cial Code from our statute books. We fought hard to get that code into our statute books. I think it would be better to draft it by stating:

1.104 (1) The following acts are hereby repealed [setting out the particular acts or provisions in such acts to be repealed]

(2) This act does not repeal the Uniform Commercial Code being §§ 28:1-101 et seq. of the District of Columbia Code, but in respect to transactions falling within the provisions of this act, this act shall control in so far as such provisions are inconsistent with those of the Uniform Commercial Code.

(3) Except as provided in this section all acts and parts of acts inconsistent with this act are hereby repealed.

Finally, I would like to put in evidence an analysis of the two approaches adopted by S. 316 and S. 2589, S. 2590 and S. 2592, prepared by Mr. Kass for the ad hoc committee.

Senator TYDINGS. Without objection, we will insert that in the record at this point.

(The document entitled "Ten Principles" follows:)

TEN PRINCIPLES

(An analysis of Senator Morse's bill (S. 316) and Senator Tydings' bills (S. 2589 2590, 2591, and 2592) relating to consumer protection legislation)

The Ad Hoc Committee on Consumer Protection has endorsed the following ten principles as the minimum protection which any consumer credit legislation must contain:

1. Standardization of terms and form of retail installment contracts, including full disclosure of terms and enumeration of rights and remedies of the parties.

a. Senator Morse-would authorize the Commissioners (the City Council) to make and enforce such regulations as they deem appropriate to accomplish principle #1. (§ 4a (1)−(10)).

b. Senator Tydings-specifically spells out these points in the legislation itself. Generally speaking, the disclosure requirement roughly parallels the disclosure format of the Truth-in-Lending Bills, with some modifications. Revolving charge account agreements are subject to annual rate disclosure. 2. Reasonable limitation of finance charges and other fees, costs and penalties. a. Senator Morse-contains no provision limiting finance charges, or other fees.

b. Senator Tydings-limits finance charges, delinquency charges, court costs and attorney's fees that may be imposed on consumers. (S. 2590.) This bill would require that interest charges not exceed 20% per annum for the first $500, and 16% per annum for all debts above that amount. Revolving charge account agreements (open end credit plans) are limited in that service charges can not exceed 12% per month on the unpaid balances not exceeding $500, nor 1% per month on unpaid balances exceeding $500.

3. Provision that the only collateral for a contract shall be the goods covered by the contract. (Ora Lee Williams clause.)

a. Senator Morse-requires this in § 8.

b. Senator Tydings—§ 4.104 (S. 2589) is identical to the Morse proposal. 4. Regulation of allocation of payments to buyer's several contracts with one seller so that first contract will be paid off at original rate and each subsequent contract will be paid off in turn.

a. Senator Morse-provides that Commissioners (City Council) shall have authority to issue regulations governing this principal (§ 4a(9)).

b. Senator Tydings no provision made, since prohibition against add-on security clauses (§4.104) could be held to prohibit formal consolidation of obligations. Consolidation of payments for convenience is not prohibited, as long as the consolidation does not violate § 4.104 or S. 2590, relating to finance charges.

5. Prohibition of "add-on" contracts and "balloon notes".

a. Senator Morse-Balloon notes are covered in § 4(a)(6), where Commissioners (City Council) are authorized to issue regulations requiring that payments, other than the down payment, under retail installment contracts, be made in substantially equal amounts and at regluar intervals.

"Add-on" contracts are prohibited by § 8 (see principle 3).

b. Senator Tydings-language for both "balloon notes" and "Add-on" contracts is similar to Senator Morse. The main difference between the two bills is that Tydings does not leave this up to the City to regulate, but specifically controls the problems from the Congress (§ 4.103(B); § 4.104). 6. Strict regulation of installment selling by salesmen who solicit buyers in their homes, including licensing of salesmen, clear labeling of cash price, and requirement that cash price be same as that for same article in seller's store.

a. Senator Morse-the bill is regrettably silent on this principle.

b. Senator Tydings-this principle is not covered.

7. Right of buyer to cancel contract prior to delivery of goods or within a specified time, such as 48 hours.

a. Senator Morse-no such provision.

b. Senator Tydings-this is the subject of S. 2591. Where door-to-door solicitations result in sales, a buyer is given a three-day "cooling off" period in which to cancel his contract at no loss to himself. Exceptions include:

(1) home-improvement sales contracts-cancellation by buyer permitted within three days or before good-faith performance of any services,

whichever is earlier.

(2) buyer must return the goods to seller if contract is cancelled, and has duty to take reasonable care of the goods in his possession prior to cancellation and until the tender to seller.

8. Provision that where installment contract is sold by the seller to finance company or bank, the installment buyer's rights and defenses will be good against the finance company or bank (e.g., breach of warranty). This would affect the traditional holder in due course concept, (h-d-c).

a. Senator Morse-bill adopted a certification procedure, whereby the third party taking a note cannot enforce it as a h-d-c, unless the retail installment contract is accompanied by the buyer's certification that he has received the goods purchased and that they appear to conform to his contract. A note-accompanied by a properly signed certificate is fully negotiable and the assignee enjoys the position of h-d-c. (§ 9b).

b. Senator Tydings-§ 4.102 of S. 2589 provides that third parties shall take instruments arising in connection with retail installment transactions subject to all defenses which the buyer could raise as against the seller. This provision, for practical purposes, eliminates the h-d-c concept in retail installment sales transactions. It does not limit a seller's ability to obtain financing, however, because the instrument remains assignable.

9. Limitation of secured party's right to accelerate payments and/or repossess collateral.

a. Senator Morse

(1) acceleration of payments-§5 permits this only in the case of a default in payment or performance by the buyer, or on the same grounds which would authorize an attachment before judgment, i.e.:

(a) buyer is evading service of ordinary process;

(b) buyer has removed or is about to remove some or all of the property from the District;

(c) buyer has assigned.. or about to assign his property with intent to hinder, delay or defraud his creditors;

(d) buyer fraudulently contracted the debt or incurred the obligation.

(2) repossession-§ 11 limits the demands which may be made on the defaulting buyer for expenses which do not exceed the amount realized from the disposition of the collateral. The section provides, however, that nothing in it is to be construed to relieve the debtor of liability for reasonable costs in connection with the collection of a deficiency allowed to be recovered under the Act.

b. Senator Tydings—

(1) acceleration-basically same as Morse proposal, but need substantial default in payment of performance by buyer to permit acceleration of indebtedness (§4.103 (A)—S. 2589).

(2) repossession-in order to give reasonable protection to the buyer's equity in rapidly depreciating consumer goods, the seller is given an election of alternative remedies:

(a) repossession without subsequent deficiency judgment, or

(b) action on the unpaid balance without retaking the goods. (§ 6.101-106, S. 2589).

10. Limitation of amount of deficiency judgment after forced sale (see discussion in #9).

In addition to these ten principles, Senator Tydings' bills would accomplish the following:

1. S. 2589 would create a D.C. Department of Consumer Protection. Such a Department would be created under the Act, for purposes of:

(a) administering and enforcing the Act;

(b) conducting studies and investigations into consumer problem areas; (c) conducting educational programs.

2. S. 2592 provides that security interests in real property-such as mortgages or deeds of trust-can only be foreclosed through court proceedings.

Presently, in the District of Columbia—as developed by the recent Washington Post series on second mortgages-automatic foreclosures are common and often work to the extreme disadvantage of the homeowner. Under S. 2592, such automatic foreclosures would be prohibited, and the homeowner would be given his day in court to protect himself and his interests.

Although the Washington community-business and otherwise-will generally support the four bills, the following areas will be hotly contested:

1. elimination of the holder-in-due-course concept;

2. cancellation rights in door to door sales contracts;

3. regulation of finance charges.

BENNY L. KASS.

Senator TYDINGS. If you would submit language for the proposed amendments, we would be delighted to have it. We appreciate very much your being here.

Mr. GUTTMAN. Thank you very much.

Senator TYDINGS. We will have a 2-minute recess. (Short recess.)

Senator TYDINGS. We will reconvene the hearing.

Our next witness is Mr. Frank A. Gunther, chairman of the Law and Legislative Committee for the District of Columbia Bankers Association.

We will be glad to hear from you now.

We are delighted to welcome you, Mr. Gunther.

STATEMENT OF FRANK A. GUNTHER, PRESIDENT, SECURITY BANK, AND CHAIRMAN, LAW AND LEGISLATIVE COMMITTEE FOR THE DISTRICT OF COLUMBIA BANKERS ASSOCIATION

Mr. GUNTHER. Mr. Chairman, I am Frank A. Gunther, president of Security Bank and chairman of the Law and Legislative Committee for the District of Columbia Bankers Association.

I was not aware that S. 316 was up for consideration at this hearing. I would like to say that I was privileged, as a representative of the District of Columbia Bankers Association to participate in a number of conferences over a series of months in the Corporation Counsel's office, and we arrived at what we thought was a series of compromises in putting together the divergent views of what we thought was a pretty good bill. And in the form it is, we feel it would be a workable bill. However, I would like to direct my statement to S. 2589.

First I wish to make it clear that our association is wholeheartedly in accord with the intent of this bill, as set out in section 1.101 (B). Since the Washington banks sell only banking services and, to my knowledge, have not been accused of the kinds of activities which this bill is intended to correct, the banks do not have a direct interest.

There are, however, certain sections of the bill which would appear to make quite difficult the discounting of retail paper arising from installment sales of consumer goods and services for the merchants or others who furnish services. Since we feel that it may be farily presumed that a majority of merchants, home improvement contractors, and other suppliers of retail services doing business in Washington to operate in an ethical manner and are not guilty of fraud and deceit, fraudulent advertising, or reprehensible sales, credit, and collection practices, the subcommittee might wish to assess the effect of some of the provisions of this bill, as written, upon the reputable type of entrepreneur.

I refer particularly to the following sections:

"4.102-Negotiable Instruments Prohibited": Normally, negotiation of an instrument, payable to order or bearer, arising out of a retail transaction, would not cut off any right of action or defense which the buyer may have against the seller. The heading of this section, however, and the wording seem to indicate that a discounting bank, due to lack of negotiability, would not be a holder in due course, with the unrestricted right to proceed against the buyer who executed the note. I call the attention of the subcommittee to the fact that, as of June 30, 1967, Washington banks held retail paper amounting to $42,413,000; and that if this legislation including provisions adversely affecting negotiability, this important segment of the Washington banking business will probably be diminished. Whatever damage results will fall primarily on the ethical sellers with small or moderate volume and on the people who do business with them in good faith. Generally speaking, the large department store and chains do not discount retail paper with banks, nor, as a matter of fact, do the types of merchants and other operators which this legislation is intended to reach.

"Section 3.107-Completion Certificate Invalid Unless True": It appears the imposition of very severe penalties against the seller who accepts a signed completion certificate would be a more practical way in which to handle a situation wherein the buyer is induced to sign when improvement or construction work has not actually been completed. This section seems to say that in no case could the purchaser of home modernization or improvement people trust the authenticity of a signed completion certificate. Also, in this type of work, I am informed that there are frequently honest differences of opinion as to when a job has been completed in every detail.

Senator TYDINGS. As a practical matter, I speak as one who represented banks when I practiced law. When it comes to these papers without recourse, which you are acquiring from home-improvement operators, we have in many types of industries the requirement that reserve funds be set aside so that the bank never gets in on something like that. Is that not true?

Mr. GUNTHER. That is true in some banks. I can only speak for my own bank, because I am not aware of the details of operation of the other banks here. We buy no paper without recourse, but we do not set up reserves.

Senator TYDINGS. I know that insofar as this legislation is concerned, it would not affect your bank.

Mr. GUNTHER. I am talking on behalf of the combined banks here. I might say that out of that $42 million in retail discount paper they hold, that about $14 million of it is without recourse, and twothirds of it is with recourse.

Senator TYDINGS. But even of that $14 million without recourse, is that not with longstanding accounts of consumers having substantial balances in your own bank?

You say that in your bank you do not have those. With others, however, from practical banking experience, would you not unless you have a longstanding business relationship with them, require recourse?

Mr. GUNTHER. We would. Some of the banks buy without recourse, and, probably, do set up reserves out of the discount factor, and, perhaps, are pretty well protected in that way.

Senator TYDINGS. So that, actually, in this case, the purchaser of the paper is protected?

Mr. GUNTHER. With or without recourse, the bank should have the right, as a holder in due course, to proceed against the maker of the note.

Senator TYDINGS. Regardless of how much is involved?

Mr. GUNTHER. I would say that the law now contains adequate remedies for the buyer against the seller. A reputable neighborhood seller of hard goods may discount $100,000 worth at a bank and have a net worth of $25,000. Obviously, he would not be good for all of the paper that he discounts, but the occasional notes that goes bad he, presumably, could take it up.

Senator TYDINGS. Could you give me a breakdown of the $42 million: how much of it is good with recourse-that is, with recourse and how much is without recourse, and then a breakdown of the balance of $14 million, how much they require as a reserve balance? Mr. GUNTHER. I think we can obtain that information for you, but I do not have it available here.

Senator TYDINGS. That would be very helpful, Mr. Gunther. (The information follows:)

Hon. JOSEPH D. TYDINGS,

SECURITY BANK, Washington, D.C., February 16, 1968.

Chairman, Subcommittee on Business and Commerce, Senate District Committee, U.S. Senate, Washington, D.C.

DEAR SENATOR TYDINGS: In the course of my testimony for the District of Columbia Bankers Association before your Subcommittee, December 12, 1967, on S. 2589, I mentioned that the Washington banks hold approximately $42,413,000 of retail paper discounted. This is exclusive of automobile paper. Several of the banks have found it difficult to supply an additional breakdown of this figure, but applying the percentages reported by banks of over $33,000,000 of such paper, it appears that approximately $9,000,000 is with recourse to dealers, with the remainder ($33,413,000), without recourse to dealers.

I trust that this information will meet your request for a further breakdown. Sincerely yours,

FRANK A. GUNTHER,

Chairman, Law and Legislative Committee for the District of Columbia Bankers Association.

Mr. GUNTHER. "Section 6.105-Recovery of Deficiency Prohibited": If the proceeds of the sale of repossessed property are not sufficient to retire in full the indebtedness incurred in connection with