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Banking in the Consumer
Protection Age
Forecasts 1972
1971 Farm Financial and
Credit Conditions

The M o n t h l y R e v i e w is produced by the Research
Department of the Federal Reserve Bank of Richmond.
Subscriptions are available to the public without charge.
Address inquiries to Bank and Public Relations, Fed­
eral Reserve Bank of Richmond, P. 0 . B ox 27622,
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article is used.

Banking in the Consumer Protection Age:
Part III
Parts I and II of this series reviewed the develop­
ment of consumer protection legislation in the United
States, with particular reference to the Truth in
Lending A ct and the range of criminal and civil
sanctions that may be imposed for failure to comply
with it. Am ong the subjects discussed in this final
part are the following: (1 ) elements of an internal
Truth in Lending compliance program for banks;
(2 ) principal features of the Fair Credit Reporting
A c t ; (3 ) important recent and pending legislation
involving bank credit cards; and (4 ) the work of
the National Commission on Consumer Finance.
An important protective clause of the Truth in
Lending A ct provides that a creditor may not be
held liable for civil penalties “ in any action” if it
can clearly show that its violation was not intentional
and resulted from a bona fide error even though it
maintained procedures designed to avoid any such
error.1 Obviously, the same evidence would preclude
any possibility of criminal prosecution. Banks can
take advantage of this protective clause by following
a number of comparatively inexpensive steps, thereby
placing themselves in a favorable position when dis­
putes with consumers or regulatory authorities arise
because of errors in disclosure statements.
Elements of a Truth in Lending Compliance
Program A n effective program begins with
designation of a particular officer to be responsible
for establishing and maintaining compliance pro­
cedures on a regular basis within the organization.
The first task of this officer is to equip himself with
a file of essential published materials. A t minimum,
this should include a copy of the Truth in Lending
A ct and a copy of Regulation Z of the Board of Gov­
ernors, including amendments and formal inter­
pretations by the Board relating to it. Copies of
these materials may be obtained free of charge from
any Federal Reserve Bank or from the Publications
Section, Board of Governors of the Federal Reserve
System, Washington, D. C. 20551. Although the
coverage of these materials is comprehensive, sup­
plemental information applicable to particular lending
or credit sales transactions will be useful in many
situations. The most helpful supplemental source is
the large number of informal opinions that have been
182 Stat. 157 (1968).

Section 130(c) of the Act.

written by members of the Board of Governors and
its staff. W ell over 500 opinion letters had been
written through December 1971, all in response to
inquiries from creditors or the public presenting
basic compliance issues in the context of stated
factual situations.2 These informal opinions do not
have the same legal status as the formal interpreta­
tions of Regulation Z published by the Board of G ov­
ernors ; nevertheless, they do represent the con­
sidered judgment of the staff or of individual mem­
bers of the Board on a subject committed to the
Board for administrative decision by Congress. Pre­
sumably, therefore, the courts will give weight to
these informal opinions in the event of litigation,
even though they do not have the same legal status
as the Board’s official interpretations.
The practical problem a bank or any other creditor
faces is how to prove in court that it does in fact
maintain procedures designed to prevent uninten­
tional violations from occurring. One important
document to help accomplish this is a written com ­
pliance policy that has been distributed to all per­
sonnel in the organization responsible for the ex­
tension of consumer credit. By now, all banks should
have forms that meet the disclosure requirements of
Truth in Lending.
The next logical step for a
bank, therefore, is to be able to show that all per­
sonnel with responsibilities for completing the forms
and transmitting them to customers have been trained
to complete them properly. One way to accomplish
this is to furnish credit personnel with sample forms
properly filled out as they would be in actual or
hypothetical transactions, accompanied by written e x ­
planations where needed.
A s a supplement to direct written instructions to
credit personnel, banks should also consider issuing
a written directive to their Auditing Departments to
make periodic spot checks of compliance.


representatives should examine copies of completed
disclosure forms that have been given to customers
and make additional investigations as may seem
necessary under the circumstances at any particular

There is yet another advantage to this pro­

2 One commercial publisher of these opinions is Commerce Clearing
House, Inc., 4025 W . Peterson Avenue, Chicago, Illinois 60646, in
4 CCH Consumer Credit Guide. Another useful source for many of
them, and for many other useful Truth in Lending materials as
well, is the Truth in Lending Manual by Ralph C. Clontz, Jr., pub­
lished by Warren, Gorham & Lamont, Inc., 89 Beach Street, Boston,
Massachusetts 02111.



cedure. It increases the likelihood that the bank
might be able to take advantage of the second
creditor defense written into the Truth in Lending
Act. Section 130(b) provides that a creditor has no
liability for civil penalties if, within 15 days after
discovering an error and prior to the institution of
a legal action by the consumer or the receipt of
written notice of the error from the consumer, the
creditor notifies the consumer of the error and makes
whatever adjustments are necessary to insure that
the consumer will not be required to pay a finance
charge in excess of the amount or percentage rate
actually disclosed.3 A program of regular surveil­
lance increases the chances of detecting and cor­
recting errors prior to notification from the con­
sumer. If spot checks suggest that particular lend­
ing officers are prone to error in completing dis­
closure statements, more thorough review of their
disclosure statements may be in order. For larger
transactions, such as real estate loans, it might be
feasible to have a single individual complete all dis­
closure statements, thus reducing further the chances
of error.
The Truth in Lending compliance officer or de­
partment can also play a particularly useful role in
monitoring the adequacy of disclosure by retail
dealers for whom the bank discounts installment
paper on a regular basis. Here again, as discussed
in Part II, if Truth in Lending violations occur,
banks may well be equally as liable for civil penalties
as retail dealers themselves. Am ong the measures
that can reasonably be taken by banks to reduce ex ­
posure to loss are (1 ) advance examination and
approval of disclosure forms used by dealers;
(2 ) spot checks of disclosure forms completed by
dealers for accuracy; (3 ) insistence that dealers
obtain written acknowledgments by consumers that
they have received required disclosures; and (4 ) in­
sistence that dealers forward copies of disclosure
statements and acknowledgment of receipt of dis­
closures by consumers to the bank along with in­
stallment contracts that are assigned. W hile the last
step will be of no help if the disclosures have not in
fact been received and if the credit transactions in­
volve security interests in real property, such
acknowledgments are conclusive evidence of com ­
pliance by assignee banks in all other situations, pro­
vided the violations are not apparent on the face of
the disclosure statements and the assignee did not
know of the violation when the assignment was made.
For insured banks, good faith compliance with the
Truth in Lending Act and Regulation Z is essential
3 82 Stat. 157 (1968).



not only because of the threat of legal proceedings
for money damages by consumers but also because
examiners are likely to become increasingly alert to
the requirements of Truth in Lending and other new
consumer protection laws. Already, examiners of the
Federal supervisory agencies carry checklists of im­
portant Truth in Lending points to aid in their
examinations of insured banks.
A n excellent recent article by Mr. Griffith L. Gar­
wood, Chief of the Truth in Lending staff of the
Board of Governors of the Federal Reserve System,
reviews developments with the Truth in Lending
A ct since 1968. It is published in The Banking Law
Journal, 89, No. 1 (January 1972).
The Fair Credit Reporting Act W ith the grow th
of consumer credit, a necessary satellite industry
dedicated to the accumulation and sale of information
relating to individuals and their credit standing came
into being. This industry is composed, for the most
part, of credit bureaus, investigative reporting com ­
panies and other organizations whose business it is
to gather and report information about consumers.
Am ong the principal users of consumer reports are
banks, retail merchants, lenders, insurance companies,
and other companies who regularly decide whether
individuals who are the subjects of these reports are
to receive credit, be granted insurance, or be em­
ployed— and, if so, upon what terms.
Erroneous information in a person’s file can cause
serious injury if it leads or contributes to the denial
of credit, insurance, or employment. Prior to en­
actment of the Fair Credit Reporting A ct on
October 26, 1970,4 many people were apparently
damaged by inaccurate information, yet there was
little they could do about it.5 Only one state had
legislation designed to protect consumers against
false and inaccurate reports affecting their financial
standing, eligibility for insurance, or employment op ­
portunities. Furthermore, common law rights of con­
sumers have been almost completely ineffective.6
The individuals themselves had no way of knowing
what information was contained in credit files main­
tained on them. The typical credit investigation re­
quired only 30 minutes, and much of the information
obtained was not verified.

Frequently, victims of

erroneous and harmful information were not even
aware that a credit report had been used against
4 Public Law 91-508, 84 Stat. 1127 (1970).
The Fair Credit Re­
porting Act was added as Title V I of the Consumer Credit Pro­
tection Act of 1968.
5 Hearings before the Subcommittee on Financial Institutions of the
Committee on Banking and Currency, 91st Cong., 1st Sess., on S. 823
(1969), especially pp. 427-30.
6 Ibid., pp. 437-42; see also, “ Credit Investigations and the Right
to Privacy: Quest for a Remedy,” Georgetown Law Journal (Febru­
ary 1969).


them. In addition, because many people have the
same or similar names (John Smith, for example),
adverse information about a particular Smith mis­
takenly found its way into the files of other, innocent
Smiths. As data became automated, and as the files
of different credit bureaus were interconnected by
telecommunication techniques using direct access re­
mote terminals, errors in the process of coding, key­
punching, programming, or transmission became
more likely, entirely apart from the problem of
multiple John Smiths. Cases of abuse or misuse of
consumer credit information also came to light in the
course of Congressional hearings.7
The Fair Credit Reporting Act was designed to
provide remedies for consumers adversely affected by
false or inaccurate consumer reports and to limit the
uses of such reports to legitimate business purposes.
However, the statute is complex, and its effect in
any particular factual situation depends upon three
key definitions: (1 ) of “ consumer report” ; (2 ) of
“ investigative consumer report” ; and (3 ) of “ con­
sumer reporting agency.” 8
A bank may well become a “ consumer reporting
agency” unless it is scrupulously careful in limiting
the types of information about consumers it com ­
municates to third parties.

But even where this

classification is avoided, every bank is a regular
user of information about consumers obtained from
third parties; and the statute imposes a number of
duties upon users, regardless of whether the infor7 Supra, note 5, pp. 42-430.
8 “ (d) The term ‘consumer report’ means any written, oral, or
other communication of any information by a consumer report­
ing agency bearing on a consumer’s credit worthiness, credit
standing, credit capacity, character, general reputation, per­
sonal characteristics, or mode of living which is used or ex­
pected to be used or collected in whole or in part for the purpose
of serving as a factor in establishing the consumer’s eligibility
for (1) credit or insurance to be used primarily for personal,
family, or household purposes, or (2) employment purposes, or
(3) other purposes authorized under section 604.
The term
does not include (A ) any report containing information solely
as to transactions or experiences between the consumer and the
person making the report; (B) any authorization or approval
of a specific extension of credit directly or indirectly by the
issuer of a credit card or similar device; or (C) any report in
which a person who has been requested by a third party to
make a specific extension of credit directly or indirectly to a
consumer conveys his decision with respect to such request,
if the third party advises the consumer of the name and address
of the person to whom the request was made and such person
makes the disclosures to the consumer required under section 615.
(e) The term ‘investigative consumer report’ means a con­
sumer report or portion thereof in which information on a
consumer’s character, general reputation, personal charac­
teristics, or mode of living is obtained through personal inter­
views with neighbors, friends, or associates of the consumer
reported on or with others with whom he is acquainted or
who may have knowledge concerning any such items of in­
formation. However, such information shall not include specific
factual information on a consumer’s credit record obtained di­
rectly from a creditor or from a consumer reporting agency
when such information was obtained directly from a creditor
of the consumer or from the consumer.
The term ‘consumer reporting agency’ means any person
which, for monetary fees, dues, or on a cooperative nonprofit
basis, regularly engages in whole or in part in the practice of
assembling or evaluating consumer credit information or other
information on consumers for the purpose of furnishing con­
sumer reports to third parties, and which uses any means or
facility of interstate commerce for the purpose of preparing
or furnishing consumer reports.”
Public Law 91-508, Section
603 (d ), (e ), and (f) (October 26, 1970); 84 Stat. 1128 (1970).

mation comes from a consumer reporting agency or
from other third parties who do not fall within
this classification.
Every user must inform the consumer orally or in
writing if information received in a consumer report
from a consumer reporting agency causes the user
to deny, or increase the cost of, credit or insurance or
to deny employment. The user must also inform the
consumer of the name and address of the consumer
reporting agency issuing the report. The user is not
required, however, to tell the consumer the nature
of the information in the report.
In turn, every consumer reporting agency must,
upon request and proper identification by any con­
sumer, clearly and accurately disclose the nature and
substance of all information (except medical infor­
mation) in its files on the consumer at the time of
its request. In addition, the agency must reveal the
sources of any information unless it is to be used
in an “ investigative consumer report.” 9 The agency
must also disclose the names of recipients of any re­
port on the consumer that it has furnished for em­
ployment purposes within the two-year period pre­
ceding the request, and for any other purposes
within the six-month period preceding the request.
A different rule applies to information obtained by
a creditor, insurance company, or employer from a
source other than a consumer reporting agency. N o
disclosures of any kind need be made to the consumer
in this situation unless credit is involved. If credit
is denied, however, or if its cost is increased either
wholly or partly because of information bearing upon
the consumer’s credit worthiness, credit standing,
credit capacity, character, general reputation, per­
sonal characteristics, or mode of living, then the user
of the information must disclose its nature to the
consumer if, within 60 days after learning of the
adverse action, the consumer asks in writing to know
the reasons for it. The statute specifically requires
the user clearly and accurately to disclose to the con­
sumer his right to make a written request at the
time the adverse action is communicated to him.
A bank or other financial institution may become
a “ consumer reporting agency” if it regularly passes
on information in its files about consumers, other
than information solely confined to its own transac­
tions or experiences with the consumer.10 The bank
or financial institution may, however, relate informa­
tion based solely upon its own transactions or ex­
periences with the consumer without becoming a
9 The sources of information acquired solely for use in an “ in­
vestigative consumer report” and used for no other purpose need
not be disclosed except in the event of litigation.
10 See note 8, supra, for definition of “ consumer reporting agency.”



consumer reporting agency, even if it regularly fur­
nishes such information to a consumer reporting
If a bank or other financial institution becomes a
consumer reporting agency, it must comply with a
number of duties to the consumer. First, information
about consumers may not be disclosed to anyone
except as authorized by Section 604 of the A ct.1
Second, certain types of obsolete information may
not be furnished to anyone except in connection with
a credit transaction expected to involve $50,000 or
more in principal, or the underwriting of insurance
expected to involve a face amount of $50,000 or more,
or employment at an annual salary of $20,000 or
more. Third, reasonable procedures must be main­
tained to assure maximum possible accuracy of all
information in every consumer report, and certifica­
tion must be obtained from all users that the infor­
mation disclosed will only be used for authorized
purposes. Fourth, a consumer reporting agency may
not furnish a consumer report to any person if it
has reasonable grounds to believe that the report
will not be used for an authorized purpose. Finally,
the identity of all new users must be verified by
the agency.
Banks and other financial institutions that wish
to avoid becoming consumer reporting agencies must
be particularly cautious in discounting installment
paper for retail dealers.

W hen a dealer calls the

bank or other institution before credit is extended
to inquire whether the contract will be purchased or
credit will be extended to the consumer directly, and
the bank or institution denies the credit or increases
the cost even partially because of information ob­
tained from outside sources, then the dealer and the
bank or other financial institution must each make
certain disclosures to the consumer if the bank or
other institution is not to become a consumer re­
porting agency.

First, the dealer must advise the

1 Section 604 provides: “ A consumer reporting agency may furnish
a consumer report under the following circumstances and no other:
(1) In response to the order of a court having jurisdiction
to issue such an order.
In accordance with the written instructions of the con­
sumer to whom it relates.
(3) To a person which it has reason to believe—
(A ) intends to use the information in connection
with a credit transaction involving the consumer on
whom the information is to be furnished and involving
the extension of credit to, or review or collection of an
account of, the consumer; or
(B) intends to use the information for employment
purposes; or
(C) intends to use the information in connection
with the underwriting of insurance involving the con­
sumer: or
(D) intends to use the information in connection
with a determination of the consumer’s eligibility for
a license or other benefit granted by a governmental
instrumentality required by law to consider an ap­
plicant’s financial responsibility or status; or
(E) otherwise has a legitimate business need for
the information in connection with a business trans­
action involving the consumer.”

Digitized 6 FRASER


consumer of the name and address of the bank.12
The bank must then follow the normal procedure a
user of information follows. If the bank’s decision
is based on information in a consumer report, the
bank must give the consumer the name and address
of the agency.
If the information comes from a
third party, other than a consumer reporting agency,
the bank must disclose to the consumer his right
to make a written request within 60 days for the
nature of the information. If, however, the bank’s
decision was based on its own prior experience with
the consumer or its own internal credit policies, then
it need not make any disclosures at all.
Special rules apply to a bank or other financial
institution that uses or prepares an “ investigative
consumer report.” A s a user, if a bank requests such
a report from a consumer reporting agency, the bank
must mail or deliver written notice to the consumer
within three days that an investigative consumer re­
port may be made and that it may include informa­
tion regarding the character, general reputation, per­
sonal characteristics, and mode of living of the con­
sumer. The consumer must also be informed that
he may make a written request for disclosure of the
“ nature and scope” of the investigation. If the con­
sumer then requests this information within a rea­
sonable time thereafter, the bank must within five
days furnish the consumer with a complete and ac­
curate written description of the “ nature and scope”
of the investigation.
If a bank or other financial institution denies or
increases the cost of credit or insurance or denies
employment based upon information in an investiga­
tive consumer report, it must make the same dis­
closures a user must make if it takes such action
on the basis of an ordinary consumer report. No
disclosures at all need be made, however, if an in­
vestigative consumer report is to be used for em­
ployment purposes and the consumer has not
specifically applied for the position, or if the bank or
other institution conducts the investigation for its
own purposes, using its own employees.
These and many other important questions relat­
ing to the Fair Credit Reporting A ct are discussed
in two documents, both of which should be in the
file of every bank or affiliated institution engaged in
extending consumer credit.

The first is a pamphlet

containing the text of the A ct and 61 specific ques­
tions and answers, entitled “ Guidelines for Financial
Institutions in Complying with the Fair Credit R e­
porting A ct.” The pamphlet was prepared jointly by
1 4 CCH Consumer Credit Guide, f99,486; Section 603(d) (3) (C) of
the Fair Credit Reporting Act.



the Board of Governors of the Federal Reserve
System, the Comptroller of the Currency, the Fed­
eral Deposit Insurance Corporation, and the Federal
Home Loan Bank Board. Copies may be obtained
free of charge from any of the foregoing organiza­
tions or from any Federal Reserve Bank. The second
useful document, entitled “ Compliance with the Fair
Credit Reporting A ct,” may be obtained free of
charge from the Bureau of Consumer Protection,
Federal Trade Commission, Washington, D. C.
20580. Both publications represent the informed
views of the staffs of the agencies publishing them,
but are not substantive rules having the force and
effect of law. A s a matter of fact, none of the
agencies charged with enforcement of the A ct has
the authority to issue substantive rules, as does the
Board of Governors with respect to Truth in
Consumers may bring legal actions for money
damanges against users of information and consumer
reporting agencies who fail to comply with the Act,
if they can prove that the agency or user was either
willful or negligent in its noncompliance. This stands
in sharp contrast to Truth in Lending where, as
shown in Part II published last month, monetary
penalties may be assessed for inadvertant violations.
Moreover, no user or consumer reporting agency may
be held liable for any violation of the provisions of
the Fair Credit Reporting Act pertaining to in­
vestigative consumer reports if it can prove that at
the time of

the alleged


it maintained

“ reasonable procedures” to assure compliance.13
Once again, then, the new consumer protection
laws favor companies that take positive steps to

For users of consumer information who

are not “ consumer reporting agencies,” this involves
the following procedures, at minimum.
(1 )
Instruct credit personnel in writing that
consumer reports may only be obtained for per­
missible purposes, and list these purposes.
(2 )
Establish procedures to insure that
proper disclosures are made to consumers when
credit is denied or the charge is increased based
on information in a consumer report or received
from third parties. Even though the A ct does
not require it, it is good practice to develop
forms for making the required disclosures and
1 a Nevertheless, the courts are likely to give great weight to es­
tablished administrative practices of the agencies responsible for
enforcing compliance.
F.T.C. v. Mandel Brothers, Inc., 359 U.S.
385 (1959). Although, as discussed in Part I, FTC does not appear
to have jurisdiction over banks themselves, it may have over bank
holding companies and other affiliates of banks.

13 Section 61 5 (c), 84 Stat. 1133 (1970).

to retain copies showing that the disclosures
were made.
(3 )
Maintain records, even if only in the
form of handwritten notations, of information
received from others so that such information
will be available in the event the consumer
asks for it.
Banks and other financial institutions face much
more formidable compliance problems if they become
consumer reporting agencies. The document pre­
pared by the F T C entitled “ Compliance with the Fair
Credit Reporting A ct,” mentioned above, is one es­
sential source of information on this subject. Another
useful one, entitled “ H ow to Comply with the Fair
Credit Reporting A ct,” has been prepared by A s ­
sociated Credit Bureaus, Inc. Copies may be ob­
tained free of charge by sending a stamped, self­
address envelope to Associated Credit Bureaus, Inc.,
6767 Southwest Freeway, Houston, Texas 77036.
Credit Cards and the Proposed Fair Credit
Billing Act N o survey of current consum er p ro ­
tection laws affecting banks would be complete
without brief reference to recent and pending legis­
lation relating to credit cards. Approximately 25
million bank cards are now in use, involving about
375 million purchases and over seven million loans
annually. Outstanding charges based on bank credit
cards at the end of 1971 approached $4 billion, a dra­
matic increase from the level of $633 million reported
by the Federal Reserve System as recently as Sep­
tember 1967. Even though credit extended on the
basis of bank cards accounts for something less than
10 percent of total consumer credit extended by
banks at the present time, nearly 200 million state­
ments were sent to consumers in connection with
bank credit card programs in 1971.
Most credit card plans permit the cardholder to
obtain a direct cash advance, up to a certain stated
amount, from a participating bank, or to use the
card as a substitute for currency or a check to pay
for merchandise or services purchased from par­
ticipating retailers. W here cash is advanced directly
by a bank, an initial transaction charge of approxi­
mately 2 to 4 percent of the amount of the advance
may be assessed, depending upon the particular credit
card plan. In addition, finance charges may begin
to accrue from the date the funds are initially made
available to the cardholder, or at some later date.
W here merchandise or services are purchased, the
cardholder is ordinarily allowed a “ free ride” period
averaging about 45 days from the date of the pur­
chase before finance charges begin to accrue. No
charge is assessed if payment is received before the



end of the “ free ride” . Finance charges (exclusive
of transaction and minimum charges) on both cash
advances and retail purchases range from around
10 to about 18 percent per year, depending upon
the particular plan.
Acceptance and use of a bank credit card is regu­
lated by a complex network of contractual arrange­
ments among banks and individual cardholders, on
the one hand, and among banks and retail merchants,
on the other. Under their agreements with mer­
chants, banks take all of the credit risks associated
with sales of merchandise or services by retailers
honoring bank cards. Retailers accepting the cards
for purchases discount the sales drafts with a par­
ticipating bank, usually receiving immediate credit
in their account for somewhere between 92 and 100
percent of the face amounts of the drafts depending
upon the particular agreement between retailer and
bank in individual cases. The average discount for
credit card sales handled by mediants is said to be
about 3 percent of the face amount of the sales
drafts, or 54 cents on the average sale. Currently,
income to banks from bank credit card programs,
based upon finance and other charges paid by card­
holders, is said to account for about 77 percent of
total revenues of such banks from their credit card
programs, while the remaining 23 percent results
from merchant discounts in connection with sales
transactions involving credit cards.14
A key feature of the cardholder’s agreement with

and many of these may be subject to the law of
more than one state. Some 1,450 banks are now
issuing bank credit cards, in cooperation with about
8,000 “ agent” banks, approximately 4,200 of which
are in the Master Charge system and about 3,600 of
which are associated with the BankAmericard group.
The functions and powers of agent banks vary ac­
cording to the terms of their individual agreements
with card-issuing banks, subject, however, to con­
trolling interchange regulations governing the e x ­
change of debits and credits among all the par­
ticipating banks. These interchange rules are ad­
ministered by the Interbank Card Association, in the
case of Master Charge cards, and by National Bank­
Americard, Inc., in the case of BankAmericards.
Interchange regulations are essential to bank credit
operations for two reasons. First, a substantial (and
increasing) use of the cards is in connection with
interstate transactions, where the issuing or agent
bank is in one state and the bank extending credit
or the merchant selling to the cardholder is in a dif­
ferent state. Second, such regulations are needed
for intrastate transactions if more than one bank is
Prior to October 26, 1970, the legal status of in­
dividuals holding credit cards depended almost en­
tirely upon their contractual agreements with par­
ticipating banks under the laws of the 50 states,
except for disclosure requirements imposed by the
Truth in Lending Act.

On that date, Title V of the

the issuing bank (a feature, by the way, that may

Consumer Credit Protection A ct became law.16 This

be changed by pending legislation and by a proposed
regulation of the Federal Trade Commission, as dis­

statute prohibits issuance of a credit card except in
response to a request or application, although the

cussed below) is the cardholder’s undertaking to look

prohibition does not apply to issuance of a card in

to the merchant from whom the goods or services

renewal of, or in substitution for, an accepted card.

were purchased for warranties of performance and

It also limits the liability of a cardholder for un­

not to the bank to whom payment is to be made.15

authorized use of his card to a maximum of $50.

Three states, Massachusetts, California, and New

Even this liability does not exist unless the card

Jersey, have recently enacted legislation making such

issuer has given adequate notice to the cardholder of

banks responsible for claims by consumers against

his potential liability for unauthorized use and unless

merchants arising out of credit card sales.


additional conditions

are met.

These a re :

In the neighborhood of 30 percent of the 382

(1 ) that the card issuer has provided the cardholder

million annual purchase and loan transactions by
means of credit cards involve more than one bank,

with a self-addressed, prestamped notification to be
mailed by the cardholder in the event of loss or theft
of the ca rd ; and (2 ) that the unauthorized use occurs

14 For a comprehensive review of current financial aspects of bank
credit cards, see Andrew F. Brimmer, “ Growth and Profitability of
Credit Card Banking,” paper presented at the 1971 National
Credit Card Conference of the American Bankers Association
(October 27, 1971).
15 Interestingly, when the FTC issued its Trade Regulation Rule
proscribing the issuance of unsolicited credit cards in March of
1970, it took the position that “ the activity of issuing credit cards
by banks appears to fall within the jurisdiction of the Commission.”
This seems exceedingly doubtful in view of the specific language
of Section 5 of the FTC Act excluding banks from the Commission’s
jurisdiction. It is understood that most bank credit card plans are
operated by banks directly, and not through nonbanking sub­
sidiaries or affiliated corporations.



before the cardholder has notified the issuer that
an unauthorized use may occur as the result of loss
or theft.

Furthermore, after January 25, 1972, no

liability for unauthorized use exists with respect to
any credit card unless the card issuer has provided
16 Public Law 91-508, 84 Stat. 1126 (1970).


a method whereby the user of the card can be identi­
fied as the person authorized to use it.17
A s pointed out in a letter from the three Federal
bank supervisory agencies to all insured banks in the
autumn of 1971, many card issuers have continued
to issue cards with statements imprinted on the re­
verse side such as the following:

legal effect of preventing cardholders from refusing
to pay issuing or agent banks when merchandise or
services, purchased by means of the cards, turn out
to be defective. Pending in Congress is S. 652, the
“ Fair Credit Billing A ct,” sponsored by Senators
Proxmire and Brooke, which, among other things,
contains the following provision:

In case the credit card is lost or stolen, the cus­
tomer shall be responsible for any extensions of
credit to anyone through use of the card until
the card issuer receives written notice of its loss
or theft.

§169 Rights of Credit Customers
A card issuer who has issued a credit card to a
cardholder shall be subject to all claims and de­
fenses arising out o f any transaction in which the
credit card is used as a method o f payment or
extension o f credit.

The letter advised banks that continued issuance of
cards with statements such as the above would not
appear to be justified under present law.
Except for the above provisions of Federal law,
and except for more general Federal authority under
antitrust and trade regulation laws, state laws now
control the legal relationships among cardholders,
banks, and merchants. This situation is said to be un­
satisfactory to both the credit card industry and to
consumer groups, but for different reasons.
The principal objections of the credit card in­
dustry to the present state of the law center around
the lack of uniformity of state laws and the high
proportion of credit card transactions involving two
or more states.18 Serious conflict-of-law problems
may arise when disputes occur in multi-state trans­
actions, and this situation is aggravated by the
tendency of states to enact different types of consumer
protection laws or to enact similar types but with
significantly different provisions. Vexing questions
arise regarding which state laws should apply, and
such controversies may well wind up in the courts.
The credit card industry is said to believe that as
credit cards evolve from the present concept of a
currency substitute with a credit feature into an
identity card by means of which the holder can gain
access to a wide range of financial services on a na­
tionwide scale, more uniform legal rules throughout
the United States will become increasingly necessary.
Consumer groups advocate greater Federal regula­
tion of credit card practices on the ground that many
historic provisions of state law are unfair to con­
sumers. Under particularly heavy attack are the
so-called “ holder-in-due-course” doctrine and the
“ waiver of defense” clause, both of which have the
17 The statute places the burden of proof upon the card issuer to
show that the use was authorized or, if the use was unauthorized,
to show that the conditions of liability set forth above have been
met. In a separate provision, the statute declares that any person
who, in a transaction affecting interstate or foreign commerce,
uses any counterfeit, fictitious, altered, forged, lost, stolen, or
fraudulently obtained credit card to obtain goods or services, or
both, having a retail value aggregating $5,000 or more, shall be
fined not more than $1,000 or imprisoned not more than five
years, or both.
18 The American Banker (October 27, 1971).

Presumably, this section is designed to increase
the consumer’s leverage by permitting him to with­
hold payment from the bank in the event of disputes
with merchants regarding products or services pur­
chased. Conceivably, however, the broad language
might be construed to render card issuers subject to
liability for tort claims arising out of use of the
merchandise. Moreover, in many situations, par­
ticularly involving interstate transactions or small
purchases, a credit card is not used to obtain credit
in the traditional sense, but instead is merely a con­
venient substitute for cash or a check. Probably no
finance charges are imposed in the vast majority of
interstate sales or sales involving small purchases
because the cardholders pay before expiration of the
“ free ride” period. It seems questionable, therefore,
whether there is any rational basis for using a
statute purportedly dealing with the regulation of
consumer credit as a means of eliminating statecreated legal rights where the transactions have only
a distant relationship, at best, to the extension of
consumer credit. This section of the proposed A ct
is under heavy fire from creditors, many of whom
argue that it would force them out of business.19
Other significant provisions of the proposed “ Fair
Credit Billing A ct” are summarized in the footnote
below.20 A n informative and extensive review of
10 The American Banker (October 28, 1971). Apart from S. 652,
and the new state statutes in Massachusetts, California, and New
Jersey referred to earlier, the Federal Trade Commission has pro­
posed a “ Trade Regulation Rule,” which would require a merchant’s
“ promissory note or other instrument of indebtedness” in a credit
sale to provide that any holder in due course who takes the in­
strument takes it subject to all claims and defenses of the mer­
chant’s customer arising out of the sale. 16 C.F.R. §433, 36 Fed.
Reg. 1211 (1971).
20 The proposed bill would also: (1) amend §127 (b) (2) of the Truth
in Lending Act by adding a requirement that the card issuer
identify on the periodic statement the “ vendors and/or creditors in­
volved” ; (2) amend §127(b) to require that periodic statements
contain an address or telephone number for use by the cardholder
in making inquiries about his billing statement; (3) require the
card issuer to acknowledge complaints about billing statement errors
within 10 days and correct the account within 30 days, or send the
cardholder an explanation with documentary evidence of the ac­
curacy of the account; (4) prohibit open-end creditors offering a
“ free ride” period from imposing a finance charge unless the billing
statement was mailed at least 21 days prior to the date payment
must be made; (5) require the creditor, in determining the balance
upon which the finance charge is computed, to reduce the opening
balance in the account at the beginning of the billing cycle by de­
ducting all payments and credits made during the cycle; (6) pro­
hibit open-end creditors from imposing minimum finance charges;
(7) prohibit credit card issuers from offsetting a cardholder’s
indebtedness against funds of the cardholder held on deposit with
the card issuer; and (8) assure the consumer of his right to refund
of any credit balance in his account.



pending Federal and state regulatory developments

operating on a national or regional basis; about 2,000

affecting the credit card industry may be found in
The Business Lawyer, 27, No. 1 (Novem ber 1971),

credit unions; and approximately 1,500 retailers.
All 50 states and the District of Columbia were rep­


resented in the sample.

The National Commission on Consumer Finance
Basic research of great potential significance for the
future of the consumer credit industry in the United
States is now in progress by the staff of the National
Commission on Consumer Finance. Created in 1968
by Title IV of the Consumer Credit Protection A ct,21
the Commission is composed of Senators John J.
Sparkman (D .-A la .), William Proxmire (D .-W is c.),
and William E. Brock (R .-T enn .) ; Representatives
Henry B. Gonzales (D .-T e x .), Leonor K. Sullivan
(D .-M o .), and Lawrence G. Williams (R .-P a .) ; and
Dr. Robert W . Johnson, Professor of Industrial A d ­
ministration, Purdue University, Douglas M. Head,
Minneapolis attorney and former Attorney General
of Minnesota, and Ira M. Millstein, New Y ork City
attorney, who



principal duty is to



. . study and appraise the

functioning and structure of the consumer finance



tions generally.”





The law requires it to report to

Congress on or before July 1, 1972, on

. . the

adequacy of existing arrangements to provide con­
sumer credit at reasonable rates.”
In an interview with this writter in W ashing­








Attorney for the Commission, and Professor Robert
P. Shay, Professor of Banking and Finance, Co­
lumbia University, and consulting economist to the

described two major


projects now in progress by the Commission’s staff.
The first is a massive survey of consumer creditors,
entitled “ Survey of Consumer Credit Volume, Out­
standings, and Rates.” Designed by Dr. Shay, the
objective of the survey is to determine the amounts
of all of the various types of consumer installment
credit outstanding in each state and the corresponding
finance charges. The initial purpose is to assess the
influence of state laws and regulations on the price
and availability of consumer installment credit. The
survey is based upon questionnaires approved by the
Office of Management and Budget, which were sent
to 2,325 commercial banks; 490 mutual savings
banks; 1,375 finance companies, including the large
nationwide sales finance companies as well as ap­
proximately 30 large, diversified finance companies
2 82 Stat. 164 (1968) as amended 84 Stat. 440 (1970).



Am ong other things, the questionnaires call for
information on the volume of consumer credit e x ­
tended during the second quarter of 1971 and the
amount of such credit outstanding on June 30, 1971.
It is understood that the response rate has been well
over 90 percent for every class of creditor except
credit unions, whose response rate has been some­
what lower.

Most of the data was collected by the

Bureau of the Census, and all of it was processed and
tabulated by that Bureau’s data processing facilities
and personnel.

It is now being analyzed by the

Commission’s staff.
The second important project is an evaluation of
the effectiveness, under the laws of the 50 states, of
creditors’ legal remedies to enforce payment of con­
sumer debt.

One objective of this survey, entitled

“ Survey






Creditors’ Remedies,” is to find out which legal
remedies of creditors are actually used and which
ones are not.

A questionnaire running to 30 legal-

size pages, also approved by the Office of Manage­
ment and Budget, has been distributed to 1,250 com ­
mercial banks, 600 credit unions, 650 finance com ­
panies, 380 retail creditors, and 300 collection

Here again, it is understood that the re­

sponse rate has been high. The data is currently
being analyzed by the Commission’s staff.
In conjunction with the gathering of data, the
Commission held public hearings in Washington,
D. C., in June of 1970, on methods used to collect
consumer debts.

In announcing the hearings, Mr.

Robert Braucher, Professor of Law at Harvard and
Chairman of the Commission at the time, stated:
“ W e believe there are widespread abuses of creditor
remedies which place a particularly harsh burden
on unsophisticated or uneducated low -in com e
families. Indications are that these abuses have
had severe economic and social consequences on
thousands of American families.” Subjects explored
at the hearings included (1 ) legal tactics or devices
that may be used to circumvent the consumer’s
ability to contest claims against him, including the
holder-in-due-course doctrine, (2 ) confessions of
judgment, (3 ) wage assignments, (4 ) postbank­
ruptcy suits, (5 ) debtors’ prisons, and (6 ) misuse
of the small claims court. Additional public hearings
were held in June of 1971 to determine the extent


of Federal and state enforcement of existing con­
sumer credit protection laws.22

in Lending A ct was enacted that year, applying
equally to commercial banks and their affiliates en­

The next step planned by the staff is the prepara­

gaged in extensions of consumer credit and to other,

tion of an econometric model that will include de­

nonbanking enterprises. The rapid expansion of un­
regulated one-bank holding companies, beginning in

mographic data of the consumer credit market in
each state. The Commission’s staff will then attempt

the spring of 1968, led to extensive changes in bank

to tie together the results of its two surveys.


holding company regulation in 1970, greatly enlarg­

particular, the staff plans to look closely at “ con­
venience and advantage” laws in many of the states,

ing the permissible range of activities for all types

which have the effect of limiting freedom of entry
into the consumer finance industry. The staff plans
to evaluate the possible effects of these laws on
availability of consumer credit, as well as rates of
finance charges for consumer credit.
Another responsibility of the Commission is to
study the adequacy of existing Federal and state en­
forcement mechanisms to prevent violations of con­
sumer credit protection laws. The Commission is
itself reviewing enforcement practices of Federal
regulatory agencies. In cooperation with the Com­
mission, the National Conference of State Bank Su­
pervisors is undertaking to study the capability of
state banking departments to enforce state laws.
The Commission’s report to Congress may be ex­
pected to comment on both Federal and state en­
forcement laws and practices, and their effectiveness.

of bank holding companies both functionally and

Although banks themselves con­

tinue to be specifically exempt by statute from the
enforcement jurisdiction of the Federal Trade Com­
mission, bank holding companies and their affiliates
may not be.
In 1970, the Fair Credit Reporting A ct was en­

Like Truth in Lending, it covered banks,

bank holding companies and other bank affiliates,
as well as nonbanking organizations, and imposed
affirmative disclosure


Credit card

usages were also brought under certain Federal re­
strictions, and more extensive legislation may be

The work of the National Commission on

Consumer Finance may lead to greatly expanded
Federal legislation in the area of consumer finance.

Concluding Comments U ntil 1968, banks and
bank holding companies had little reason to be con­
cerned about Federal consumer protection laws. The
Federal Trade Commission A ct was the principal
Federal statute dealing with prevention of unfair
and deceptive business practices, but it did not apply
to commercial banks (and still does n ot). Multi­
bank holding companies were severely restricted in
the performance of consumer credit functions, and
the activities of unregulated one-bank holding com ­
panies were only beginning to be of importance.
A combination of events commencing in 1968
drastically changed the entire situation. The Truth

Banks and bank holding companies that fail to
establish and maintain effective internal compliance
programs to deal with the broadening requirements
of Federal and state consumer protection laws may
find that the risks they have assumed far outweigh
the effort and expense they have avoided. This will
be even more probable if Congress accepts the recom­
mendation of the Board of Governors in its Annual
Report to Congress for the Year 1971 that the Truth
in Lending A ct be amended to provide for a “ good
faith” defense such as is contained in the Securities
and Exchange A ct of 1934— one which would apply
not only to the Board’s Regulation Z, but also to all
interpretations of it by the Board.23
William F. Upshaw

22 A t this hearing commercial banks and savings and loan associa­
tions were criticized by the Chairman of the Federal Trade Com­
mission, Miles W . Kirkpatrick, for their alleged failure to refuse to
discount retail installment paper not in full compliance with the
Truth in Lending Act.
As discussed in Part II, the Federal
supervisory agencies have taken positive action to call to the at­
tention of regulated financial institutions their responsibilities in
connection with dealer paper.

23 The relevant section of the Securities and Exchange Act states:
“ No provision of this subchapter imposing any liability shall
apply to any act done or omitted in good faith in conformity
with any rule or regulation of the Commission, notwithstand­
ing that such rule or regulation may, after such act or omission,
be amended or rescinded or be determined by judicial or other
authority to be invalid for any reason.”
12 U.S.C. §77s(a).

The M o n t h l y R e v i e w wishes to express its appreciation to Mr. Griffith L. Garwood, Chief,
Truth in Lending Section, Division of Supervision and Regulation, Board of Governors of the Federal
Reserve System, for his many useful suggestions and comments and for making available materials
that were most helpful in the preparation of “ Banking in the Consumer Protection Age.”



Success for the New Economic Program?
Like the economy itself, economic forecasting has
its peaks and troughs. Based solely on last year’s
forecasts for current dollar G N P, one would con­
clude that some recovery is under way in the fore­
casting accuracy cycle.
A more comprehensive
evaluation of last year’s forecasts, however, calls this
conclusion into question.
In general, last year’s forecasts were close to pre­
dicting current dollar G N P accurately, but overly
optimistic with regard to the rate of inflation. The
forecasters did not expect cost-push inflation to con­
tinue in 1971 to the extent that it did. Thus, they
overestimated the increase in both real G N P and
the index of industrial production but underestimated
the rise in the unemployment rate.
In retrospect, cost-push forces could have been
expected for 1970 and 1971, since an extraordinarily
large number of workers were due for contract re­
negotiation in those years. But the forecasters ap­
parently did not think that cost-push forces would
be sufficient to outweigh the excess capacity and
easing employment markets that resulted from the
1970 recession.
This year the forecasters are relying upon Presi­
dent N ixon’s New Economic Program to restore the
economy to a healthier rate of real growth and a
lower rate of price increase and to engender a de­
cline in the unemployment rate. The large increase
in residential construction spending in 1971 is ex­
pected to lead to rather substantial increases in con­
sumption spending for major household goods and
appliances in 1972. This rise in the demand for con­
sumer home durables, coupled with an expected high
level of domestic automobile sales due to the excise
tax cut and the lessening of import competition, is
expected to generate a 9.1% growth rate for total
durable goods expenditures. Most of the forecasters
are also predicting a good year for the steel industry
because of strong durable goods demand, rebuilding
of inventories, and lessened import competition.
The consensus of forecasts examined in this
article indicates a 1972 G N P of around $1,141.0
billion. Based upon current Department of Com­

growth of G N P throughout the year with no major
strikes expected. Inventory replenishment will be
a notable source of strength if the recovery proceeds
as expected.
The 1972 forecasts summarized here represent the
best efforts of business and academic economists
during the autumn and winter of 1971 to predict
the performance of the U. S. economy in 1972.
This article attempts to convey the general tone and
pattern of some 60 forecasts reviewed by the R e­
search Department of this Bank. Not all of them
are comprehensive forecasts, and some incorporate
estimates of the future behavior of only a few key
economic indicators. Several represent group rather
than individual efforts.

merce estimates for 1971 GN P, this figure would

ticipating an increase in the implicit price deflator

represent a gain of approximately 9.0% , which is

for G N P of around 3.6% , which would indicate a


real growth rate for G N P of almost 4.2% .








Economists are predicting a rather steady rate of


The views and opinions set forth in this
article are those of the various forecasters. N o
agreement or endorsement by this Bank is

The consensus forecast for 1971 G N P, published
in last February’s Monthly Review, was $1,049.6
billion, an increase of 7.8% over 1970. The col­
lection of forecasts ranged from a low of $1,031.0
billion to a high of $1,059.0 billion. After allowing
for expected price increases, the growth of real G N P
was predicted to account for more than half of the
7.8% rise. On the government side of the forecast­
ing spectrum, the controversial forecast made by the
Council of Economic Advisers from the now wellknown Laffer model projected a G N P of $1,065.0
billion for 1971. Latest estimates by the Depart­
ment of Commerce indicate a 1971 G N P total of
$1,046.8 billion, which is reasonably close to the
consensus forecast of the business and academic
Compared to 1970, when the seers
overestimated the G N P by $10.0 billion, and to 1969,
when they underestimated it by $18.0 billion, 1971
was a better year. A t least so far as current dollar
G N P is concerned.
In late 1970 and early 1971 forecasters were an­

In fact,

the implicit price deflator for G N P rose 4.6% , and



Unit or

Preliminary Forecast 1970/ 1971/






-0 .4




Plant and equipment expenditures ___________ ___ $ billions
Corporate profits before ta x e s ________________ ___ $ billions




Gross national product ______________________ ___
Personal consumption expenditures _______ ___
Durables ________________________________ ___
N ondurables_____________________________ ___
Services_________________________________ ___
Gross private domestic investment _________ ___
Business fixed investment _______________ ___
Residential construction _________________ _
Change in business inventories __________ ___
Government purchases of goods and services ___
Net exports of goods and services__________ ___


Private housing starts________________________ ___
Automobile sales _____________________________ ___
Rate of unemployment _______________________ ___


Industrial production index __________________ __ _ _
Wholesale price index _______________________ ___
Consumer price index _ _
__ _ _
Implicit price d efla tor______ ________________




* Figures are constructed from the typical percentage change forecast for 1972.

real G N P increased only 2.8% . Thus, although the
forecasters predicted current dollar G N P relatively
accurately, they underestimated the rate of inflation
and overestimated the rate of real growth. This type
of forecasting error is hardly a new phenomenon.
The consensus predictions have substantially under­
estimated the rate of inflation for each of the last
four years. The 1971 inflation forecast, in particular,
would have been even less accurate if the wage-price
freeze had not been ordered.
The consensus of the quarter-by-quarter forecasts
for 1971 was that current dollar G N P was expected
to rise by approximately $30.0 billion during the
first quarter, $20.0 billion in the second, $17.0 bil­
lion in the third, and $18.2 billion in the fourth.
G N P actually increased $32.4 billion, $19.2 billion,
$13.4 billion, and $19.6 billion for the four quarters,
respectively. Again, the estimates were remarkably
close to the actual quarter-by-quarter figures.
The quarterly inflation predictions of 3.9% , 3.5% ,
3.4% , and 3.1% made by the forecasters were too
low for the first half of the year and too high for
the price-controlled second half. During 1971 the

annual rate of price increase was 5.3% in the first
quarter, 4.2% in the second, 2.5% in the third, and
1.5% in the fourth.
On the consumer side, 1971 personal consumption
expenditures were expected to total $663.4 billion,
but they now appear to be $662.2 billion. Gross
private domestic investment was underestimated;
that account was predicted to reach $145.0 billion,
but it actually totaled $150.9 billion. Much of this
underestimate is attributable to the greater-than-expected upsurge in residential construction. Fore­
casters had predicted that private housing starts
would total only 1.7 million units in 1971, but they
actually totaled over 2.0 million.
W ith respect to the public sector of the economy,
government purchases of goods and services were
predicted accurately. The consensus of forecasters
expected these outlays to total $233.9 billion. Actual
spending was $233.1 billion, according to the pre­
liminary estimates.
Because it overestimated the rate of real growth
of the U. S. economy, the consensus forecast for the
average unemployment rate was overly optimistic.



The rate, predicted to average 5.5% for the year,
was actually 6.0% .
The tendency to expect a more rapid recovery was
also evident in the forecast for the index of in­
dustrial production. The predictors expected a 3.6%
increase, but the index actually fell 0.4% .
Strangely enough, the seers, having overestimated
the fall in the unemployment rate, the rate of real
growth, and the index of industrial production,
underestimated corporate profits. Pretax corporate
profits, estimated to increase 8.0% , actually rose
12.6%. If their expectations for a stronger recovery
had been correct, their corporate profits estimate
would have been even farther from the mark.
The consumer price index rose 4.3% from its
1970 average, a figure close to the consensus fore­
cast of a 4.0% rise. The wholesale price index,
however, predicted to rise 2.0% , rose approxi­
mately 3.0% .
Many of last year’s forecasters apparently thought
that the U. S. economy in 1971 would recover from
its recessionary and inflationary woes more vigor­
ously than it did. On the other hand, the consensus
of forecasters for the year before that, 1970, under­
estimated the extent of the downturn. Although this
tendency to underestimate a downturn and to over­
estimate an upturn might tempt the analyst to accuse
the business and economic forecasters of a maidenly
optimism, the more likely explanation is that years
of recession and recovery are much more difficult
to project than those of more normal growth.

G ross N a tio n a l P ro d u c t Forecasts for 1972 cu r­
rent dollar G N P are concentrated around $1,141.0
This estimate represents an approximate
9.0% yearly gain, which is somewhat more than the
7.5% advance registered in 1971. However, price
rises are expected to account for only about onethird of the anticipated increase, whereas they ac­
counted for nearly two-thirds of the 1971 increase
in current dollar G N P. The forecasts range from a
low of $1,135.0 billion to a high of $1,155.0 billion.
Most of those who made quarterly forecasts expect
G N P, measured at seasonally adjusted annual rates,
to increase by almost $26.5 billion during the first
quarter and by about $25.5 billion in each of the
three succeeding quarters.
Personal consumption expenditures are estimated
to total $717.8 billion in 1972, an 8.4% increase
compared with the 7.5% rise registered during 1971.
The forecasters expect relatively more of the 1972
increase to stem from expenditures for durable goods



Q u a rte r-b y -Q u a rte r C hanges in
Unless O th e rw is e

B illio n s o f D o lla rs
N oted

Gross National Product




















Personal Consum ption
G ross Private D om estic
Investm ent
N e t E xp orts
G overnm ent Purchases





Im plicit Price D e fla to r f





Rate of U n em p loym en t ( % )





* M edian.
f Percentage changes at annual rates.

than from nondurable goods spending. The fore­
casts call for a 9.1% increase in durables spending
and a 7.7% rise in outlays for nondurables.
Government purchases of goods and services are
expected to total $252.7 billion in 1972. This pro­
jected increase of 8.4% , larger than the 1971 gain
of 6.2% , reflects the probability that defense spend­
ing will again begin to rise.
Gross private domestic investment is expected to
rise by about 11.0% to $167.5 billion, which is only
slightly smaller than the 11.5% increase during 1971.
However, compared to the 3.1% decline in 1970, the
projected gain for 1972 represents a continuation of
the substantial recovery achieved in 1971. The
forecasters' estimates for gross private domestic in­
vestment ranged from $163.0 billion to $178.0 billion.
N o clear-cut consensus emerged, so a median figure
was chosen for use in the accompanying table. Fully
half of the forecasters’ estimates, it should be noted,
were between $166.0 billion and $169.5 billion.
The leading growth component of gross private
domestic investment during 1971 was residential
construction, which increased 33.6% from its de­
pressed 1970 level. Residential construction is ex­
pected to rise approximately 9.1% in 1972, a reduced
but still healthy rate. Business fixed investment ex­
penditures are projected to rise 7.5% , an improve­
ment over the 6.0% growth registered for 1971.
Finally, businessmen are expected to rebuild their
inventories in 1972. O f the expected $16.6 billion
increase in gross private domestic investment, $4.8
billion stems from inventory buildup. The estimates
for inventory investment ranged from $5.1 billion to
$10.1 billion.



Industrial Production M ost predictions call for
the Federal Reserve index of industrial production
(1 9 6 7 = 1 0 0 ) to average 113.2 during 1972, an in­
crease of 6.5% over the previous year. This com ­
pares with a 0.4% actual decline for 1971 and a
3.0% drop for 1970. The forecasters are expecting
increases in automobile production, steel production,
and an expansion in the production of consumer
household durables.
Construction T h e value of new construction put
in place is expected to total around $117.0 billion
or $118.0 billion in 1972, an increase of around
9.0% or 10.0% over 1971. Both private residential
construction and private nonresidential construction
are expected to do well in 1972. Private residential
construction is predicted to increase 9.1% for the
year. This forecast is considerably below the 33.6%
increase actually registered during 1971, because
much of the pent-up demand for housing appears to
have been satisfied. Private nonresidential construc­
tion is expected to increase 5.0% to 6.0% over its
1971 total. Private housing starts are commonly ex­
pected to increase only a slight 2.0% over the very
large 1971 total of 2.03 million units. The prediction
that they will remain as high as the 1971 level, how­
ever, implies that the housing industry will have
another good year.
Business Fixed Investment M ost forecasts in­
dicate that firms will put $116.3 billion in fixed in­
vestment spending in 1972. This figure represents
an increase of 7.5% over 1971. This projected in­
crease over the 6.0% rate realized in 1971 stems
from an expected moderate resurgence of investment
spending during the second half of the year. Most
of the forecasters based their predictions on the as­
sumed passage of President N ixon’s investment
tax credit.
Corporate Profits
Forecasters are far from
unanimous about the future for corporate profits, and
predictions for the growth of corporate profits before
taxes range from around 8.0% to 20.0% . Most of
the estimates, however, center around a 15.0%
growth, which would raise the total to $97.6 billion
for the year. Such a growth of corporate profits sug­
gests a more profitable year for businesses than
either 1970 or 1971. In 1971, pretax profits grew
approximately 12.6% ; in 1970 they fell 9.4% .

Unemployment T he unem ploym ent rate is p ro ­
jected to average 5.4% by most of the observers of
the 1972 scene. Individual forecasts range between
5.0% and 5.7% . The unemployment rate reached
6.1% in December 1971 and averaged 6.0% for
all of 1971. Hence, forecasters are predicting a
moderate fall in the rate.
Prices This year all forecasters are predicting a
more moderate rate of price increase.
The most
common prediction is that the implicit deflator for
G N P will increase by only 3 .2% — well below the
4.6% increase of last year. The most pessimistic of
the forecasters predicts an increase of 4.0% . The
consumer price index is expected to rise 3.1% during
the year. Predictions of the increase in this index
ranged from 2.0% to 3.5% . Wholesale prices are
expected to increase by a smaller amount, approxi­
mately 2.0% , during the year.
Quarter-by-Quarter Forecasts
Fourteen fore­
casters made quarter-by-quarter predictions for 1971.
A s indicated by the quarterly table, these forecasters
call for a fairly steady rate of increase of around
$25.0 billion per quarter in G N P measured at an­
nual rates and adjusted for seasonality. Prices are
expected to rise at an annual rate of about 3.4% in
the first quarter, 3.0% in the second, 3.3% in the
third, and 3.3% in the last. The rate of unemploy­
ment is expected to fall steadily from an average of
5.7% in the first quarter to an average of 5.1%
in the fourth.
Summary T h e forecasters for 1971 were rela­
tively close to the target in predicting current dollar
G N P for the year.
However, they rather sub­
stantially underestimated the rate of inflation, thereby
overestimating the rate of real growth. The unem­
ployment rate, expected to average 5.5% , actually
averaged 6.0% .
The 1972 consensus forecast indicates a healthy
rate of real growth, an abatement of inflation, and
a decline in the unemployment rate. These fore­
casts seem to be based on the presumption that Presi­
dent N ixon’s program will continue to show results
on the inflation front. They can be termed “ gen­
erally optimistic.” If these expectations are realized,
the economy should show more health and vigor
in 1972.


William E. Cullison


A Fifth District Review o f . . .
This analysis, prepared in December 1971 at the request of
USDA’s Agricultural Finance Branch, is based on a sample survey of Fifth District
bank agricultural specialists and on data from the U. S. Department of
Agriculture, the Farm Credit Administration, and the
Federal Deposit Insurance Corporation.

W eather’s capricious nature, continued tightening
of the cost-price squeeze, effects of present Govern­
ment farm programs, less expensive credit, and an
increase in the availability of funds for farm loans
were prime factors influencing the financial and
credit conditions of Fifth District farmers in 1971.
A full review of the situation turned up the follow ­
ing major findings.
Farmers’ cash income from
farming may well have been slightly below the im­
proved level of 1970, but their off-farm income con­
tinued to climb. Farm and family living costs also
rose further. Expenditures for capital items showed
a slight advance, as did spending for family living
items. Prices of farmland continued to rise and at
a much faster pace than in the past several years.
Farm real estate market activity remained slow but
apparently not as slow as in 1970. Farmers’ de­
mand for farm credit was strong, and the availability
of bank loan funds improved. Bankers’ loan policies
were generally about the same as those a year earlier.
Farm Income and Costs Location and type of
farming determined the level of farm income more
than ever in 1971. Many livestock farmers, espe­
cially poultry and hog producers, experienced a poor
year. Crop farmers had widely different experiences.
Viewed as a whole, it seems quite likely that total
District farm income was moderately below that in
Bankers’ views concerning farm income in
1971 relative to farm income in 1970 varied con­
siderably but indicated a slightly improved level over­
all. Even if gross cash income from farming records
a modest increase, the gain will probably not be high
enough to offset the persistent rise in farm produc­
tion expenses.
Lower livestock prices, particularly for poultry
and hogs, were the major reason for the reduced
level of income from livestock and livestock products
in 1971. Livestock prices were below year-earlier
levels in all District states, in fact, with average de­



creases ranging from 2 % in Maryland to 8 % in
the Carolinas. Market supplies of milk and cattle
and calves were about the same as in 1970. Broiler
supplies were about 5% smaller, and supplies of
eggs were down around 2 % . H og marketings, on
the other hand, were 13% larger, and the number
of turkeys marketed was up some 4 % .
Farmers’ January-October cash receipts from sales
of livestock and livestock products were 5% below
those in the comparable period of 1970. Losses were
recorded in all District states and ranged from 1%
in Virginia to 8 % in North Carolina. The produc­
tion and price indications since October, coupled
with the fact that more than four-fifths of all live­
stock income is normally received during the first
ten months of the year, suggest that the reduction
in livestock receipts for the entire year may ap­
proximate that of the January-October period.
The 1971 growing season was generally good, and
farmers had prospects for excellent harvests. Yields
per acre were up, and, except for tobacco, acreages
for harvest were mostly larger because of the changes
in Government farm programs. During the height
of the harvesting season, however, Hurricane Ginger
struck, follow ed by four weeks of heavy rains.
Damage to the cotton, corn, and soybean crops was
high, and losses suffered b y the V irginia-N orth
Carolina peanut crop were of drastic proportions.
Seven per cent of the peanut acreage had to be
abandoned, yields dropped 25% below 1970 yields,
and total production was down 31% .
Despite the cotton, corn, and soybean losses re­
sulting from the poor harvesting conditions, produc­
tion of these crops was well above that in 1970—cotton by 8 % , corn by 2 3% , and soybeans by 15%.
Output of each of the small grains showed impres­
sive gains, and the pecan crop was five times the
small 1970 crop.

Other production increases were:

Irish potatoes, 7% ; hay, 6 % ; and apples, 3% .




tobacco, peach, and sweet potato crops were smaller,
however— tobacco by 7 % ; sweet potatoes, 8 % ; and
peaches, 11%.
W ith the price of corn the chief exception, crop
prices generally proved to be a major source of
strength in 1971. Except in W est Virginia, where
prices were lower, crop prices averaged moderately
higher in Maryland, Virginia, and North Carolina
and were up some 4 % in South Carolina. Fluecured tobacco prices were the highest in history,
averaging some 8 % above those a year earlier.
Prices of peanuts, soybeans, and cotton were also
District farmers’ cash receipts from crop market­
ings for the first ten months of 1971 were some 2 %
larger that at the same time the previous year. In
view of overall crop production prospects and the
generally favorable price situation which has pre­
vailed, it would seem that total crop receipts for the
year as a whole might well be on the plus side. The
increase will help to offset a good part of the re­
duction in livestock income.
Farm production expenses appear to have kept up
their record-setting pace in 1971. Prices paid by
farmers for commodities and services, including in­
terest, taxes, and farm wage rates, advanced almost
5 % — about the same as in 1970.
Many farmers’
costs were further increased because they had to buy
additional inputs. Nearly two-fifths of the respond­
ing bankers, in fact, held the view that the volume
of purchased inputs had risen. The increase appears
to have been somewhat larger than in 1970.
Income from off-farm employment— an important
source of buying power for farm families— con­
tinued to increase. This belief, expressed by threetenths of the replying bankers, applied to both farm
operators and to other members of farm families.
The pace of this upward trend in nonfarm earnings
appeared to have tapered off in some localities, how­
ever, since some bankers reported slight declines in
this source of income. The declines, which applied
chiefly to the off-farm income of farm family mem­
bers other than the operator, resulted in several in­
stances from the closing down of industrial plants
in rural communities.
Farmers’ Savings and Spending T h e financial
savings and reserves of Fifth District farmers at
year’s end appeared, on balance, to be slightly larger
than a year earlier. This situation no doubt resulted
from several factors.

W ith the lowering of interest

rates, for example, farmers generally were not as re­
luctant to borrow as they were in 1970 and hence
did not draw down their savings to meet current

operating and capital needs.
Still others reduced
their expenditures for machinery and equipment, fa­
cilities, and other capital goods.
Farmers’ spending for family living purposes con­
tinued to advance. Like their urban counterparts,
farmers were again confronted with a general in­
crease in the cost of living. The farm family living
index— a measure of the prices farm families pay for
food and tobacco, clothing, household operation items
and furnishings, house building materials, and so on
— rose some 4 % during 1971, the same as in 1970.
W ith this increase and farmers’ spending patterns
generally, it is not surprising that 65% of our survey
responses indicated that farmers’ expenditures for
family living items were slightly higher than a year
earlier. Most of the remaining respondents felt that
farmers had held this type spending to about the
same level as in 1970.
Farmers also stepped up their investment in capital
goods in 1971. Capital outlays for machinery and
equipment appear to have been larger than those for
facilities and other capital goods, however. Farmers’
purchases of machinery and equipment were re­
ported to be larger— though just slightly so— than
in 1970 by 45% of the replying bankers. A like
proportion were of the opinion that there had been
little change in this kind of spending, while 10%
expressed the belief that machinery and equipment
purchases had declined. Spending for facilities and
other capital goods was believed to have been slightly
larger by 35% of the respondents, one-half felt that
purchases of this nature had changed little, and the
remaining 15% thought that there had been a slight
decline. Much of the increase in capital expenditures
in 1971, which is in sharp contrast to the situation in
1969 and 1970, can doubtless be attributed to the
lower cost and increased availability of credit.
Farm real estate prices in the District as a whole
picked up momentum during the year ended March 1,
1971, rising slightly more than 8 % . The rate of in­
crease marked the fastest year-to-year advance since
1967 and compared with only a 3 % gain nationally.
Market values moved upward in all District states,
with increases of 8 % or better occurring in all
states except W est Virginia. There the advance was
about 4 % .
Though no official state estimates of
farmland prices have been released since March 1,
our banker respondents, when asked how prices of
farmland for calendar year 1971 compared with
those a year earlier, indicated for the most part
that the uptrend in prices had continued.
On balance, activity in the farm real estate market
in 1971 appears to have remained rather slow, al­
though slightly renewed activity occurred in some



availability of loan funds, the District’s farmers ac­
celerated their use of both long-term and short-term
credit as they sought to catch up on capital improve­
ments and meet the seemingly ever-increasing costs
of production inputs. A s a result, short-term farm
debt grew at a faster pace than a year earlier, both
at commercial banks and at production credit as­
sociations. There was some slackening in the growth
of long-term debt held by the Federal land banks.
Commercial banks, however, resumed more vigorous
activity in the farm-mortgage lending field after hav­
ing cut back in 1970. The resulting increase in the
dollar volume of long-term loans held by banks was
more than double the amount by which the growth
in Federal land bank loans was reduced. (T h e gain
in the volume of bank held farm real estate loans
would have been even larger had the method of re­
porting Farmers Home Administration insured notes
on the Call Report not been changed as of m id-1971.
Because of this change, F H A insured notes are no
longer reported as farm real estate loans.)
Our survey findings showed that the overall de­
mand for farm credit strengthened in 1971.
tistical evidence supports these findings.
Farmmortgage loans held by all the District’s insured com ­
mercial banks in m id-1971, for example, totaled
$304.7 million, around 5% or $13.9 million above a
year earlier. This increase contrasts with a reduc­
tion of roughly 1% or $1.7 million in bank held
long-term farm debt during the year ending at mid­
year 1970. In comparison, outstanding loans held
by the Federal land banks on June 30, 1971 amounted

areas. In certain instances, very little farmland was
reported to be for sale. Purchases of farmland for
farm enlargement were apparently not quite as slow'
as in 1970. Slight declines in the number of en­
largement purchases were indicated by only one-fifth
of the bankers surveyed in 1971, compared with 65%
a year earlier. On the other hand, one-fourth of the
survey responses noted an increase, mostly slight, in
the purchase of land for farm expansion, while only
5% reported such gains in 1970. The remaining
55% believed there had been little change in pur­
chases of this type.
Buying farmland for nonfarm purposes seems to
have generated a little more market activity than
purchases for farm enlargement; however, market
demand overall was apparently somewhat below that
of the previous year. One-third of the responding
bankers reported slight increases in buying for nonfarm reasons as against one-fourth who noted gains
in purchases for farm enlargement. The 33% who
felt increases in nonfarm purchases had occurred in
1971 compared with 40% who believed likewise in
1970. In contrast, 27% of the 1971 respondents,
about the same proportion as a year earlier, indicated
slight declines in the purchase of farmland by non­
farm buyers.

Generally, quite a few who bought

farmland for reasons other than farm enlargement
were said to have done so for speculative purposes.



Farm ers’


credit showed renewed strength in 1971.


W ith the

softening in interest rates and an increase in the



United States and Fifth District by States, June 30, 1971 com pared w ith June 30, 1970
F a rm -M o rtg a g e
S ta te

A ll Insured
C om m e rcial Banks

D eb t

N on -R ea l-E sta te Farm D eb t

Federal Land Banks

A ll In su re d
C o m m e rc ia l Banks

P ro d u ctio n C re d it
A sso cia tio n s

Am ount
O u ts ta n d in g

C ha n g e
fro m

Am ount
O u ts ta n d in g

C ha n g e
fro m

Am ount
O u ts ta n d in q

C ha n g e
fro m

Am ount
O u ts ta n d in g

C ha n g e
fro m

$ M illio n

A re a

Per C ent

$ M illio n

Per C ent

$ M illio n

Per C ent

$ M illio n

Per C ent


+ 1 .4





+ 10.4

M a r y la n d *


+ 8.6


V ir g in ia
W e s t V ir g in ia


+ 7.1




+ 6.6





+ 5.3
- 0 .7

N o rth C a ro lin a

7 6.5

- 1 .1


+ 11.3


+ 7.2


+ 20.7

S outh

2 8.9

+ 2.8





-3 .6


+ 17.2


+ 4.8

5 24 .0




+ 4.1


+ 16.6


-1 .5





+ 8.8


+ 17.1

F ifth

C a ro lin a
D istrict

U n ite d S ta te s **

* Includes D is tric t o f C o lu m b ia .
N o te :

+ 10.2

* * States a n d o th e r area s.

D a ta m a y n o t a d d to to ta ls because o f ro u n d in g .
Federal D ep o sit In su ra nce C o rp o ra tio n a n d Farm C re d it A d m in is tra tio n .




to $524.0 million for a gain of 9 % or $43.8 million
during the same 12-month period.
The increase,
however, was lower than the 12% or $49.6 million
gain recorded by the Federal land banks during the
preceding 12 months.
Non-real-estate farm debt outstanding at District
banks at midyear 1971 totaled $352.9 million. The
loans outstanding were up 4.1% or $13.8 million,
compared with a gain of 3.8% or $12.5 million
during the year ended in m id-1970. The volume of
non-real-estate debt held by the P C A ’s, on the other
hand, amounted to $446.8 million for an increase of
17% or $63.7 million during the same 12 months.
The gain in PC A loans compares with the 15% or
$48.8 million upturn recorded by the P C A ’s during
the 12-month period ended in m id-1970.
The number of farmers borrowing from com­
mercial banks dropped slightly, primarily because of
fewer farmers. But the average size farm loan in­
creased again, and in a good many cases by a con­
siderable amount. Bankers’ farm loan repayments,
on balance, were better than in 1970, and the num­
ber of delinquencies was generally lower. Farm loan
renewals wrere down, but only moderately so.
Bankers’ loan policies or practices, for the most
part, were about the same as a year earlier, or gen­
erally tight. One-fifth of the respondents indicated,
however, that they adopted more lenient policies
during 1971. Bankers in general continued to weigh
heavily good management ability and repayment
capacity when evaluating loan requests.
Bank funds available for lending to farmers in
1971 were reported to have been larger than in 1970
by 55% of the bankers surveyed. The remainder
indicated that their available funds had been about
the same as in the previous year. Without excep­
tion, all bankers said they had not found it necessary
to turn down farm loan applications because of lack
of funds.
Fifty-five per cent of the sampled banks indicated
that they had had requests for farm loans from cor­
porations during 1971. Of those replying in the af­
firmative, 18% said their requests came from family
farm corporations, 27% indicated they came from
other types of corporations, and 55% pointed out

Farm Financial and Credit Outlook for 1972 On
balance, some improvement in farm income is an­
ticipated in 1972. Assuming that the weather will
be average or better during both the growing and
harvesting seasons, one-half of the replying bankers
looked for an increase— primarily slight— in income
from farming, two-fifths expected little change, while
the remainder foresaw a decline.
Farm operating costs appear likely to increase
further. This view was held by four-fifths of the
survey respondents. The remainder believed there
would be little change.
O f those anticipating a
further rise in farm costs, the majority felt that the
increase over 1971 would be slight.
Farmers’ demand for credit in 1972 is expected
to be about the same as, or slightly larger than, that
in 1971. Half of the participating bankers, in fact,
looked for farm loan demand to continue at roughly
the same level as in the current year. The other half
anticipated some slight step-up in demand. The e x ­
pected increase in the costs of farm production items
will no doubt add to the credit demand.
The level of farmers’ spending and investment in
1972 may well be moderately higher than a year
earlier. This was the opinion of two-fifths of the
survey participants. The remaining three-fifths be­
lieved farmers will hold their spending and invest­
ment to about the same level as in 1971.
The outlook indicates that bank funds for farm
loans will be more readily available to farm borrowers
in 1972 than in 1971. This indication applies more
to funds for short- and intermediate-term loans than
to those for long-term loans. Some increase in the
availability of funds for long-term farm loans was
anticipated by 16% of the banker respondents, howrever. Despite the expected increase in available loan
funds, bankers emphasized that the more credit­
worthy farmers with sound farming operations would
have the best chance of obtaining needed loans.
Basically, little change in bankers’ current policies on
farm loans, already said to be fairly restrictive, is
expected for 1972. A tally of survey responses re­
vealed that although 85% of the bankers indicated
they would adhere to about the same policies as in
1971, the remaining 15% said their loan policies

that the requests had come from both kinds.

would be more lenient.

O ver­

all, there seemed to have been little change from

The somewhat softer interest rates that banks

1970, either in number or amount, in the requests

charged on farm loans in 1971 can be expected to

of corporations for farm loans. Where changes were

prevail in 1972.

indicated, they were in an upward direction.


according to survey results, were 8 % for long-term

the whole, a higher proportion of family farm cor­

loans and a range of 7y2c to 8 % for both short/o

The most prevalent rates quoted,

porations increased their requests for farm loans than

and intermediate-term loans. But interest rates cited

did other types.









ranging from 7% to 9 % were quoted for long-term

1971, most farm owners are in an improved equity

loans, from 7% to 8 % for short-term loans, and

position as they enter the new year.

from 7% to 10% for intermediate-term loans.

come position of farmers varies considerably, how­


The cash in­

the question “ What trends in interest rates do you



farmers to improve their debt position by paying off


seven-tenths of the responses indicated






Better incomes in 1971 enabled a good many


old debts. But unfavorable 1971 returns reduced the

softening, and the remaining one-tenth expected an

financial position of farmers in some locations—

upward trend.

especially in the Coastal Plains of North Carolina

The general debt and financial position of Dis­

and Virginia.

Many of these farmers were unable

trict farmers overall apparently will not be sub­

to meet their loan obligations in 1971 and will need

stantially different in 1972 from that in 1971.

W ith

to borrow heavily if they are to continue in farming.

the advance in the market values of farmland in

Sada L. Clarke

The Federal Reserve Bank of Richmond is pleased to announce the publication of F i f t h D i s ­
F i g u r e s — 1971 Edition and B u s i n e s s F o r e c a s t s f o r 1972.
F i f t h D i s t r i c t F i g u r e s is
a compilation of economic statistics on Fifth District States and Standard Metropolitan Statistical
Areas, as well as on the United States. B u s i n e s s F o r e c a s t s is a compilation of representative
business forecasts, with names and details of estimates, for the coming year. Both publications
are available free of charge from this Bank. Please address requests to Bank and Public Rela­
tions, Federal Reserve Bank of Richmond, P. 0 .B ox 27622, Richmond, Virginia 23261.

t r ic t