
charges as annual percentages and a minor portion, in form of "closing costs,"
as dollar amounts.
Statement of the finance charge as a dollar amount is the
typical practice of commercial banks and sales finance companies in financing
instalment sales. Indeed, disclosure of the finance charge in this manner is
a legal requirement in a number of states and a fair trade practice of the
FTC for automobile financing.
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(
.
2.
The crux of the matter rests with the manner of disclosure.
"Truth" is
defined by implication as presentation of "a simple annual rate." Since this
feature represents a basic change in present practices of disclosure, the
remainder of my analysis will be concerned with the impact of this proposal.
There appear to be two main reasons advanced for the presentation of
finance charges as annual rates.
The first is stated in the "Declaration of
Purpose" of the bill; namely, that "economic stabilization is threatened when
credit is used excessively."
The second purpose was implicit in much of the
testimony last year on S. 2755. This is the argument that statement of
charges as annual rates will enable consumers to shop more effectively for
credit. Let us examine each of these arguments in turn.
Promotion of Economic Stabilization
It is difficult to see how statement of finance charges as annual rates
will promote economic stabilization. First of all, it has not been established
that there is, or has been, an excessive use of consumer credit as suggested
in Section 2 of S. 1740.
Second, if there is an excessive use of credit, it
has not been shown that statement of finance charges as annual rates will curb
the presumed excessive use. The demand for credit is a derived demand, a
demand secondary to the demand for new cars, washing machines, and other consumer durables. Will the young housewife forego the instalment purchase of a
washing machine when the finance charge is stated as an annual rate? I do not
know, but I suspect not.
It would appear that the most reasonable argument that can be advanced
for the interest-rate form of statement as a means of promoting economic
stabilization is along the following lines. In times of boom, finance rates
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3.
would be high, and consumers would be discouraged from use of credit.
However,
during periods of recession, finance rates would decline, so that consumers
would be encouraged to purchase goods on credit and stimulate recovery.
This
argument suffers from a number of defects. In the first place, it overlooks the
fact that the consumer is usually buying a product or service with his credit.
A large reduction in the cost of credit will cause only a small percentage
reduction in the time price of the product purchased.
Second, it is very un-
likely that consumer finance rates would be sufficiently flexible to affect
consumers' use of credit. Interest rates paid by credit institutions are only
a small portion of their total costs of providing the credit service. For
example, during 1958 interest costs of sales finance companies in Indiana
absorbed only one-third of gross income. Moreover, because these companies
obtain a fairly large proportion of their funds from long-term borrowings,
this portion of their interest costs is not immediately responsive to changes
in money rates. At the end of 1960, the four largest independent sales finance
companies obtained about half of their borrowed funds under long-term
commitments.
What does all this add up to? Let us assume that a consumer is considering the time purchase of a $100 radio, but is waiting until finance rates decline. Let us say that at the peak of the boom, when short-term money costs
6 percent, his finance charge would be $8 on a 12-month contract, or an effective annual rate of about 14.8 percent*
In the recession that follows money
rates are cut in half; they fall to 3 percent. Sales finance companies are
now able to obtain short-term loans at half their earlier cost, and they pass
the full reduction along to consumers.
If we assume the sources and costs of
funds described earlier, it can be shown that the total finance charge to the
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consumer will decline to $7.33 from $8, and the annual rate will decline to
13.5 percent from 14.8 percent. The overall effect of the reduction in the
finance charge will be to cut the time price of the product by 6/10ths of 1
percent. Thus, even a dramatic change in money rates will produce a relatively
minor change in consumer finance rates and a negligible change in the time
price of a product.
The inflexibility of finance charges is supported by historical data.
The Federal Reserve Board's study on consumer instalment credit showed that
over the 10-year period from 1946 through 1956 finance charges on a popularpriced passenger car varied by no more than 10 percent.
Over the same period
average bank rates on business loans doubled. Logic and historical evidence
suggests that we can not expect statement of consumer finance charges as annual
rates to promote economic stabilization.
Permit Consumers to Compare Finance Rates
The assertion that statement of finance charges as anual rates would
permit consumers to shop more effectively for credit has a much greater appeal.
From our economic training we recognize that markets function better when both
buyers and sellers have full information.
It is most reasonable to suggest
that all consumer finance charges be converted to a single form, such as a
simple annual rate of interest on the monthly unpaid balance.
In spite of the industry's arguments to the contrary, it seems likely
that consumers will understand enough about annual percentage rates to recognize that 12 percent is higher than 10 percent. The real problem is whether
or not properly comparable rates can be presented to the consumer in writing
prior to the consummation of each credit transaction.
This will not be w .
Consumer Instalment Credit: Growth and Import (Washington, D. C,
Federal Reserve System, 1957), Part 1, V. L, p. 59
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Federal Reserve Bank of St. Louis
5.
possible in a large proportion of consumer credit transactions, either because
the finance charge can be concealed or because the annual rate can not be
calculated.
East of concealing finance charges. On instalment sales transactions,
retailers are free to set the cash price of their products and their finance
charges, subject to limits imposed by various state laws.
Thus the size of
each of the components in the total time price is a matter of discretion.
Dealers in automobiles and other consumer durables and.those engaged in home
repair and modernization could easily drive the finance charge into the cash
price of the product or service. As a result they could quote very low financing rates to attract customers from direct lenders, such as commercial banks,
. credit unions, and consumer finance companies.
To illustrate, assume that the cash price on a used car is $800 (Table 1)
With a downpayment of $2QO, the principal amount to be financed would be $600.
On a two-year contract with an add-on finance charge of 9 percent per year, the
dollar finance charge would be $108, and the time balance $708. The annual rate
of charge is about 17.5 percent.
If required to state his charges as annual
rates, the dealer could raise his cash price to $887, an increase of only 11
percent. A downpayment of $200 would leave a principal amount to be financed
of $687. The addition of a finance charge of only $21 would bring the time
balance to $708, as before.
But now the dealer is in a position to adverti.se
low financing rates of less than 3 percent per annum. He can urge consumers
to finance with him rather than through their credit union at 12 percent. Moreover, the consumer would have every reason to believe that he could rely on the
truth of the rate disclosed in this manner, for it would be in accordance with
the "Truth in Lending Act" administered by the Federal Reserve Board.
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Federal Reserve Bank of St. Louis
(
Table 1
(
6.
Recalculation of Terms on Instalment Sale to Lower
Effective Annual Rate of Finance Charge
24-month Contract
Before
After
Adjustment
Adjustment
Cash price
Less: Downpayment
Principal amount financed
Finance charge
Time balance
Monthly payment
Effective annual rate*
$800
200
$887
200
600
108
687
21
$708
$708
$29.50
17.3%
$29.50
2.97,
*The rate is calculated using the constant ratio method of converting the dollar charge to an annual rate.
Source: Robert W. Johnson, Methods of Stating Consumer Finance
Charges (New York: Graduate School of Business, Columbia
University, 1961), p. 96.
This burial of finance charges in the price of the product financed has
been common practice for some years in the case of FHA-insured and VAguaranteed loans. When the market rate on mortgage loans is above the permitted rate, the builder often absorbs a portion of the finance charge and
then passes it on to the buyer in the form of a higher price on the house. On
these loans the charge is stated as an annual rate as required in S. 1740 -but in these cases there is no truth in this form of rate statement.
Impossibility of calculating annual rates. On many types of consumer
credit it is not feasible to calculate annual rates so that they may be stated
prior to the consummation of the credit transaction.
In this category we
should list revolving credit, check credit, and possibly instalment credit
granted by mail order'concerns.
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Let us concentrate on the problems associated with revolving credit
offered by many retailers.
Assume that I have agreed to pay $20 a month on
a revolving-credit account at a department store in Lansing, Michigan.
that on July 15, I purchased a $20 item.
Suppose
If this is all that I buy during July,
the store will add 30 cents to the unpaid balance at the end of the month.
Should I pay the bill promptly on August 1, I will have paid 30 cents to use
$20 credit for 15 days. This is an annual rate of 36 percent. But if after
purchasing the first $20 item I wander off and make another purchase of $20,
my annual finance rate will decline.
If I make $20 payments promptly on
August 1 and September 1, my annual finance rate will be about 27 percent.
With each additional item I purchase my annual rate of charge declines closer
and closer to 18 percent.
If you wish further complications, let me point out
that there is also a minimum monthly charge of 25 cents. The sales clerk can
not know my unpaid balance at the moment she sells me a shirt for $5, nor
can she know what additional purchases I will make after I leave her counter.
She can not possibly tell me the annual rate of finance charge that I will pay
on the purchase of that shirt prior to the consummation of the transaction.
Check-credit plans whereby consumers may borrow from commercial banks
by signing special checks involve impossible complexities similar to those
provided by revolving credit accounts.
At present such concerns as Sears,
Roebuck & Co. publish a table in their catalogues showing the exact amount of
the dollar finance charge the customer-will pay, depending upon the price of
the item purchased on instalment.
While the complexities surrounding conver-
sion of these finance charges to annual rates may not be insurmountabls in the
case of mail-order companies, they may be so great as to interfere seriously
with this method of serving consumers.
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Federal Reserve Bank of St. Louis
8.
Consequently, under the proposed legislation the consumer shopping for
a refrigerator might find that the credit union or commercial bank would quote
a financing rate close to 12 percent, the credit appliance store a rate of 3
percent, and the department store unable to quote any rate at all on its
revolving credit plan. Is this full disclosure?
Difficulty of identifying the finance charge.
lems in defining the dollar finance charge.
There are numerous prob-
Look down the list of disbursements
included under "closing costs" on a mortgage: bank fee, tax history, survey
fee, attorney's fee, title insurance, credit report, and so on. Which of
these are part of the finance charge and which are not? To reach a fair and
truthful conclusion would require scrutiny of almost every transaction. Moreover, many of these fees have their counterparts in charges on consumer instalment credit. Uniform treatment of such fees may easily conflict with many state
laws that now limit the finance charges on small loans and instalment sales
transactions.
Difficulty of converting dollar charge to annual rate. Too much has
probably been made of the diverse answers that can be obtained with the various formulas available to convert the dollar charge into an annual rate. Some
one formula could be selected by the regulatory body and defined as the proper
method of making the conversion.
However, use of a standard formula would force consumers to adjust their
payments to the uniform mold required by the formula. Consider the school
teacher who would like to buy a $265 refrigerator in May, pay $50 in June,
$75 in September and October, and the balance of $83.15 in November. I have
been teaching rate calculations in industry programs over the past five or six
years, and I can assure you that none of my students can make this calculation.
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There are so many deviations possible on consumer credit contracts:
the number of days to the first payment, the regularity of payments, the size
of the last payment.
Some indication of the variation one encounters in prac-
tice is suggested by the survey made by the Federal Reserve Board of new car
buyers in 1954 and 1955.
In calculating annual finance rates, we used the
constant-ratio method of converting dollar charges to annual rates.
Even with
the use of an electronic computer and a large staff in the market survey
organization, we found it necessary to exclude 73 percent of 1954 contracts
and 43 percent of 1955 contracts because of the difficulty or impossibility
of computing the annual finance rate.
Let me summarize in concrete terms.the results of the ease of concealing
the finance charge and the frequent impossibility of converting the charge to
an annual rate. At the end of 1960, there was outstanding about $56 billion
of consumer credit. Some $12.8 billion was in the form of noninstalment
credit: single-payment loans, charge accounts, and service credit (credit
extended by utilities, doctors, credit card companies, and so on).
In most
of these transactions, the finance charge is already buried in the price of
the product or service, so that it is not possible to determine the annual
rate of charge.
This leaves about $43.3 billion of instalment credit. It would be
possible to bury some portion of the dollar finance charge in the price of the
product or service on roughly $26 billion, or 60 percent of this amount." These
outstandings include revolving credit and check-credit, forms of instalment
credit that would actually be immune from rate-statement legislation. Reliable estimates are not available on the amount of credit outstanding under
these plans. This leaves only $17.3 billion as a maximum on which consumers
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c
10.
can rely for a truthful presentation of annual rates. This amount represents
about 40 percent of instalment credit and about 31 percent of total consumer
credit.
This falls far short of any goal of enabling consumers to shop effec-
tively among all types of consumer credit and to compare rates charged by
these alternative sources in order to use credit wisely.
Summary
Whenever possible, consumers should be informed of the cost of their
credit.
There are too many cases in which consumers are not told of their
dollar finance charge, but only told the number and amount of their monthly
payments.
The industry deserves to be criticized, but not castigated, for
these practices.
One of the benefits of the discussion of S. 1740 may be to
encourage those credit institutions who do not now disclose finance charges
to tell consumers the dollar cost, or the monthly or annual .rate of charge for
their credit service.
However, the argument that statement of charges as annual rates will
promote economic stability rests upon assumptions that are unproved and, to
put it mildly, tenuous. Far from enabling consumers to shop wisely for credit,
legislation of this nature would benefit those dealers who would be able to
conceal the finance charge.
This deception of the consumer would be largely
at the expense of direct lenders; commercial banks, credit unions, and consumer finance companies.
It would indeed be unfortunate to facilitate decep-
tion of the consumer by providing the official sanction of a Federal act.
Criticism is easier than constructive suggestions. Let me display my
biases by suggesting that in the long run the consumer will only be safeguarded in shopping for credit and all the other items that he buys through
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c
11
better education and greater economic progress. You can not take the consumer
by the hand every time he goes shopping.
Look at the types of people most
frequently preyed upon by the unscrupulous minority that exists in this, as
in any other, industry.
My experience, and the evidence developed in last
year's hearings indicates that these are the economically depressed, the
racial and cultural minorities, the newcomers to this country.
Sad to say,
these people are least able to afford the losses they suffer at the hands of
these predators.
In part these people can be protected through vigorous
enforcement of laws now on the books.
In large measure, however, their pro-
tection must come from a significant improvement in their economic and educational status.
Although progress on this score has been great over the past
half century, as an educator, I am eager to see us move faster.
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AU6101961
rh» Honorable 1*3*1 H. Douglas,
ChslnBfcn, 3uboosuaittee on
Production and Stabilisation,
Cosisdttee on Banking and Currency,
States Senate,
Bear Jfr« Chairman:
The following information is baing supplied in ree-ponae to
your letter of Aagnat 1» is which /9a ask for an ^atimate of total
finance charges on oonaumer d*bt and r«fftr to Mr* Robert Johnsoafs
sta tenant eoao*ralng the number of l-)^ mud 1955 contracts excluded
fro® the coBputation of f inano« oharges la our 3onr«y of Hew Car
Buyers*
The r^searoh staff of the Board of Governo*,* estia&tes fehat
the dollar aacrtmt of interest and finmnoe oh&r^e payments on total
debt of o )aau«er8 amounted to about 115 billion In Ij60. The estisiite
includes 16 billion of finanoe ohargee on short* and iatsnaediate-t^ns
consumer instalment creditt $^00 million on sintfle«p«gr>ent loans,
t?«5 billion oa r.ortga^* debt, and $500 million on other oonetiflmr
debt, including eeourity loans end life inattraaoe policy loane. flieee
estimates have been prepared on the basis of Tery fragMmtaxgr infora*tioa on firian.ce charges an most types of loans, ra liable information
on finance charges on oonauaer credit naa suia^i&rised in the letter to
you fro» Vice Chainaan Balder3 ton dated April
It should be notad that the S6 billion for annual oharges
®n consumer instalv^it debt should not be related directly to the
outstanding balance to det ursine an estimated avtrag® rate on the
amount borrowed. The outstanding aaouat reported for instalment
contraeta g»n«rr,lly inalades unearned finanoe charges for the
period to
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file available data do not permit distinguishing annual
changes in finance rates* It may b* inferred, however, that total
annual charges on debts of consumers were somewhat smaller in 1933
and 19$f than in I960, particularly on mortgage debt* Outstanding
credit was smaller on the average in these years and rates on some
types of credit were moderately lower*
Our records with respect to the computation of finance
charges on loans covered in the Survey of Hew Gar Buyers, conducted
for the Board of Governors by National Analysts, Inc., in 1956, do
not agree with fir* Johnson1® statement. Our data show that cases
included in the tabulations of finance charges by the constant-ratio
method accounted for 65 per cent of the lender report sample for
195% and 73 per cent of that for 1955t or 70 per cent of the total
sample for the two years combined.
Between 5 and 6 per cent of all contracts were excluded from
these tabulations because they were 8ingle*payaent loans and hence not
relevant to the discussion of instalment credit terms* Finance charges
on many of these could undoubtedly have been computed by conventional
methods.
About 7^ per cent of all instalment contracts were included
in the computations. Of the 26 per cent excluded*. 9 per cent were
accounted for by cases in which lenders failed to supply information
on finance charges* nother 7 per cent were accounted for by balloon
notes— that la, contracts which provided for a final payment substantially in excess of earlier payments* These contracts were of some
importance in 1^*~55* but have been of little significance* at least
for the am4or lenders, in recent years* the final 10 per cent was
accounted for by a nisoellaneous group of contracts for which no
breakdown is available* It is known that they include, among other
things*, contracts in which finance charges were not incorporated in
the total amount of credit specified and contracts of farmers and
teachers in whioh payment patterns were aade to conform to income
Ho attempt was made in these computations to identify, or
wake allowance for, cases in which the date of the first regular
monthly payment may have be@n slightly more or slightly less than a
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month after the date of purchase* Any such contracts w^re Included
ia the tabulations as loans with regular monthly payments. Neither
waa an attempt m&de to judge the difficulty of computing finance rates
on individual contracts excluded from the tabulations for th@ various
reasons noted above*
It should be emphasised that the data cited refer only to
contracts on new automobiles purchased In 195^-55* Instalment contracts for purchasing other goods, or for purchasing new cars at
other j»eriodft» may include larger or smaller proportions with
variations in the frequency or sise of payments*
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Federal Reserve Bank of St. Louis
We hope that this information answers your questions*
Sincerely your3,
(Signed) Wm. McC. Martin, Jr*
Wau MoC. Kartin, Jr.
B y Messenger
September 6, 1961.
The Honorable Frederick G. Button,
Special Assistant to the President,
The White House.
Dear Mr. Button:
til reply to a telephone call today from
Miss Burch, I am glad to supply a copy of nay statement on
S, 1740, the truth in leading bill, ! on July 19, 1961, before
the Subcommittee on Production and Stabilization of the Senate Banking and Currency Committee. Also enclosed is a
copy of the Board's report to the Committee on S. 1740. My
full testimony on the bill will appear in the printed hearings
which I understand will be available from the Banking and
Currency Committee in about three weeks.
The Board*s report, my testimony, and
certain other information supplied by us in connection with
the Subcommittee*s consideration last year of S. 2755,
predecessor to S. 1740, appear in the printed hearings on
S. 27SS. 1 am confident that you have copies of these hearings of last year.
Sincerely yours,
(SIGNED) WM. iVK.O. IWAPTIN. Jr.
Wat. McC. Martin, Jr.
Enclosures
JWS:mnm
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Tit*
*. .MT.Tf V. UA
. Wllll&m MoG. Martin
Chairman of the Board
Federal Reserve
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Federal Reserve Bank of St. Louis
rit. 'i.id Stabilise
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BOARD OF GOVERNORS
OF THE
F E D E R A L R E S E R V E SYSTEM
WASHINGTON
OFFICE OF THE V I C E C H A I R M A N
September 28, 1961.
The Honorable Paul H. Douglas, Chairman,
Subcommittee on Production and Stabilization,
Committee on Banking and Currency,
United States Senate,
Washington 25, D. C.
Dear Mr. Chairmanj
This is in response to your letter of September 25, 1961,
requesting that we prepare for the use of your Subcommittee a compilation of State laws regarding the extension of consumer credit
to the extent that they relate to the seven items of information
that would be required to be disclosed by section U of S. 17^0,
the truth in lending bill.
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We shall be glad to undertake the preparation of a
compilation of the kind requested with the hope that it may be
completed for submission to you by the first of December0
Sincerely yours,
(Signed) C. C. Balderston
C. Canby Balderston,
Vice Chairman.
c
Mr. Chairman and Members of the Subcommittee:
You have asked that I appear before you today to comment on
S, 171*0, a bill to require disclosure of finance charges in connection
with extensions of credit. I am glad to give you such assistance as I
can in your consideration of this proposal, ~
Briefly, the bill would require a person engaged in the business of extending credit to furnish to each of his customers prior to
the consummation of a credit transaction a written statement setting
forth certain details concerning the credit in accordance with rules
and regulations prescribed by the Board of Governors of the Federal
Reserve System. These details would include (l) the finance charge
expressed in dollars and cents and (2) the percentage that the finance
charge bears to the total amount to be financed expressed as a simple
annual rate on the outstanding unpaid balance of the obligation,
I should like to begin my statement by reaffirming the Board!s
general position as set forth in our report and statement on S, 2755*
the similar bill considered by your Subcommittee last year, and repeated
in our recent report on S, 171*0, The Board is in full accord with the
objective of requiring lenders and vendors to disclose fully their
interest rates and finance charges to credit customers. The regulation
of trade practices of vendors and lenders in stating finance charges,
where necessary to provide credit customers with better information, is
a coranendable social and. economic objective*
While we are in full sympathy with the "truth in lending"
objective of the bill, we also believe, as we stated last year, that
administration of such legislation would not constitute an appropriate
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activity for the Federal Reserve System. As you are aware, the major
responsibility of the Federal Reserve is influencing the reserves of the
banking system in the interests of economic stability and growth*
The
statute proposed in S, l?LiO. it seems to me., would be essentially a trade
practices law not related to our primary responsibility, which is to
regulate the availability and supply of credit in accordance with the
over-all needs of the economy.
The bill is designed to protect the interests of borrowers or
other retail credit customers on a continuing basis. It would do this
by improving the quality of their information concerning the finance
charges on credit contracts into which they may enter. As a result of
the better information on financing charges., the bill would presumably
facilitate customer choice as to type and source of available credit
financing best suited to his pocketbook. In this way, the bill would
work from the demand side to make the market for funds more competitive
and make more efficient the allocation of resources generally.
The bill would not be administered as a contracyclical instrument,
tightened in boom times and eased in times of slack, Rather it would be
administered so as to give borrowers truthful information at all times-good and bad alike. Thus, regulation of the disclosure of finance
charges under the bill would differ from the administration of general
monetary policy. Its administration would also differ with respect to
cyclical flexibility from the selective credit regulations, such as
regulation of stock market credit which the Federal Reserve administers
at present, and from regulations of consumer credit and real estate credit
which the Federal Reserve has administered in the past.
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'
-3The question as to whether or not knowledge as to the actual
cost of an article bought on credit tends to diminish cyclical fluctuations can be thought of in two parts. One part has to do with the prico
of the article itself; the other with the additional cost of buying it
"on time."
Decisions as to whether or not to buy the item at all are
made more intelligently, of course, when the true price is known. Since
prices of goods and services fluctuate, potential buyers tend to be
encouraged to purchase by prices they consider low and discouraged by
those they consider high* Price changes on the items themselves,
therefore, do have contracyclical influence and this influence is enhanced
when potential buyers are quoted the total cost as well as the monthly
payment.
If consumer finance charges actually did fluctuate with economic
cycles, knowledge of the total cost of consumer credit itself would tend
to have contracyclical effects. However, finance charges on consumer
instalment credit, a major area that would be covered by the bill, have
not shown much fluctuation in response to cyclical changes in the availability of credit during the postwar period, Also, it is hard to find
evidence as to consumer responsiveness to the changes in charges that
>
have occurred. Consumer instalment credit has been more responsive to
changes in terms, such as maturities and downpayments, and in credit
standards of lenders, than to changes in finance charges.
Finance charges on instalment loans, like charges on other
types of credit, have risen from the lows reached in the World War II
period. The rise has been gradual and, unlike money market interest
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Federal Reserve Bank of St. Louis
-hrates, rates on consumer loans have not varied much in response to changes
in the availability of and demand, for credit over the course of postwar
business cycles.
One factor of particular importance in connection with the
prevailing level and relative invariability of credit charges on instalment loans is the presence of State laws setting maximum finance rates.
Another factor is the relative importance of costs other than the cost
of money per se in the consumer lending business.
These costs, which
include the cost of credit investigation, collection, and provision
for losses, do not show much cyclical fluctuation.
This is not to say that consumer instalment credit is unresponsive to changes in monetary policy. Instalment lenders, like other
lenders, are affected by changes in the supply of bank reserves. Commercial banks, which are most directly affected by changes in Federal
Reserve policy, themselves hold about two-fifths of all outstanding
consumer credit and also make loans in substantial volume to finance
companies and retailers.
Changes in the availability of credit to instalment vendors
and lenders tend to be reflected more in changes in the credit standards
which lenders and vendors apply than in changes in their finance charges,
When credit conditions tend tojbijhten, more restrictive credit standards
tend to eliminate customers who are marginal risks.
On the other hand, when credit conditions become easier,
instalment lenders and vendors are more willing to extend credit and to
accept marginal risks. Moreover, consumer lenders and vendors tend to
engage in more promotional activity when funds are readily available and
to cut back on such activity when funds are hard to come by.
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Federal Reserve Bank of St. Louis
-5In view of the technical characteristics of the consigner
credit business, it seems unlikeD.y that a fuller awareness by consumers
of instalment finance charges in and of itself would, make for increased
cyclical variation in such charges and thereby result in much contracyclical effect on consumer borrowing, Whatever increased cyclical
variation in rates and. in borrower responsiveness to rate changes did
result from the bill would, of course, be salutary. Cyclical flexibility in financing costs serves generally to discourage borrowing in
boom periods and to encourage it in periods' of slack.
Perhaps the most important effect of the bill in the instalment credit field, would be in furthering the healthful functioning of
the economy generally, through better allocation of resources. It
would, indeed, be beneficial if a fuller consumer awareness of credit
charges resulted in the avoidance of particularly burdensome indebtedness on the part of some consumers, or caused them to allocate their
funds more economically,
While most of the discussion of this bill has been in terms
of its role in requiring disclosure of terms on short-term consumer
credit, the bill also would, apparently apply to the mortgage credit area,
Mortgage interest rates, like finance charges on consumer credit, have
risen since the war, although they have fluctuated more in response to
changes in credit availability,
Contract rates on first mortgages tend to be close to their
effective rates. It is true that appreciable discounts are sometimes
charged on mortgages insured or guaranteed by the Federal Government,
This happens when administratively determined rates are below market
rates. However, sizable discounts are seldom charged on mortgages of
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the conventional type. Moreover, charges other than the cost of money
typically add little to the contract interest rates on mortgages,
'Ihere is unfortunately little information to be had about
practices in disclosing financing charges to borrowers in second and
third mortgage financing. If there is a problem requiring compulsory
disclosure of contract costs in the mortgage field, it would seem to
relate more to this area of financing than to first mortgages.
In conclusion, let me say that the Board of Governors looks
with favor on the general principle of the bill of requiring disclosure
of finance charges. A^ the same time, however, the Board believes that
the administration of such a trade practice function would be essentially
unrelated to the Board's present responsibilities.
Cn behalf of the
Board, therefore, I wish to reaffirm the position we took last year
that administration of such legislation would not constitute an appropriate
activity for the Federal Reserve,
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@FedFRASER