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Full text of "H.R. 1963, the Postmark Prompt Payment Act of 1995 : hearings before the Subcommittee on the Postal Service of the Committee on Government Reform and Oversight, House of Representatives, One Hundred Fourth Congress, first and second session, on H.R. 1963 ... October 19, 1995, and February 28, 1996"

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H.R. 1963, THE POSTMARK PROMPT PAYMENT 
ACT OF 1995 

Y4.G74/7:P 84/19 

H.R. 1963, The Postnark Pronpt Payn... 

BEFORE THE 

SUBCOMMITTEE ON THE POSTAL SERVICE 

OF THE 

COMMITTEE ON GOVERNMENT 

REFORM AND OVERSIGHT 
HOUSE OP REPRESENTATIVES 

ONE HUNDRED FOURTH CONGRESS 

FIRST AND SECOND SESSIONS 
ON 

H.R. 1963 

TO AMEND TITLE 39, UNITED STATES CODE, TO PROVIDE THAT THE 
PAYMENT OF A BILL, INVOICE, OR STATEMENT OF ACCOUNT DUE, IF 
MADE BY MAIL, SHALL BE CONSIDERED TO HAVE BEEN MADE ON 
THE DATE AS OF WHICH THE ENVELOPE WHICH IS USED TO TRANS- 
MIT SUCH PAYMENT IS POSTMARKED 



OCTOBER 19, 1995, AND FEBRUARY 28, 1996 



Printed for the use of the Committee on Government Refoinfa'atid Oversight 




^^3 2 m? 



U.S. GOVERNMENT PRINTING OFFlM ' 0?.?O? i r% 
22-103 CC WASHINGTON : 1996 \: ' 



For sale by the U.S. Government Printing Office 
Superintendent of Documents, Congressional Sales Office. Washington, DC 20402 
ISBN 0-16-053895-5 



H.R. 1963, THE POSTMARK PROMPT PAYMENT 
^' ACT OF 1995 



^ 



Y4.G74/7:P 84/19 

H.R. 1963, The Postnark Pronpt Payn. 



^INGS 



BEFORE THE 

SUBCOMMITTEE ON THE POSTAL SERVICE 

OF THE 

COMMITTEE ON GOVERNMENT 

REFORM AND OVERSIGHT 
HOUSE OP REPRESENTATIVES 

ONE HUNDRED FOURTH CONGRESS 

FIRST AND SECOND SESSIONS 
ON 

H.R. 1963 

TO AMEND TITLE 39, UNITED STATES CODE, TO PROVIDE. THAT THE 
PAYMENT OF A BILL, INVOICE, OR STATEMENT OF ACCOUNT DUE, IF 
MADE BY MAIL, SHALL BE CONSIDERED TO HAVE BEEN MADE ON 
THE DATE AS OF WHICH THE ENVELOPE WHICH IS USED TO TRANS- 
MIT SUCH PAYMENT IS POSTMARKED 



OCTOBER 19, 1995, AND FEBRUARY 28, 1996 



Printed for the use of the Committee on Government Refontt find sQyersight 




^^3 2 1997 



U.S. GOVERNMENT PRINTING OFFICE "^fir-^.^ 
22-103 CC WASHINGTON : 1996 (] / (P""" 



For sale by the U.S. Government Printing Office 
Superintendent of Documents, Congressional Sales Office, Washington, DC 20402 
ISBN 0-16-053895-5 



COMMITTEE ON GOVERNMENT REFORM AND OVERSIGHT 



WILLIAM F. CLINGER, Jr., Pennsylvania, Chairman 



BENJAMIN A. OILMAN, New York 
DAN BURTON, Indiana 
J. DENNIS HASTERT, IlUnois 
CONSTANCE A. MORELLA, Maryland 
CHRISTOPHER SHAYS, Connecticut 
STEVEN SCHIFF, New Mexico 
ILEANA ROS-LEHTINEN, Florida 
WILLL\M H. ZELIFF, Jr., New Hampshire 
JOHN M. McHUGH, New York 
STEPHEN HORN, CaUfomia 
JOHN L. MICA, Florida 
PETER BLUTE, Massachusetts 
THOMAS M. DAVIS, Virginia 
DAVID M. Mcintosh, Indiana 
JON D. FOX, Pennsylvania 
RANDY TATE, Washington 
DICK CHRYSLER, Michigan 
GIL GUTKNECHT, Minnesota 
MARK E. SOUDER, Indiana 
WILLIAM J. MARTINI, New Jersey 
JOE SCARBOROUGH, Florida 
JOHN B. SHADEGG, Arizona 
MICHAEL PATRICK FLANAGAN, lUinois 
CHARLES F. BASS, New Hampshire 
STEVEN C. LaTOURETTE, Ohio 
MARSHALL "MARK" SANFORD, South 

Carolina 
ROBERT L. EHRLICH, Jr., Maryland 



CARDISS COLLINS, Illinois 
HENRY A. WAXMAN, CaUfomia 
TOM LANTOS, California 
ROBERT E. WISE, Jr., West Virginia 
MAJOR R. OWENS, New York 
EDOLPHUS TOWNS, New York 
JOHN M. SPRATT, Jr., South CaroUna 

LOUISE Mcintosh slaughter. New 

York 
PAUL E. KANJORSKI, Pennsylvania 
GARY A. CONDIT, CaUfomia 
COLLIN C. PETERSON, Minnesota 
KAREN L. THURMAN, Florida 
CAROLYN B. MALONEY, New York 
THOMAS M. BARRETT, Wisconsin 
GENE TAYLOR, Mississippi 
BARBARA-ROSE COLLINS, Michigan 
ELEANOR HOLMES NORTON, District of 

Columbia 
JAMES P. MORAN, Virginia 
GENE GREEN, Texas 
CARRIE P. MEEK, Florida 
CHAKA FATTAH, Pennsylvania 
BILL BREWSTER, Oklahoma 
TIM HOLDEN, Pennsylvania 



BERNARD SANDERS, Vermont 

(Independent) 

James L. Clarke, Staff Director 

Kevin Sabo, General Counsel 

Judith McCoy, Chief Clerk 

Bud Myers, Minority Staff Director 



Subcommittee on the Postal Service 

JOHN M. McHUGH, New York, Chairman 



MARSHALL "MARK" SANFORD, South 

CaroUna 
BENJAMIN A. OILMAN, New York 
CHRISTOPHER SHAYS, Connecticut 
DAVID M. Mcintosh, Indiana 
ROBERT L. EHRLICH, Jr., Maryland 



BARBARA-ROSE COLLINS, Michigan 
MAJOR R. OWENS, New York 
GENE GREEN, Texas 
CARRIE P. MEEK, Florida 



Ex Officio 

WILLIAM F. CLINGER, Jr., Pennsylvania CARDISS COLLINS, lUinois 

Dan Blair, Staff Director 

Robert Twjb, Professional Staff Member 

Heea Vazirani-Fales, Professional Staff Member 

Steve Willlams, Professional Staff Member 

Jennifer Tracey, Clerk 
Denise Wilson, Minority Professional Staff 



(ID 



CONTENTS 



Page 
Hearing held on: 

October 19, 1995 1 

February 28, 1996 45 

Text of H.R. 1963 2 

Statement of: 

Barrett, Hon. Thomas, a Representative in Congress from the State of 

Wisconsin 9 

Blute, Hon. Peter, a Representative in Congress from the State of Massa- 
chusetts 11 

Boehlert, Hon. Sherwood, a Representative in Congress from the State 

of New York 5 

Bruce, Ben F., director of imagiiig systems, ElectroCom Automation, L.P.; 
Albert F. Stevens, president, Opex Corporation, accompanied by Mark 

A. Stevens, vice president of marketing, and Robert Dewitt, vice presi- 
dent of engineering; and Tod Mongan, senior vice president and general 
counsel, BancTec, Inc., accompanied by Nolan Klier, director of product 
marketing 139 

Jacobs, Hon. Andrew Jr., a Representative in Congress from the State 
of Indiana 8 

Romero-Barcelo, Hon. Carlos, a Delegate in Congress from the Common- 
wealth of Puerto Rico 6 

Sewruk, Casimir, chief executive officer. Nest Egg Federal Credit Union, 
on behalf of the Credit Union National Association; Joseph Bracewell, 
president and chief executive officer, Century National Bank; Mallory 

B. Duncan, vice president and general counsel, National Retail Federa- 
tion; Paul S. Reid, president, Mortgage Bankers Association; and Thom- 
as J. Hughes, president and chief executive officer. Navy Federal Credit 
Union, on behalf of the National Association of Federal Credit Unions .. 49 

Silbergeld, Mark, co-director, Washington Office, Consumers Union 14 

Stockman, Hon. Steve, a Representative in Congress from the State of 

Texas 11 

Williams, Bruce, Talknet Radio 25 

Letters, statements, etc., submitted for the record by: 

AUiance of American Insurers, American Council of Life Insurance, Amer- 
ican Insurance Association, the Council of Insurance Agents and Bro- 
kers, Health Insurance Association of America, Independent Insvu-ance 
Agents of America, National Association of Independent Insurers, Na- 
tional Association of Insurance Brokers, National Association of Life 
Underwriters, National Association of Mutual Insurance Companies, 
and National Association of Professional Insurance Agents, prepared 

statement of 208 

American Bankers Association, prepared statement of 20 

American Financial Services Association, prepared statement of 218 

Blute, Hon. Peter, a Representative in Congress from the State of Massa- 
chusetts, prepared statement of 13 

Bruce, Ben F., director of Imaging Systems, ElectroCom Automation, 

L.P., prepared statement of 142 

Coalition of Higher Education Assistance Organizations, prepared state- 
ment of 207 

Collins, Hon. Barbara-Rose, a Representative in Congress from the State 

of Michigan, prepared statement of 20 

Commercial Law League of America, prepared statement of 215 

Consvuner Bankers Association, prepared statement of 35 

Countrywide Funding Corporation, prepared statement of 33 

(III) 



IV 

Page 

Davis, Hon. Thomas M., a Representative in Congress from the State 
of Virginia, prepared statement of 31, 103 

Dinwiddie, Yvonne, president, Citizens Protecting Your Rights, prepared 
statement of 212 

Duncan, Mallory B., vice president and general counsel. National Retail 
Federation: 

Prepared statement of 77 

Response to Written Questions Submitted by Hon. John M. McHugh . 84 

Drozanowski, James C, president. Chase Manhattan Bank (USA), pre- 
pared statement of 35 

GE Capital Mortgage Services, Inc., prepared statement of 39 

Oilman, Benjamin A., a Representative in Congress from the State of 
New York, prepared statement of 33 

Green, Hon. Gene, a Representative in Congress from the State of Texas, 
prepared statement of. 4, 48 

Hughes, Thomas J., president and chief executive officer. Navy Federal 
Credit Union, on behalf of the National Association of Federal Credit 
Unions, prepared statement of 106 

Institute of Real Estate Mangement of the National Association of Real- 
tors, prepared statement of 200 

King, Hon. Peter T., a Representative in Congress from the State of 
New York, prepared statement of 31 

Lackritz, Marc E., president. Securities Industry Association, prepared 
statement of 226 

Lazio, Hon. Rick, a Representative in Congress from the State of New 
York, prepared statement of 33 

McHugh, Hon. John M., a Representative in Congress from the State 
of New York, prepared statement of 46 

Mongan, Tod, senior vice president and general counsel, BancTec, Inc.: 

Prepared statement of 187 

Response to Written Questions Submitted by Hon. John M. McHugh . 191 

Mortgage Bankers Association of America, prepared statement of 37 

National Retail Federation, prepared statement of 43 

Owens, Hon. Major, a Representative in Congress from the State of 
New York, prepared statement of 5 

Reid, Paul S., president, Mortgage Bankers Association: 

Prepared statement of 91 

Response to Written Questions Submitted by Hon. John M. McHugh . 99 

Romero-Barcelo, Hon. Carlos, a Delegate in Congress from the Common- 
wealth of Puerto Rico, prepared statement of 7 

Sewruk, Casimir, chief executive officer, Nest Egg Federal Credit Union, 
on behalf of the Credit Union National Association, prepared statement 
of 53 

Silbergeld, Mark, co-director, Washington Office, Consumers Union, pre- 
pared statement of 17 

Stenehjem, Leland M., Jr., president. First International Bank and Trust, 
Fargo, ND, on behalf of the American Bankers Association, America's 
Community Bankers, American Financial Services Association, 
Consumer Bankers Association, Independent Bankers Association of 
America, MasterCard International Incorporated, and Visa U.S.A. Inc.: 

Prepared statement of 61 

Response to Written Questions Submitted by Hon. John M. McHugh . 70 

Stevens, Albert F., president, Opex Corporation: 

Prepared statement of 154 

Response to Written Questions Submitted by Hon. John M. McHugh . 179 

USAA, prepared statement of 42 

VISA U.S.A. Inc. and MasterCard International Incorporated, prepared 
statement of 41 

Walsh, Hon. James T., a Representative in Congress from the State 
of New York, prepared statement of 31 

Williams, Bruce, Talknet Radio, prepared statement of 29 

Wysocki, Mary E. (Betty), chair, government affairs committee, National 
.Association of Credit Management, prepared statement of 204 



H.R. 1963, THE POSTMARK PROMPT PAYMENT 

ACT OF 1995 



THURSDAY, OCTOBER 19, 1995 

House of Representatives, 
Subcommittee on the Postal Service, 
Committee on Government Reform and Oversight, 

Washington, DC. 

The subcommittee met, pursuant to notice, at 10:05 a.m., in room 
2247, Rayburn House Office Building, Hon. John M. McHugh 
(chairman of the subcommittee) presiding. 

Members present: Representatives McHugh, Sanford, Mcintosh, 
Ehrlich, CoUins of Michigan, Owens, Green. 

Staff present: Dan Blair, staff director; Jane Hatcherson, Robert 
Taub, Heea Vazirani-Fales, Steve Williams, professional staff mem- 
bers; Jennifer Tracey, clerk; and Denise Wilson, minority profes- 
sional staff member. 

Mr. McHuGH. I'll begin this subcommittee hearing. I expect that 
the gentleman from Texas, Mr. Gene Green, is on his way. I just 
saw him at another postal event. 

Let me, before I begin, acknowledge gratefully the vice chairman, 
Mr. Mark Sanford, who has joined us here today. Thank you, sir. 

Let me also welcome all of you here today for this hearing. Let 
me pay a special tribute to two of my esteemed colleagues. Con- 
gressman Sherry Boehlert from my State of New York, a friend 
and neighbor, and also Congressman Andy Jacobs from Indiana. 
Both of these gentlemen are here this morning to present testi- 
mony. 

As we proceed with the subcommittee's hearing on the legisla- 
tion, H.R. 1963, the Postmark Prompt Payment Act of 1995, we 
will be hearing as witnesses, as I mentioned, some of the co-spon- 
sors, as well as other individuals who expressed an interest in this 
legislation. 

In addition to my colleagues, I want to especially welcome talk 
show host Bruce Williams. As I'm sure most, if not all, of you 
know, Mr. Williams is the host of a nationally syndicated radio 
show heard on approximately 400 radio stations nationwide. 

Mr. Williams' program is heard on Talknet and is the country's 
longest running national talk radio program, and callers to the pro- 
gram frequently cite their experiences with the payment due prob- 
lem and the resulting late fees, interest, and credit record prob- 
lems. 

I certainly want to give credit — speaking of credit — where credit 
is due. Mr. Williams was the originating force behind the idea con- 
tained in H.R. 1963. His inspiration for and support of this meas- 

(1) 



ure has been invaluable and undoubtedly will aid H.R. 1963, gath- 
ering an even more broad base of support in the future. 

For the record, H.R. 1963 currently has 35 co-sponsors, including 
the chairman of this full committee, Mr. dinger, the gentleman 
from Pennsylvania, and indeed enjoys bipartisan support. 

[The bill H.R. 1963 follows:] 

H.R. 1963 

IN THE HOUSE OF REPRESENTATIVES 
JUNE 29, 1995 

Mr. McHuGH (for himself, Mr. Ackerman, Mr. Barrett of Wisconsin, Mr. Boeh- 
LERT, Mr. Ehrlich, Mr. Oilman, Mr. Gene Green of Texas, Mr. Jacobs, Mrs. 
Kelly, Mrs. ICennelly, Mr. Kleczka, Mr. Livingston, Mr. Parker, Mr. Romero- 
Barcelo, Mr. Serrano, Mr. Shays, Mr. Stockman, Mr. Underwood, Mr. Towns, 
Mr. Walsh, and Mr. Davis) introduced the following bill; which was referred to the 
Committee on Government Reform and Oversight 

A BILL 

To amend title 39, United States Code, to provide that the pajrment of a bill, invoice, 
or statement of account due, if made by mail, shall be considered to have been made 
on the date as of which the envelope which is used to transmit such pajrment is 
postmarked. 

Be it enacted by the Senate and House of Representatives of the United States 
of America in Congress assembled, 

SECTION 1. SHORT TITLE. 

This Act may be cited as the "Postmark Prompt Pajonent Act of 1995". 

SEC 2. DATE OF POSTMARK TO BE TREATED AS DATE OF PAYMENT OF A BILL, INVOICE, OR 
STATEMENT OF ACCOUNT DUE. 

(a) In General. — Chapter 26 of title 39, United States Code, is amended by 
adding at the end the following: 

**§ 2602. Date of postmark to be treated as date of payment of a bill, invoice, 
or statement of account due 

"(a) If any payment required to be made on or before a prescribed date is, after 
such date, delivered by the Postal Service to the payee, such payment shaU be 
deemed received by the payee on the date of the United States postmark stamped 
on the envelope or other cover in which such payment is mailed. 

"(b) Subsection (a) shall not apply with respect to any payment — 

"(1) other than a pajrment on a biU, invoice, or statement of account due; 
"(2) which is required, by law, regulation, or contract, to be deUvered by any 
method other than by mail; or 

"(3) which is subject to any other provision of Federal law specifying how 
a postmark date shall be used in determining the date on which such payment 
shall be deemed to have been deUvered or made. 
"(c) Subsection (a) shall apply only if — 

"(1) the postmark date falls on or before the prescribed date for making the 
payment; and 

"(2) the pa)mrient was, on or before such date, deposited in the mail in the 
United States in an envelope or under other appropriate cover, postage prepaid, 
properly addressed to the payee. 

"(d) Subsection (a) shall not apply in the case of a postmark not made by the 
Postal Service. 

"(e) For purposes of this section — 

"(1) the term 'payee', as used with respect to a payment, includes any per- 
son duly authorized to receive such pa5Tnent; and 

"(2) the term 'United States' means the 50 States, the District of Columbia, 
the Commonwealth of Puerto Rico, and any territory or possession of the United 
States. 

"(f) Regulations to carry out this section may be prescribed by the Postal Serv- 
ice.". 

(b) Conforming Amendment. — ^The table of sections for chapter 26 of title 39, 
United States Code, is amended by adding at the end the following: 



"2606. Date of postmark to be treated as date of payment of a bill, invoice, or state- 
ment of account due.". 

SEC. 3. EFFECTIVE DATE. 

The amendments made by this Act shall apply with respect to any mailing post- 
marked after the end of the 3-month period beginning on the date of enactment of 
this Act. 

Mr. McHUGH. In addition to this distinguished group of wit- 
nesses, the subcommittee also welcomes Mark Silbergeld. Mr. 
Silbergeld will testify on behalf of the Consumers Union and 
Consumer Federation of America. 

Unfortunately, the subcommittee will not be hearing from invited 
witnesses who had previously made their opposition known to me, 
personally, as well as to the subcommittee staff. I truly regret that 
these invited witnesses chose not to testify before the subcommittee 
during today's proceeding. 

I want the record to show that this subcommittee made all ef- 
forts to include those interested parties in this legislative process. 
In an effort to try to be responsive to those individuals' and organi- 
zations' concerns, I will order the record on this hearing to be 
maintained for the next following 7 business days, in which time 
they may submit written testimony. We have received some testi- 
mony already from the American Banking Association. 

As we walked in this morning, for those of you who looked, there 
was what I would describe as a legislative memo being passed out 
from several credit card companies. Visa and MasterCard, who 
have expressed concern about, and opposition to, H.R. 1963. If we 
receive this formally, we will make that part of the written record. 
If there are representatives from that interest in the room this 
morning, I would urge you to formally submit your concerns in 
writing. 

Let me say, rather extemporaneously, I have read the testimony 
by the bankers. Frankly, I think they raise some very legitimate 
points and, again, I regret that they were either unable or chose 
not to participate directly. I think, truly, their presence could have 
added in very important ways to the quality of this hearing. 

That having been said, let me say that, in my opinion, H.R. 1963 
is sound legislation, aimed at addressing a problem with which 
most bill-payers can claim experience. Quite often, conscientious 
people will dutifully pay their bills on a timely basis, only to dis- 
cover that they were assessed late fees and interest charges when 
the recording or receipt of their payment is delayed through no 
fault of their own. 

I know many of my colleagues have been approached by constitu- 
ents relaying their problems with payments that have been mailed 
in a timely fashion and not delivered by the due date. H.R. 1963 
is intended to address this problem. 

The bill mandates that the postmark on the envelope containing 
the pa3mient will be proof of a timely admission. The legislation ap- 
plies to pajnnents of a bill, invoice, or statement of any account 
due, and only when made through the mail. It excludes metered 
mail. Furthermore, the envelope will have to be correctly addressed 
to the payee and have adequate postage affixed to it. 

The use of the postmark has precedence in contract law. For ex- 
ample, the Internal Revenue Service uses the postmark on the en- 



velope as proof that a taxpayer mailed their income tax return on 
or before the April 15 deadline, regardless of when the IRS re- 
ceived payment. 

Clearly, the intent behind this legislation is to protect conscien- 
tious consumers who pay their bills, invoices, or accounts through 
the mail in a timely fashion. 

Some in the financial community have raised questions regard- 
ing H.R. 1963 and possible hardships it might impose on creditors 
who will be forced to preserve the postmarks on envelopes of late 
bill payers. I'm confident that these companies share my concerns 
regarding late fees, penalties, and adverse credit ratings being 
wrongly assessed against timely bill payers. 

Consequently, I would look forward to working with them, as 
well as the co-sponsors of H.R. 1963, to meet those concerns that 
might impact the intent of the legislation and, at the same time, 
reflect the concerns of those industries. Again, I welcome the wit- 
nesses here before the subcommittee, and I look forward to their 
testimony. 

At this time, as I had mentioned, I would like to recognize the 
presence of the gentleman from Texas, Mr. Green, and ask him if 
he has any opening comments he might wish to make. 

Mr. Green. Thank you, Mr. Chairman. I do have an opening 
statement, but in the case of brevity and moving this along, I 
would like to submit it for the record. But also, I met Bruce Wil- 
liams in Houston recently, and I'm glad to know that we can re- 
spond to not only his listeners but our constituents. 

[The prepared statement of Hon. Gene Green follows:] 

Prepared Statement of Hon. Gene Green, a Representative in Congress 
From the State of Texas 

As an original co-sponsor of H.R. 1963, The Postmark Prompt Payment Act of 
1995, I believe that this legislation is long overdue. I have heard many accounts of 
individuals whose credit had been ruined because they had sent their payments in 
on time for things Uke mortgage and car payments that did not arrive on time, con- 
sequently, they were assessed late fees and interest charges and their credit ratings 
were negatively affected. This legislation will help those diligent bill payers who pay 
their bills on time but through no fault of their own have problems with delivery 
service of their mail. This legislation will require creditors to use the postmark on 
the envelope containing the pa3mient as proof that the payment was sent in a timely 
manner. I would like to commend Chairman McHugh for having the foresight to in- 
troduce this important piece of legislation that will benefit both the American 
consvuner and the U.S. Postal Service. It will benefit the consumer by requiring the 
creditors to use the postmark as proof of a timely payment and it wiU benefit the 
Postal Service by identifying areas where they may have delivery problems. Again 
I would like to thank Chairman McHugh for introducing this legislation and holding 
these hearings. 

Mr. McHuGH. Thank the gentleman. Let me next recognize in 
the order in which the chair saw them enter the room, the gen- 
tleman from New York, Major Owens, for any comments he might 
have. 

Mr. Owens. Thank you, Mr. Chairman. I have an opening state- 
ment, which I shall submit for the record. 

[The prepared statement of Hon. Major Owens follows:] 



Prepared Statement of Hon. Major Owens, a Representative in Congress 
From the State of New York 

Mr. Chairman, I am pleased to be a co-sponsor of this bipartisan effort to em- 
power the American consumer. "The Postmark Prompt Payment Act" (H.R. 1963) 
would require lenders to accept the postmark date as evidence of a timely payment. 
This bill represents a victory for the consvuner who oftentimes feels intimidated by 
the giant industry of financial institutions, creditors and lenders. 

The "Postmark Prompt Payment Act" is an effective remedy for the frustrating 
position in which many people find themselves. Many of my constituents and I have 
all had the unpleasant experience of mailing a pa3rment far in advance of the due 
date, and later being assessed an additional fee because the payment arrived at the 
payment center late. Through no fault of the consumer, but for the delay of the 
Postal Service, consumers are unfairly confronted with situations over which they 
have no control. 

Currently, it is evident that the postmark system of timely payment verification 
is a workable policy. The Internal Revenue Service requires that all tax payments 
are deemed on time if the postmark date is on or before April 15. Taxpayers are 
not charged with the unreasonable task of estimating the time the Postal Service 
will actually take to deliver the payment. If this system is adequate for the Federal 
government, then it should be adequate for American businesses too. 

Some businesses contend the bill unfairly shifts the cost of delays in the mailing 
system from the consumer to the creditor. However, consumers reasonably counter 
that it is unfair that they are expected to bear the burden in the first place. H.R. 
1963 empowers consumers who can rest assured that their responsibility and has- 
sles end when they walk to their local post office, and mail their payment. 

H.R. 1963 is a logical, fair and simple solution and encoiu-age my colleagues to 
move this legislation forward. 

Mr. McHuGH. Thank you very much. I would also like to recog- 
nize Mr. Mcintosh. 

Mr. McIntosh. I have no opening statement, Mr. Chairman. 

Mr. McHuGH. Also, the gentleman from Maryland, Mr. Ehrlich. 
No statement. 

As I mentioned, we do have a number of Members of Congress 
who have joined in the co-sponsorship of this legislation. Leading 
off, because I know he has his own mark-up coming at 10:30, is my 
good friend, the gentleman from New York, Mr. Boehlert. Sherry, 
welcome. 

STATEMENT OF HON. SHERWOOD BOEHLERT, A REPRESENTA- 
TIVE IN CONGRESS FROM THE STATE OF NEW YORK 

Mr. BOEHLERT. Thank you very much, Mr. Chairman. I'm here 
to speak in favor of H.R. 1963, the Postmark Prompt Pa3anent Act 
of 1995. I'll be brief because the case for this bill is so self-evident. 
This measure is very simple, yet very important. Each day, thou- 
sands of Americans charge everything from groceries to college tui- 
tion on their credit card, and, each month, they send off a check 
in the mail to pay the bill without a second thought. 

While it may be the case that neither snow nor rain nor heat nor 
gloom of night stay our faithful couriers from the swift accomplish- 
ment of their appointed duties, mail has been known on occasion 
to be late, and the penalties are severe — huge interest payments 
and the possibility of a bad credit rating. That is very severe. 

Especially for younger families just starting out and for elderly 
people on fixed incomes, interest pa5anents of 10, 15, or even 20 
percent are harmful and unnecessary when the check was in the 
mail on time. 

This bill would rectify that situation by allowing the postmark on 
the envelope to be proof of timely payment. This measure would 



apply only to pa3Tnent of bills, and the envelope must have the cor- 
rect address and the postage affixed. 

The Internal Revenue Service already uses the postmark system, 
as you have observed, Mr. Chairman, and it works very well. Ev- 
erybody is familiar with the countdown to the April 15 deadline. 
It's a winning proposition for consumers and creditors. The argu- 
ments and hassles over when the check was mailed will be solved, 
and those who use the old adage that "the check is in the mail" 
will have to actually live up to their word. 

Mr. Chairman, I want to compliment you for leading the way 
with this bill. I think it's very important legislation. As a fan of 
Bruce Williams myself, who often listens to him on Talknet, I must 
admit I have heard him espouse the merits of this proposal, and 
I compliment you for taking advantage of his suggestion, and I 
would urge the subcommittee to have timely action on the bill. 

Mr. McHUGH. Well, I thank the gentleman and, again, appre- 
ciate his joining us here this morning and thank him, too, for his 
co-sponsorship of this legislation. 

We all recognize busy schedules, but I will ask the subcommittee 
members if anyone has a question for our colleague. 

[No response.] 

Mr. McHuGH. With that, thank you very much. I have now been 
handed the correct order in which we notice the Members of Con- 
gress who have entered the room. I'm told that the next co-sponsor 
is the delegate from Puerto Rico, the Honorable Carlos Romero- 
Barcelo. 

Mr. Romero-Barcelo. He was here first. 

Mr. McHuGH. Well, the gentleman is indeed a gentleman, but I 
go by what the staff said. 

STATEMENT OF HON. CARLOS ROMERO-BARCELO, A DELE- 
GATE IN CONGRESS FROM THE COMMONWEALTH OF PUER- 
TO RICO 

Mr. Romero-Barcelo. Thank you, Mr. Chairman. Mr. Chairman 
and members of the subcommittee, I appreciate having the oppor- 
tunity today to voice my support for H.R. 1963, the Postmark 
Prompt Pa)Tnent Act of 1995. 

Mr. Chairman, you are to be commended for introducing this 
measure, and I was pleased to join with a number of members of 
the subcommittee in co-sponsoring your bill. A substantial majority 
of individuals who work hard to pay their bills in a timely manner 
suffer from consequences that are not under their control. They re- 
ceive a bill; they take note of the date that it's due; they write a 
check, and, at the appropriate time, they mail it. And that should 
be it. 

But unfortunately, despite all of their good intentions and actions 
and through no fault of their own, numerous bill payers find them- 
selves assessed late fees or interest charges because their payments 
were not delivered or credited in a timely manner. If this has not 
happened to each of us at some point, it has certainly happened to 
someone that we know and some of our constituents. 

Once this happens to an individual several times, it begins to 
have a detrimental impact on one's credit rating. In Puerto Rico, 



I must say that if the post office is bad in Washington, DC, Puerto 
Rico is worse. It's the worst one in the Nation of the post offices. 

From that time on, when you have your credit rating affected, 
and the individual is ready to make a major purchase, such as a 
home, or buy a car or borrow some money, he is confronted with 
a major problem, one which the individual had nothing to do with. 
His credit has been affected, and he probably can't get the loan, or 
he has been penalized, or it takes much longer than it should have 
to get the loan. 

'The best argument in support of this measure is that H.R. 1963 
is a narrowly drawn and a very sensible bill. It requires the pay- 
ment to be properly addressed, carry adequate postage, and to be 
mailed in advance of the due date. By then allowing the postmark 
on the envelope containing the pajrment to serve as proof that the 
payment was made in a timely manner, we're simply being fair and 
equitable to consumers. 

The measure does not seek to establish a totally new and elabo- 
rate system, it merely builds on the well-known, existing IRS prac- 
tice of recognizing the postmark on the envelope as proof that a 
taxpayer mailed Ws return before the April 15 deadline, no matter 
what or when the IRS received the return. This practice has func- 
tioned in a satisfactory manner for a number of years and I believe 
a similar system for the pajrment of bills will work equally well. 

We are well beyond the days when one settled their accounts in 
person. This legislation seeks to correct a simple problem, but nev- 
ertheless a very real problem, which can have substantial con- 
sequences and expenses for the individual involved. 

Many times he is at a loss. He has to argue and fight with com- 
puters. They say, "The machine says, the record says," and some- 
times they don't even have a person to speak to when they call be- 
cause there's a machine answering the phone calls. 

Therefore, I think this is a measure of great justice to our con- 
sumers, and I urge the subcommittee to favorably report the need- 
ed legislation at an early date. Thank you. 

[The prepared statement of Hon. Carlos Romero-Barcelo follows:] 

Prepared Statement of Hon. Carlos Romero-Barcelo, a Delegate in 
Congress From the Commonwealth of Puerto Rico 

Mr. Chairman and members of the Subcommittee, I appreciate having this oppor- 
tunity today to voice my support for H.R. 1963, the Postmark Prompt Payment Act 
of 1995. 

Mr. Chairman, you are to be commended for introducing this measure, and I was 
pleased to join with a number of members of the Subcommittee in cosponsoring your 

bill- 

A substantial majority of individuals work hard to pay their bUls in a timely man- 
ner. They receive a bill, they take note of the date it is due, they write a check at 
the appropriate time and they mail it. And that should be it. Unfortunately, despite 
their good intentions and actions, and through no fault of their own, numerous bill 
payers find themselves assessed late fees or interest charges because their pa3rments 
were not delivered or credited in a timely manner. If this has not happened to each 
of us at some point, it has certainly happened to a number of our constituents. 

Once this happens to an individual several times, it begins to have a detrimental 
impact on one's credit rating. From that time on, whenever the individual is ready 
to make a major pvu-chase such as a home or a car or borrow money, he is con- 
fronted with a major problem — one which the individual did nothing to cause. 

The best argument in support of this measure is that H.R. 1963 is a narrowly- 
drawn, sensible bill. It requires the payment to be properly addressed, carry ade- 
quate postage and be mailed in advance of the due date. By then allowing the post- 



8 

mark on the envelope containing the payment to serve as proof that the payment 
was made in a timely manner, we are simply being fair and equitable to consumers. 

The measure does not seek to establish a totally new or elaborate system. It mere- 
ly builds on the well-known, existing IRS practice of recognizing the postmark on 
the envelope as proof that a taxpayer mailed his return on or before the April 15th 
deadline no matter when the IRS receives that return. This practice has functioned 
in a satisfactory manner for a nimiber of years. I believe a similar system for the 
pajrment of bills will work equally well. 

We are well beyond the days when one "settled their accounts" in person. This 
legislation seeks to correct a simple problem, but nevertheless a very real problem 
which can have substantial consequences and expenses for the individual involved. 
I urge the Subcommittee to favorably report this needed legislation at an early date. 

Thank you. 

Mr. McHuGH. Thank the gentleman. We have a growing number 
of Members who have come here to give testimony, and I'm very 
grateful. If we ask a lot of questions, we could be here all morning. 

But let me ask you, just very quickly, as delegate from Puerto 
Rico, you perhaps have a very unique situation, as well. How often 
do your constituents actually have to mail payment to the States? 
Or are all your transactions handled on the island of Puerto Rico, 
itself? 

Mr. Romero-Barcelo. No, some of them have to mail to the 
States. Sometimes, the main office of the credit card is on the 
mainland, but it should take no more time from Puerto Rico, than 
to Alaska or to Hawaii. It's just a matter of the fact, somehow or 
other, there has never been enough money allotted to the Postal 
Service in Puerto Rico. That's why the services at home are the 
worst. 

Mr. McHUGH. It shouldn't be any longer, but usually is? 

Mr. Romero-Barcelo. Yes. 

Mr. McHuGH. And your constituents pay that in late fees. 

Mr. Romero-Barcelo. Sometimes it takes up to 7 days for a let- 
ter to be delivered. In those instances, you know, 7 days is a lot 
of time for a pajmient letter. 

Mr. McHuGH. Thank you. Any other questions? 

[No response.] 

Mr. McHUGH. Well, we thank the gentleman. 

Mr. Romero-Barcelo. Thank you. 

Mr. McHuGH. We appreciate it very much. The next gentleman 
is an individual who has been in Congress for nearly 30 years, and 
in that time, he has only gotten better and has been one of the 
leading advocates of postal reform and issues that involve 
consumer relations in the Postal Service. 

I've worked with him on this initiative and a number of others, 
and I'm really delighted that he's not only co-sponsoring this bill, 
but is also with us here this morning. Andy Jacobs, the gentleman 
from Indiana. Welcome, sir. 

STATEMENT OF HON. ANDREW JACOBS, JR., A REPRESENTA- 
TIVE IN CONGRESS FROM THE STATE OF INDIANA 

Mr. Jacobs. I thank the chairman, and I return the encomium 
by saying that, in Washington, advocating common sense can be 
very hazardous, so I admire your courage, and I hope that in this 
case it's successful. It's always awkward to argue in favor of the ob- 
vious, but sometimes, because of extraneous factors, it is necessary 
to do so. 



In constitutional law, particularly in the case of criminal stat- 
utes, the scholars tell us that one of the most important criteria is 
certainty. That is true of the law of contracts, as well, I think. It 
is better to be a little off and certain that both parties understand 
the rules of the game and abide by them. 

Think how much litigation can be avoided. As a matter of fact, 
think how many wars could be avoided if human beings could ac- 
complish certainty in their relations. Misunderstandings — Bill 
Mauldin did a cartoon once that said, ''Wars are impossible unless 
both sides are right," 

I hear it many times. You have a contractual relationship, both 
sides fervently believing they're right. Take the intersection acci- 
dent with automobiles. You have two witnesses, one who swears 
the one person had the green light, the other swears the other had 
the green light. And both are telling the truth as best they can. 

But what if you had a camera there? It would settle the matter. 
There never is a camera there. What if, in conversation, you agree 
with somebody else, "Well, we'll do this. We'll meet at this corner"? 
And then you go to different comers, and then you get a little fuss 
going. Let's say it was of commercial significance, and you go to 
court. Now, if there had been a tape recording, and somebody could 
play back that tape, that would be about it. You would know ex- 
actly what happened. 

By some strange paradox, for several years, one of the largest 
banks in my city was my tenant. The rent was due on the first day 
of the month, and it usually came straggling in around the 15th 
day of the month. After that happened for about 6 months, I sent 
a polite note saying that if this continued, I would be forced to as- 
sess late charges and penalties. They began paying exactly on time. 

But the most important thing of all, as I say, is the certainty of 
it. The amount of money that can be saved in litigation, I don't 
know. There may be some interest, some creditor interest, who cal- 
culate on their bottom line what they can get from people in pen- 
alties. Interest might make sense, but interest and penalties, that 
might be part of the profit picture. I don't know. It shouldn't be. 

What should be is good relations between the borrower — or the 
charger, whatever it might be — and the creditor, and this bill 
would straighten out a lot of disagreements, save a lot of litigation, 
and, as I say, it makes all the common sense in the world. I just 
hope that that common sense isn't too much of a handicap getting 
it through Congress. 

Thank you, Mr. Chairman. 

Mr. McHuGH. I thank the gentleman. We appreciate his, as al- 
ways, lucid and commonsensical testimony. Any questions from the 
subcommittee? 

[No response.] 

Mr. McHuGH. None. Thank you. We next have the gentleman 
from Wisconsin, Mr. Barrett. 

STATEMENT OF HON. THOMAS BARRETT, A REPRESENTATIVE 
IN CONGRESS FROM THE STATE OF WISCONSIN 

Mr. Barrett. Thank you, Mr. Chairman. As Mr. Jacobs was 
talking, I thought of my grandfather, who used to say that "Com- 



10 

mon sense isn't that common." So I hope that in this case it be- 
comes common. 

I want to thank you for the opportunity to appear before you this 
morning and testify in support of H.R. 1963. Your bill is an exer- 
cise in common sense. At a time when we must become more dili- 
gent in using Federal laws and regulations that confuse and com- 
plicate, this bill would alleviate some of the uncertainty involved 
in paying bills through the mail. 

If the payment of a bill is late, there are basically three possible 
causes of delay. The consumer could be late; the mails could be 
late; or the person who receives the bill could be late in processing 
it. 

With improved communication technology in recent years, con- 
sumers are more frequently sending their bill pa5mients to address- 
es in other States. In Milwaukee, we send our phone bill payments 
to Columbus, OH. Ask 10 people where their credit card bills are 
sent, and you will likely hear 10 different States. 

The amount of time it takes for a piece of mail to travel from a 
consumer in one State to a business in another varies widely. Dis- 
tance, weather, and a variety of other factors can slow the process 
down, resulting in a late arrival, even if the payment was sent sev- 
eral days ahead of time. 

By considering the postmark on the bill envelope proof of pay- 
ment, rather than the day the bill is received, this bill would 
present consumers' credit ratings from becoming victims of delays 
by the Postal Service. 

The bill would also protect consumers from late penalties due to 
slow processing of mail by companies receiving payments. Many 
large telecommunications companies and banks receive hundreds of 
thousands of payments every month, and if their employees do not 
record the receipt of payment from consumers in a timely manner, 
the consumers should not have to pay late fees. Using the post- 
mark for the effective date of payment would shield the consumer 
from overdue penalties resulting from inefficient processing of in- 
coming mail. 

H.R. 1963 does not infringe on the right of fair-minded busi- 
nesses to charge late fees for interest payments when appropriate. 
Consumers would still be responsible for paying their bills prompt- 
ly, and any disputes over whether a pa3mient was sent on time 
could be answered by simply checking the envelope containing the 
check. 

As you have noted, Mr. Chairman, there is ample precedent for 
using the postmark date as the date of payment. The IRS requires 
that income tax returns be postmarked no later than April 15. This 
method has a proven record of effectiveness, and could be extended 
to the private sector with great success. 

Mr. Chairman, your bill offers a promise of honest and simplified 
dealings between businesses and consumers. These days, honest 
consumers who pay their bills on time have enough to worry about 
while trying to maintain a good credit rating. So let's not miss the 
opportunity to make things a little easier for the people we rep- 
resent. Thank you. 



11 

Mr. McHuGH. We thank the gentleman for his testimony and for 
his common sense in helping to advance this initiative. We appre- 
ciate his co-sponsorship. There are no questions. 

The gentleman from Texas, Mr. Stockman. 

Mr. Stockman. Good morning, Mr. Chairman. How are you? 

Mr. McHUGH. Good morning, Steve. Very well. 

STATEMENT OF HON. STEVE STOCKMAN, A REPRESENTATIVE 
IN CONGRESS FROM THE STATE OF TEXAS 

Mr. Stockman. Well, I don't have a prepared statement. I'm just 
going to speak to you from my heart. 

I've been a Congressman for only 10 months. Very shortly before 
that, I was a consumer. During our campaign, we ran up credit 
card debt. Now, I have to tell you that this legislation is about com- 
mon sense and individuals, and I'm very proud that you've taken 
a leadership role in this, because I believe that this sends the sig- 
nals that we do care about the consumer. 

So often, I think, as we're discussing today, on different issues, 
it looks like we forget where we came from and that we, ourselves, 
no longer remember. But 11 months ago, I was a consumer, and 
I, too, experienced personally the situation where you write out 
your check and they either lose it — in fact, I actually experienced 
it with my student loan. I hope this applies also to the student loan 
program — and I was assessed a late fee. This was not my fault, but 
really, as mentioned earlier, was either the fault of their processing 
or the fault of late mail. 

So this legislation is something, I think, that Congress needs to 
do, and I don't understand why it hasn't already been in effect. It's 
long overdue. I appreciate your leadership in this and your accom- 
modating the rest of our Members to speak on behalf of this. H.R. 
1963 should have been done in 1963. Thank you very much. 

Mr. McHuGH. Well, we thank you, Steve, for coming, and again, 
appreciate your help in leading the fight for this piece of legisla- 
tion. We look forward to working with you. 

Mr. Stockman. Thank you very much. And to my good friend 
who pushed this, we still listen to him late at night on the radio 
in Houston, TX. 

Mr. McHuGH, Many of us do. Not in Houston, but in other 
places. 

The gentleman from Massachusetts, Mr. Peter Blute. 

STATEMENT OF HON. PETER BLUTE, A REPRESENTATIVE IN 
CONGRESS FROM THE STATE OF MASSACHUSETTS 

Mr. Blute. Thank you very much, Mr. Chairman and members 
of the committee. I would like to commend you and the members 
of this committee for addressing what I think is a major problem 
in the area of consumer debt. That is the problem of late payments 
which may be no fault of the consumer. 

As you know, most people in the country have some sort of 
consumer debt where they pay interest rates of as much as 21 per- 
cent on insurance, credit cards, home improvement loans, and auto 
loans. It is a necessary evil in most people's lives, and hopefully, 
this year, the Congress will go to great lengths to bring us a bal- 



12 

anced budget which, hopefully, will reduce those interest rates on 
American consumers. 

Recently, I leased a new car, which requires me to make a 
monthly payment for the next 2 years by a date certain. If I fail 
to make that payment on time, I am charged a penalty. Needless 
to say, I am very diligent about paying my loan on time to avoid 
pajdng more than I already do. 

However, a little known practice in the financial services commu- 
nity adds an additional burden to consumers for actions that are 
often beyond their control. Banks which offer a grace period gen- 
erally charge interest on a monthly payment if it is not paid on 
time. 

What this means is that if an individual mails a pajmient with 
a week to spare, if the payment is delayed by circumstances beyond 
his or her control, the individual is charged extra. In essence, they 
could be charged extra due to circumstances that they had nothing 
to do with. 

A quick survey of banks and credit unions in this area and my 
home State of Massachusetts revealed a consensus. While the 
terms varied from bank to bank, all charged consumers extra if a 
monthly payment for a credit card was not received on time. In 
Massachusetts, one of the largest banks. Bay Bank, charges inter- 
est for every day the pajrment is late. 

Closer to home for many people who work in the House of Rep- 
resentatives, the Wright-Patman Federal Credit Union charges in- 
terest retroactively. This means that if a payment is just 1 day 
late, Wright-Patman will charge interest for the days late plus the 
grace period. 

This practice can cost consumers more than money, though. It 
can also cost them a good credit rating. Late pa3rments are noted 
on everyone's credit record, whether it is the fault of the individual 
or not. Enough of these late payments can tip the balance against 
a family applying for a mortgage, auto loan, or student loan. 

Fortunately, though, my good friend from New York and the 
members of this committee have proposed a solution. This legisla- 
tion, the Postmark Prompt Payment Act of 1995, would change the 
status quo in favor of the consumer. It would require that a pay- 
ment be considered on time if it is postmarked by the due date. 
This means that the bank, post office, insurance company, or other 
institution cannot cause an individual's payments to be late and 
thus cause a charge or black mark on his or her credit rating. 

This legislation has been endorsed by companies in my district, 
who say, "My business depends on the mail being used to carry 
bills and payments." Furthermore, they call it an important mile- 
stone. The American consumers deserve this protection, and in- 
deed, the IRS affords it for the purpose of paying taxes. This prece- 
dent should be followed by financial institutions. 

As a co-sponsor of H.R. 1963, I want to congratulate the gen- 
tleman from New York and the members of this committee for fi- 
nally addressing this issue and giving the people of America a 
chance to feel more secure with their financial system. I urge the 
chairman to speed this bill through the legislative process. Thank 
you, Mr. Chairman. 

[The prepared statement of Hon. Peter Blute follows:] 



13 

Prepared Statement of Hon. Peter Blute, a Representative in Congress 
From the State of Massachusetts 

Thank you Mr. Chairman. I would Uke to commend you for addressing what I 
think is a major problem in the area of consumer debt. That is the problem of late 
pa3anents which may be no fault of the consumer. 

Most people in the country have some sort of consumer debt where they are pay- 
ing interest rates of as much as 21% on insurance, credit cards, home improvement 
loans, and auto loans. It is a necessary evil in most people's lives. 

Recently, I leased a new car which requires me to make monthly payments for 
the next two years by a date certain. If I fail to make that payment on time I am 
charged a penalty. Needless to say, I am very diligent about paying my loan on time 
to avoid pajdng more than I already do. 

However, a little known practice in the financial services community adds an ad- 
ditional burden to consumers for actions that are often beyond their control. Banks 
which offer grace periods generally charge interest on a monthly payment if is not 
paid on time. What this means is that if an individual mails a payment with a week 
to spare, but the pa3Tnent is delayed by circumstances beyond his or her control the 
individual is charged extra. In essence, they can be charged extra due to cir- 
cumstances beyond their control. 

A quick survey of banks and credit unions in this area and my State of Massachu- 
setts revealed a consensus. While the terms varied from bank to bank, all charge 
consumers extra if a monthly pa3Tnent for a credit card is not received on time. In 
Massachusetts, one of the largest banks, BayBank, charges interest for every day 
the payment is late. Closer to home for many people who work in the House, the 
Wright Patman Federal Credit Union charges interest retroactively. 

This means that if a payment is just one day late Wright Patman will charge in- 
terest for the days late plus the grace period. 

This practice can cost consumers more than money, though. It can also cost them 
a good credit rating. Late pa3Tnents are noted on everyone's credit record whether 
it is the fault of the individual or not. Enough of these late pajonents can tip the 
balance against a famUy applying for a mortgage, auto loan or student loan. 

Fortunately, though, my good friend from New York has proposed a solution. His 
legislation, the "Prompt Pajonent Act of 1995", would change the status quo in favor 
of the consumer. It would require that a payment be considered on time if it is post- 
marked by the due date. This means that the bank. Post Office, insurance company 
or other institution, can not cause an individual's payment to be late and thus cause 
a charge or black mark on his or her credit record. 

This legislation has been endorsed by companies in my district who say, "My busi- 
ness depends on the mail being used to carry bills and payments." Furthermore, 
they call it "an important milestone." The American consumers deserve this protec- 
tion, and indeed, the IRS affords it for the purpose of pajdng taxes. This precedent 
should be followed by financial institutions. 

As a cosponsor of H.R. 1963, I congratulate the gentleman from New York for fi- 
nally addressing this issue and giving the people of America a chance to feel more 
secure with their financial system. I urge the Chairman to speed this bill through 
the legislative process. 

Mr. McHuGH. Well, I thank you, Congressman Blute. Let me 
note for the record that when we reached out for support and co- 
sponsorship, you were one of the very first to indicate your willing- 
ness to join this fight, and we appreciate that early and strong in- 
dication. 

Mr. Blute. Thank you, Mr. Chairman. 

Mr. McHuGH. That concludes the Members who have indicated 
an interest to testify and who are co-sponsors of the legislation. 
Now we can move to the second phase of our hearings. We will call 
up first, Mr. Mark Silbergeld, who is co-director of the Washington 
office of Consumers Union. 

Mr. Silbergeld, it may not make a lot of sense, but, under the 
House rules. Members of Congress who testify before subcommit- 
tees are not required to swear an oath, but all others should. Per- 
haps we should rethink that, as well. 



14 

Mr. SiLBERGELD. YouVe sworn me before, Mr. Chairman. Fm 
happy to do it again. 

[Witness sworn.] 

Mr. McHuGH. The record will show that the witness attested in 
the affirmative to the oath. Mr, Silbergeld, welcome again before 
this subcommittee. It's good to see you, and we appreciate your 
being with us. 

STATEMENT OF MARK SILBERGELD, CO-DIRECTOR, 
WASHINGTON OFFICE, CONSUMERS UNION 

Mr. Silbergeld. Thank you, Mr. Chairman. I compliment the 
chair and the co-sponsors for introducing and promoting this legis- 
lation, which I am pleased to endorse on behalf both of Consumers 
Union of the United States, Inc., which is the nonprofit publisher 
of Consumer Reports, and also on behalf of Consumer Federation 
of America, of which I serve as a vice president. CFA is the largest 
coalition of consumer organizations in the United States. 

Mr. Chairman, it's quite clear, and I agree with the Members 
who testified just before me, that this is a common-sense solution 
to a very real problem for consumers. 

I can't provide the quantity of evidence that Mr. Williams will 
provide, but my testimony also has some examples of why this leg- 
islation is needed and appropriate. I asked via our intra-organiza- 
tional e-mail for some examples from our own employees and added 
my own, and those are capsulized in my testimony. 

Whether it's the cable operator who posts the bill as paid 2 days 
after the paid date stamped on the back of the check by the 
consumer who paid the bill — in that case, that's my own experi- 
ence — or the person who has a mortgage company in California, 
lives in New York, and finds that it's potluck from 1 month to the 
next whether or not mailing on the same day gets it there on time 
each month — some months that date will get him a late payment, 
and some months it will get the mail there on time. 

Or whether it's the occasional consumer, who says, as one fellow 
employee told me, "In August 1995, my pa3mnents to several credit 
card and charge card creditors were all posted 10 to 15 working 
days later than normal. Normally, it has been about 3 days after 
I mail it." But whether it's any one of the hundreds of consumers 
who have complained, there is a problem. 

I noted today in this morning's Baltimore Sun — and I suspect it's 
also in the Post — an ad by the U.S. Postal Service, talking about 
its on-time performance. In my home city of Baltimore, Mr. Chair- 
man, Postmaster General Runyon informs the public in this ad, 
"Mail is delivered on time 81 percent of the time." 

That means that 1 in 5 letters — and I assume that means 1 in 
5 bills — is received late, that is to say, not on time, not within the 
standard time provided by Postal Service standards. That's a lot of 
late bills, and that's a lot of problems for consumers. 

Now, some creditors are going to tell you that there are some 
problems with this bill. I agree that this is not a free lunch, that 
there will be some costs and some inconveniences and some 
changes necessary in the way business is done in order to accom- 
modate the provisions of this bill. 



15 

But, given a large bank or Joe Smith — I guess that's not such an 
unusual name an5anore, given the fortunes of Maryland basketball 
last year — who has to deal with the consequences of the mail tak- 
ing several days to get across town, or more than the allotted 
amount of time to cross the country, the question is, who should 
pay for it? 

I think the common-sense answer is that the larger business in- 
stitution needs to make the adjustments that are necessary, factor 
it into its costs so that we all pay some tiny share of whatever ad- 
ditional costs there may be — and there will be some, but probably 
not as much as some of the opponents of the bill will suggest — in- 
stead of having those who have the misfortune of living in a poor 
performance postal area or simply the random chance of dealing 
with the post office box that isn't emptied for several days — there's 
a footnote in my testimony that describes such an incident — pay 
the larger amount involved in additional interest and/or late fees. 

And so we're happy to support this solution to the problem. Per- 
haps one of the external effects of this solution may be that the 
business community will put more pressure on the Postal Service 
in their local area to deal with delivery in a more timely manner. 
That would be a welcome added affect to this legislation. 

There are some arguments I'm sure you will hear. I, too, am 
sorry that the people who object to this chose not to testify today. 
You will hear some objections. Some will say that creditors already 
waive late charges if it's well explained. 

Well, it seems to me that dealing on the phone with the customer 
may not be the most efficient or the most equitable way to ensure 
that everybody who has the problem is dealt with equally, that 
some charges must be rescinded. Well, yes, if postmarks are re- 
ceived long after the next billing cycle ends and the bill has been 
printed and sent to the customer, there will have to be some late 
charges rescinded. 

I would point out that as they indicate the3^re ready to do that 
on a case-by-case basis now, and they probably do it. But retail 
creditors do that all the time with defective merchandise and other 
returns, and there are other ways to deal with rescinded charges, 
as well. 

I know, for instance, that while my American Express Optima 
card says that it's due on the 27th of the month, when I called this 
summer to find out how I could make two payments, because I was 
going to be on vacation for a month, I was told that actually it 
wasn't posted until the 2nd of the month. So there is some lead 
time that they've built in. 

The May department stores tell the customer not what the due 
date is, but what the mail-by date is, and leave a cushion there so 
that one can know the guesstimated lead time that's necessary to 
get the pa)nTients due. 

There are a number of options that creditors have to try and 
minimize the costs that will be the result of this provision. But it 
seems to me that, given the choice of having some costs and put- 
ting those costs on the consumers with the problems or regulariz- 
ing them as the cost of doing business, that it's more equitable to 
place that cost on the business rather than the consumer. 



16 

I would point out also that this isn't just for consumers. As I read 
the bill, this applies to businesses, too, so that while I have to pay 
the person who comes and fixes my plate glass window when my 
10-year-old and his friends put a soccer ball through it, that person 
has to pay the wholesaler of plate glass, and that wholesaler has 
to pay somebody in Pittsburgh, or wherever, who manufactures 
plate glass. 

Many of them mail their payments by mail, too, and the/re 
going to get the same advantage, and I'm sure that some of them 
have the same kinds of problem. This is good for consumers. I 
think that it's only fair that businesses get the advantage of the 
provision. 

I do note several things about the draft of the bill, Mr. Chair- 
man, that I would recommend that you take a look at. I think that 
it needs to be absolutely clear that the language of the bill that de- 
fines coverage applies to fixed loan payment coupons. I think they 
fit into the language, but it's not absolutely clear. Consumers' loans 
for automobiles and fixed payment mortgages, especially, typically 
involve receiving a coupon book at the beginning of the credit 
transaction and then no notices from the company other than a late 
charge, if that occurred, throughout the remaining course of the 
credit relationship. So we want to be sure, I would think, that 
that's covered. 

The date of crediting the account — the bill refers to the date of 
receipt, but it doesn't refer to the date of crediting. Now, for trans- 
actions that are covered by Truth in Lending, there is a provision 
in the Truth in Lending implementing regulations. Regulation Z, 
that says that the creditor shall promptly credit the account on the 
date of receipt unless no late payment occurs. 

So this provision, working in tandem with the Truth in Lending 
Act, would in fact provide the intended effect, but there are many 
transactions that I read the bill to cover that would not necessarily 
be Truth in Lending transactions. 

My cable bill example, for instance. I don't have the right to pay 
my cable bill in installments. It's due in full every month. That's 
not covered by the Truth in Lending Act, and so you would need 
to reword the bill slightly to assure that the payment is actually 
credited on the postmark date, rather than simply being deemed 
received. 

Finally, Mr. Chairman, I would suggest that regulation writing 
authority not be given to the USPS, but rather be given to the Fed- 
eral Reserve System with instructions that they write the regula- 
tions in consultation with the USPS and the Federal Trade Com- 
mission. In consulting with those agencies, you may find that the 
other depository regulatory agencies should also be consulted. 

The reason is very simple. USPS has no experience in the 
consumer credit area, no experience in writing this kind of regula- 
tion. Regulations in the consumer credit area have pretty uniformly 
been given to the Federal Reserve Board. It has that experience. 
The Federal Reserve Board, the Federal Trade Commission, and 
the other depository regulators enforce those. Those are the agen- 
cies with the experience, and I think that it would be preferable 
to have the Fed write those regulations. 



17 

I would also note, as the chairman well knows, that under the 
Revenue Forgone Reform Act, there was quite a bit of trouble in 
getting the USPS to write regulations that reflected the intent of 
the statutory language. For that reason, as well, I would urge that 
the Fed be charged with writing these regulations. • 

Mr. Chairman, I close by once again thanking the chair and the 
co-sponsors for sponsoring this important piece of legislation. I be- 
lieve that it will do consumers a great deal of good and urge the 
subcommittee to move this legislation forward. Thank you. 

[The prepared statement of Mr. Silbergeld follows:] 

Prepared Statement of Mark Silbergeld, Co-Director, Washington Office, 

Consumers Union 

Mr. Chairman and Members of the Subcommittee, Consmers Union ^ appreciates 
your invitation to testify on H.R. 1963, the Postmark Prompt Payment Act of 1995. 
We congratulate the Chairman for introducing this legislation. We are pleased to 
offer our support for it and to offer our suggestions to strengthen the bill. 

PROVISIONS OF THE BILL 

H.R. 1963 would deem all pa)mients of bUls, invoices and statements of accounts 
due, if they are paid by mail, as having been received by the payee on the date of 
the postmark, provided the payment is deposited in the mails within the U.S., in 
an envelope or other appropriate cover, postage is prepaid, the cover is appro- 
priately addressed, and the postmark is afnxed by the Postal Service (not the send- 
er) and falls on or before the due date. 

NEED FOR THE BILL 

This simple provision addresses a problem that most of us have experience from 
time to time — some of us, repeatedly, and some more than others depending in part 
upon the locations in which we live and work. Due to the inconsistent and often 
poor on-time performance of the U.S. Postal Service, consumers cannot reliably cal- 
culate how much delivery time is reqxiired to assure that a payment will be received 
by a creditor by the due date of a payment. As a result, consumers may incur late 
fees in addition to their scheduled pa)Tnents. 

In addition, this bill could help to address the issue, difficult to dociunent or quan- 
tify, but sometimes alleged, that on occasion some creditors may delay posting of 
some payments actually received, thereby causing the imposition of late charges on 
customers who have in fact pjiid on time.^ 

While I am unaware of any systematic, quantitative analysis of these problems, 
there is ample anecdotal evidence to support the proposition that this measure is 
useful and needed. I would start by offering the following anecdotes based on the 
experiences of myself and some of my colleagues at Consumers Union. These illus- 
trate some of the time-of-receipt problems consumers experience due to Postal Serv- 
ice performance and/or creditor posting practices: 



* Consumers Union is a nonprofit, educational membership organization chartered in 1936 
xmder the laws of the State of New York to provide consumers with information, education and 
counsel about goods, services, health, and personal finance; and to initiate and cooperate with 
individual and group efforts to maintain and enhance the quality of life for consumers. Consimi- 
ers Union's income is solely derived from the sale of Consumer Reports, its other publications 
and from nonconunercial contributions, grants and fees. In addition to repwrts on Consumers 
Union's own product testing. Consumer Reports with approximately 5 million paid circulation, 
regularly, carries articles on health, product safety, marketplace economics and legislative, judi- 
cial and regulatory actions which affect consumer welfare. Consumers Union's pubUcations carry 
no advertising and receive no commercial support. 

2 In the case of consumer credit transactions as defined imder the Truth in Lending provisions 
of the Consumer Credit Protection Act, 15 USC 1601 et seq., it is already required that "a credi- 
tor shall credit a payment to the customer's account as of the date of receipt, except when a 
delay in crediting does not result in a finance or other charge. . . ." See the implementing pro- 
vision. Regulation Z, 12 CFR Section 226.9. However, that Act only applies to true credit trans- 
actions, those that involve a finance change or repayment of an obligation in more than four 
instalhnents, 12 CFR Section 226.2(a)(14) and (17). However, H.R. 1963 would apply to many 
transactions that do not meet the Trurth in Lending definition of consumer credit. Consumer 
credit contemplates a "right" to defer the payment of debt. The proposed legislation would cover, 
as well, transactions in which no such consumer right exists and business-to-business trans- 
actions. 



18 

• Several times I have mailed a mortgage payment to my bank from Yonkers, and 
have had a late fee attached, even though I posted it 6 working days before the due 
date. The last time it happened, I called the mortgage company asking why I was 
being assessed a late charge. They first asked for the location I mailed it from. 
When I said Yonkers, the operator immediately waived the late charge, saying 
something to the effect that "we've had a lot of trouble getting mail from that area 
of the country lately." I no longer mail time-critical bills from Yonkers. I mail them 
from my home in Connecticut only. 

• In August [1995], my payments to several credit card and charge card cus- 
tomers were ALL posted 10-15 working days later than normal. Normally, it has 
been about three days after I mail it. 

• Until a few years ago, our mortgage was paid to a company based in Califor- 
nia. . . . My wife regularly mailed the payment in [from New York] a week ahead 
of time, but we frequently found a $15.00 late charge added the next month. 

• My cable company knowingly added late fees for an invoice which they knew 
was mishandled/lost by the Postal Service. When I called to say that I never re- 
ceived the previous month's invoice, and that I was not going to pay the late charge, 
they admitted that there had been a problem with the Post Office the previous 
month. 

• In 1994, my cable service provider posted my payment two days after the "paid" 
date stamped on the back of my payment check and I was assessed a late payment 
fee. 

• During this past year [1995] on several occasions, I've received a "warning" 
from my bank. Citibank, that I've not paid my mortgage by the 1st of the month, 
despite my paying the bill in fiiU before the end of the month at a local branch. 
The teller explained to me that even though my account was credited at the bank, 
it would take at least 3 business days before it was "received" by the central 
Citicorp mortgage department, which I beUeve is located either in Denver or St. 
Louis. Apparently my paying the local branch is the same as if I had made the pay- 
ment by mail. 

In addition, Mr. Chairman, I would offer another bit of anecdotal evidence that, 
while it does not affect the receipt or posting of payments, tends to corroborate that 
the problem of slow mail delivery can affect these issues. Two maU order book clubs 
and two maU order record clubs to which I belong have all, within in the past two 
years, lengthened the time they allow their customers to exercise their "don't send" 
options and thereby avoid receiving the clubs' automatic selections. They, too, ap- 
pear to have noted the inconsistency of the Postal Service in serving the needs of 
both businesses and customers. 

Not all of the problems that I have related will or can be solved by H.R. 1963. 
If the consumer does not get the bill, invoice or statement of account in the first 
place, this legislation wiU not help. If the payment is lost in the mails and never 
received by the creditor, this legislation cannot help to prove timely pa3Tnent. If the 
Postal Service fails to postmark promptly payments deposited in the mails, the post 
mark will not achieve the intended effect.^ Nonetheless, for the great majority of 
transactions covered by this bill, consumers will be better off. 

INCLUSION OF FIXED LOAN PAYMENT COUPONS 

The bill would amend 39 USC Chapter 26. Section 2606(b) as amended would pro- 
vide that the bill applies only to "a payment on a bill, invoice, or statement of ac- 
count due . . . ." In many fixed payment credit transactions, the consumer receives 
a payment coupon book at the beginning of the credit arrangement and may not re- 
ceive and other form of 'Taill, invoice or statement of account due." While such a cou- 
pon can reasonably be construed to be included in the term "statement of account 
due", it would be more clear if it were either explicitly included or if the legislative 
history were to explicitly state the intent to include pajrment coupons. We assume, 
and certainly would urge, that the bill cover payments made on such credit trans- 
actions. Typically, these include fixed payment mortgages and car loans, which are 
those most likely to have very large balances due at the beginning of the credit rela- 
tionship and to result in large charges for late payments. 



3 See "This Time, The Checks Really Were In The Mail", St. Petersburg Times, Tuesday 
March 29, 1994, p.7. This article relates an incident in which a local post office mix-up resulted 
in one USPS mail box not being emptied for an unknown but apparently very substantial period 
of time, until at least six citizens noticed that the box was filled to the top. USPS agreed to 
send notices to creditors, explaining the incident. 



19 

DATE OF CREDITING OF ACCOUNT 

While the bill deems a payment to have been received on the postmark date, it 
does not deem or require the account to be credited as of the date of receipt, even 
when delayed posting may result in late fees or other resultant charges. This prob- 
lem is addressed sufficiently by the combined effects of this bill and the Federal 
Consumer Credit Protection Act (FCCPA), noted above, with respect to transactions 
subject to that Act. But there is nothing in this bill itself to require prompt crediting 
of the account based on the postmark. While a payment might be deemed as re- 
ceived on the date of the postmark, nothing in the bill itself would prevent a credi- 
tor from delaying the posting of the pajmaent and imposing additional fees. The in- 
tent of the legislation, however, is to assure crediting of an account based on the 
postmark in order to prevent unwarranted additional fees. To achieve this intent, 
we recommend that the language of the FCCPA be included in this bill as well. 

REGULATION- WRITING AUTHORITY 

Section 2606(f) as amended would authorize the U.S. Postal Service to prescribe 
regulations to carry out the purposes of this Act. We would recommend, instead, 
that this authority be granted to the Board of Governors of the Federal Reserve Sys- 
tem in consultation with the Federed Trade Commission and the U.S. Postal Service. 
The reasons for this recommendation are simple. 

Although the problem relates in substantiad part to the performance of the Postal 
Service and the remedy relates to the USPS postmark, the Postal Service has no 
experience in the area of consumer credit. H.R. 1963 creates a consumer credit right 
that is similar to those contained in the Truth in Lending Act and the Fair Credit 
Billing Act, which are implemented by regulations written by the Federal Reserve 
System. The Fed, the other federal depository institution regulatory agencies and 
the Federal Trade Commission are familiar with the issues such as dispute settle- 
ment procedure and recordkeeping requirements that are likely to be the subject of 
regulations. We believe that the Fed would be more appropriate than the Postal 
Service to write implementing regulations. 

Second, our incUnation to make this recommendation is enhanced by the Postal 
Service's recent difficulties in writing implementing regulations that reflected the 
intent of the Congress under the Revenue Forgone Reform Act of 1994. 

SUMMARY 

In closing, Mr. Chairman, we strongly support H.R. 1963 and urge that the Sub- 
committee act favorally on it, taking into account our recommendations for change. 
Again, thank you for your invitation to testify and congratulations on your leader- 
ship in proposing this legislation. 

Mr. McHuGH. Thank you very much, Mr. Silbergeld. Let me just 
note that we have been joined by the distinguished and ranking 
member of the subcommittee, the gentlelady from Michigan, Miss 
Barbara-Rose ColHns. Welcome. Any opening comment? 

Miss Collins of Michigan. Thank you, Mr. Chairman. I'm very 
pleased to be here this morning, because I believe that H.R. 1963 
is a badly needed bill. I'm just sorry I didn't think of it before you 
did. 

Mr. McHuGH. No, I didn't think of it. 

Miss Collins of Michigan. And I think that perhaps we need 
to take the suggestion Mr. Silbergeld put in his written testimony 
that not only should a payment be considered received as of the 
postmark date, but posted, also, on that date, so that late fees don't 
occur. 

I don't think there's hsirdly anyone in this room who has not had 
a problem with a bill not being paid on time because of them re- 
ceiving it late, even though it was postmarked earlier. So I com- 
mend you for the bill. Thank you for your testimony. 

[The prepared statement of Hon. Barbara-Rose Collins follows:] 



20 

Prepared Statement of Hon. Barbara-Rose Collins, a Representative in 
Congress From the State of Michigan 

Mr. Chairman, as the ranking Democrat on this Subcommittee, I am pleased to 
join you in marking up three postal naming measures and in hosting the hearing 
on legislation to make the payment of bills mailed via the postal service, and post- 
marked, as having been received by the payee on the postmarked date. 

I like many people, have been in the position of mailing my bills in a timely man- 
ner, only to find it has taken 10-15 days to be received and subsequently posted 
to my account. Many times upon checking, late fees have been waived due to the 
large volume of mail and problems with delivery. H.R. 1963 comes as a welcome re- 
lief to many bill paying consiuners, including myself. 

Thank you. 

Mr. McHuGH. Well, I thank the gentlelady, and while we're talk- 
ing about truth in lending, let's have truth in government. I regret- 
tably have to say I didn't think of the bill, but we're all working 
together. We will hear from, really, the thought-father of the bill 
in a few moments. 

But I appreciate the distinguished ranking member's comments 
and look forward to working with her and agree that, Mr, 
Silbergeld, you've made some very helpful suggestions, and we'll 
have the subcommittee look at the text of the bill to try to see how 
we might integrate them. 

Let me just start off with a couple of questions, and let me re- 
state, I really regret that we weren't able to bring in some of those 
who have concerns about this bill. I mentioned in my opening 
statement that the American Bankers Association has prepared 
written testimony. We will make that a part of the record. 

[The prepared statement of the American Bankers Association 
follows:] 

Prepared Statement of the American Bankers Association 

The American Bankers Association ("ABA") appreciates the opportunity to submit 
our statement for the record on H.R. 1963, the "Postmark Prompt Pajonent Act of 
1995." 

H.R. 1963 provides that, generally, payments are considered paid based on the 
U.S. postmark stamp if a payment is received after the date prescribed. ABA strong- 
ly opposes this bill because we believe that it is unnecessary, costly, and an inappro- 
priate government intrusion into private contracts. Moreover, treatment of pay- 
ments made under voluntary private arrangements should not be compared to gov- 
ernment mandated taxes collected once a year. 

The ABA is the only national trade and professional association serving the entire 
banking community from small community banks to large bank holding companies. 
ABA members represent about 90 percent of the commercial banking industry's 
total assets, and about 94 percent of the ABA members are community banks with 
assets of less than $500 million. 

In essence, H.R. 1963 provides that if a payment is received after the date pre- 
scribed under a contractual agreement for credit, but was mailed before or on that 
date, creditors and other pajrment recipients must treat the payment has having 
been made as of the mail date. In practice, this means that accounts must be retro- 
actively credited and that charges such as late payment fees must be rescinded even 
though the creditor did not receive timely pajonent. We understand the appeal of 
the proposal because it appears to shift the consequences of the uncertainty of the 
mail system's delivery time to the business sector. However, this legislation is not 
needed because existing industry practices already adequately shield consumers 
from those uncertainties in the form of grace periods and flexibility when payments 
do arrive late. 

Most banks and other creditors already provide consumers with a generous grace 
period before payment is due. For example, mortgage payments are typically due 
on the first of the month, but payment is considered timely so long as it is received 
by the 14th or 15th. Obviously, 14 or 15 days is sufficient to allow for consumer 
procrastination, legitimate problems in making the payment, and any mail delays. 
Similarly, credit card issuers frequently give consumers about three weeks to pay 



21 

after receipt of the bill. For many cardholder, this simounts to an interest free loan. 
In addition, most card issuers unofficially add an extra five days to that period in 
order to allow for possible mail delays. Credit cards tjrpically do not add a late pay- 
ment fee until 10 to 15 days after the due date. 

In spite of these payment date extensions, pajrments nevertheless sometimes ar- 
rive late. For example, some consimaers, rather than using the designated "due 
date" as the date a mortgage pajmient must be received, consider the end of the 
grace period as the due date. By mailing closer to this date, they increase the risk 
that the payment will arrive late due to Postal Service delays. In other cases, such 
as credit cards, borrowers gamble and simply wait until close to the last possible 
day to mail pa3rment, increasing the chances that it will arrive late. 

However, if a late payment fee or finance charge is imposed because of this late 
payment, banks wiU often waive the penalty or interest if the consumer provides 
an adequate explanation for the delay. Thus, most banks try to be flexible to ensure 
that consumers' payments are deemed timely notwithstanding the vagaries of the 
mail system, customer procrastination, and legitimate problems in making the pay- 
ment. Handling customer complaints and adjusting accounts is time consuming, 
labor intensive, and threatens customer relations. Accordingly, banks try to mini- 
mize complaints. 

Supporters of the bill allege, without documentary evidence, that some vmscrupu- 
lous creditors deliberately delay crediting an account on the day of payment receipt 
in order to impose additional charges. However, we should note that under Section 
164 of the Truth in Lending Act (Section 226.10 of Regulation Z), credit card issuers 
must post payments on the date of receipt. 

Not only is the proposed biU unnecessary, it will also impose significant costs on 
creditors and other entities and individuals collecting payments. Furthermore, the 
bill will promote inefficiency and storage reqviirements at a time when the industry 
is moving toward greater automation and reduced paper. These costs will ultimately 
be reflected in the total cost of borrowing. Thus, all borrowers will end up paying 
the extra cost the bill would impose. The benefits to a few will be greatly out- 
weighed by the cost to many millions of consumers. 

Most credit payment processors today are highly automated and are not designed 
to process the varying bulk and measurements of envelopes as this bill would re- 
quire. Machines and processes vary, but as an example of one common processing 
sequence, machines first cut envelopes. The contents are then removed and the en- 
velope discarded. The remittance statement is then fed into a high speed reader 
which captures the essential data: the customer's name; account number; amovmt 
due; amount paid; due date; etc. by reading the specially encoded remittance state- 
ment. The only information which may not be captvu-ed automatically is the pay- 
ment amount if it varies fi-om the scheduled or minimum payment. In this case, the 
amount paid may have to be entered manually. 

However, under the bill, pa3rment collectors would have to capture the postmark 
by reading the postmark, or retaining the envelope or its image. The postmark 
would have to be captured for all payments because the "late payment process" is 
not performed until later in the sequence. With most systems, the envelope and re- 
mittance statement would have to remain together or be rejoined somehow. We are 
not aware of any machines that can process envelopes or read postmarks. 

In effect, the bill would render toda/s expensive equipment virtually obsolete. 
Processing equipment would have to be invented and built to replace existing ma- 
chines, or existing ones retrofitted, if feasible, in order to process various sized enve- 
lopes and to capture the postmark. 

In addition to the initial equipment expense, payment collectors will incur con- 
tinuing per item costs. Capturing the postmark, whatever the technology, will inevi- 
tably increase the cost of processing each payment. Even if the cost per item merely 
rises by $0.20, the amount is astronomical when multipUed by the billions of pay- 
ments processed each year. 

For example, there are an estimated 200 million active credit cards accounts held 
by the major credit card associations. Based on $0.20 (this amount does not rep- 
resent any actual or estimated increase in cost, but is only used for purposes of dem- 
onstration), the additional processing costs for the major credit card issuers alone 
would be $48 million per year — and this represents just the tip of the iceberg. The 
number increases dramatically when you add the bUHons of payments made by both 
individuals and companies each month. These include the estimated 400 to 600 mil- 
lion active credit cards issued by retailers and the millions of mortgages, home eq- 
uity loans, car loans, car leases, student loans, personal loans, farm equipment 
loans, mobile home loans, rent payments, health club payments, and utiUty pay- 
ments. 



22 

Processing costs wovild also increase because late payments would have to be han- 
dled manually to adjust the payment date from the one entered automatically, a 
very labor intensive task. The expense of replacing or retrofitting existing machines, 
the continuing added processing expenses, and the expense associated with manual 
handling will substantially increase the cost of processing. Ultimately, these costs 
are absorbed by the creditor and the consumer. 

In addition, creditors would have to manually adjust interest charges: the bill ap- 
pears to require that the balance be retroactively credited and finance charges recal- 
culated. This is not only costly, but unfair: the creditor is having to give credit to 
a customer — ^not only before the creditor actually receives the funds — but even be- 
fore it receives the check. Essentially, the government appears to be mandating that 
creditors give late-paying borrowers interest-free loans. 

It should also be not^ that the costs and inequities of the bill are not limited 
to banks and other creditor grantors. The bill applies to any entity or individual col- 
lecting a payment This includes, for example, pajrments to utility companies, tele- 
phone companies, landlords, condominium associations, health clubs and other 
membership organizations, individuals or companies rendering services, and bill and 
fee collecting units of state and local governments. 

In addition to the unnecessary additional costs, ABA strongly opposes H.R. 1963 
because we believe it represents an inappropriate intrusion into private contracts. 
As discussed, the marketplace has created a system which generally works weU 
with consumers enjoying generovis grace periods for legal debts and leniency for late 
payments. Yet, under this bill, the federal government is dictating the minute legal 
terms of private contracts — not just for creditors but for anyone collecting a legal 
payment. 

All creditors, but banks particularly, are already burdened by mountains of fed- 
eral and state regulations. This means banks must spend valuable resources to 
know and research laws and to implement, audit, and prove compliance. In addition, 
these copious regulations inspire lawyers to search for technical violations to provide 
the basis of potentially expensive lawsuits. Both the banks and consumers ulti- 
mately pay for these compliance costs. We object to any new basis for compliance 
traps and Mvolous lawsuits. 

Finally, proponents of H.R. 1963 suggest that creditors should accept a postmark 
as the date of receipt because the IRS does. First, we should note that the IRS 
manually checks the postmark. Second, unlike creditors, the IRS deals with a single 
pajonent date and one annual pajmient. This makes processing based on the post- 
mark considerably more manageable. Obviously, tax returns received before April 
15 need not be reviewed at all. Only those received within a certain time frame after 
April 15 must be checked. Creditors, in contrast, usually handle millions of monthly 
payments with 365 different due dates. Manual and automated processing obviously 
becomes more of a challenge in this case. 

We also believe that there is a difference between tax returns, which are not op- 
tional, and a payment made pursuant to a contract the consumer voluntarily agreed 
to. In the case of a tax return, the consiuner has no choice about pa3dng taxes. Per- 
haps then, the taxpayer is entitled to a little more leeway where it is operationally 
feasible. With loans and other payment arrangements, however, the consumer has 
the choice of entering into a contract and agrees to the terms of repayment. Also, 
unlike the IRS, creditors typically give a grace period. 

Moreover, it may be more appropriate that the Postal Service postmark be consid- 
ered the date of receipt for a tax return since the item due one government agency, 
the IRS, is delivered by another government agency, the Postal Service. Essentially, 
the Postal Service is to the IRS as a bank teller is to the bank. The Postal Service 
is simply stamping the postmark as proof of the date of receipt for the IRS, just 
as a barJc teUer would stamp a loan payment personally delivered to the bank. 

In svunmary, the ABA strongly opposes H.R. 1963. We believe that it is unneces- 
sary given the widespread availability of grace periods and due date extensions. The 
bill wiU impose unnecessary and wasteful operational costs on creditors and other 
entities receiving payments. Finally, we believe that the bill represents an unwar- 
ranted interference in legitimate private sector matters. 

We appreciate the opportunity to submit our statement for the record. We will be 
happy to provide additional information and answer questions. 

Mr. McHuGH. Frankly, they make some excellent points, and 
we're losing an opportunity, in my view, to discuss that with them 
in this forum. But nevertheless, let me just pose two of the issues 
that they raise, for your comment. 



23 

They say, No. 1, that in most instances, insofar as they are con- 
cerned, you already have a bilHng grace period. Take for example, 
a mortgage payment. All of us, on our fixed pa3rment coupons that 
you mentioned, see a due date — say, the first of the month — and 
then a late date after which the late payment is assessed — let's say 
the 15th, whatever it may be. 

They claim that is a grace period provided outside the conditions 
of the contract, and if this bill were put into place, it would nec- 
essarily follow that they and others would have to eliminate the 
grace period. They would say to the detriment of the consumer. 
How would you respond to this claim? 

Mr. SiLBERGELD. Well, I don't necessarily read the bill that way, 
but that could easily be fixed. There is a footnote in my testimony 
that cites the Regulation Z provision, which does apply to them, by 
the way. So I don't see why that and this bill would have a dif- 
ferent effect. 

It says that it "shall be deemed received" on the date of the post- 
mark unless no late pa3mient is imposed. So if they choose not to 
impose the late pa3nnent or if they are required not to impose the 
late pa3mient, then I don't see why that has any effect whatever 
on the grace period. 

I do not read this bill as telling them they must charge a late 
charge if that postmark is after the due date or, legally, the con- 
tractual date. The bill can very simply be revised to allow them to 
do that. 

Mr. McHuGH. I think what they're saying — again, because they 
chose not to appear, or couldn't, perhaps, in the short period of 
time that they were provided — is the/re not so concerned that the 
technical language of the bill would prohibit them from doing that 
currently, but rather they are concerned about the impact of the 
bill. They contend that they could no longer provide, or would no 
longer provide, that voluntary 2-week, roughly, float period from 
the time the payment is actually due to the time beyond that point 
in which they begin to assess a late charge. 

In other words, that 2-week period that most of us see on our 
mortgage pajmient coupon would disappear, and they would say 
that would be to the detriment of the consumer. Therefore, we're 
really implementing this and seizing what Congressman Andy Ja- 
cobs called "certainty" which I think is important. By seizing that, 
we would actually be harming the consumer. 

Mr. SiLBERGELD. Well, we would actually, in order to do any 
quantitative measurement, have to look not only at those creditors, 
but everyone else to whom consumers typically pay their obliga- 
tions by mail, and see what the total cost is, because those banks 
are not the only creditors — I'm using creditor in the broader sense, 
not in the Truth in Lending sense — with whom consumers have 
this problem. 

There may be some losses. My snap judgment is that there are 
larger off-setting gains. I'm also not certain that we consumers, as 
a whole, have a 2-week float with anybody and everybody to whom 
we pay our mortgage pa3mnents. 

Mr. McHuGH. Right. So you would say, then, for the record, that 
the question of certainty, knowing as a consumer that you post 



24 

your pa3rment in a timely fashion, is worth whatever theoretical 
loss of float may occur? 

Mr. SiLBERGELD. Unless I see some quantitative measures to the 
contrary, I would say that would be the solution I would accept. 

Mr. McHuGH. Let me ask you something else in your position as 
an expert. We've also received from other folks the concern that 
there is really little basis for this in contract law and that, indeed, 
what we have in this bill is an unnecessary intrusion of govern- 
ment into what are, essentially and in fact, private contracts be- 
tween two willing, voluntarily entering adults. 

As someone who is part of the 104th Congress that wants to get 
Government out of people's lives, how might you respond to that 
statement of concern? 

Mr. SiLBERGELD. Well, that's sort of an argument for a free-for- 
all marketplace, Mr. Chairman, and I don't think that, whether one 
believes in more regulation or less regulation, that most of us be- 
lieve in no regulation whatsoever. 

I note, for instance, that the Congress is in the process of revis- 
ing the Truth in Lending Act, and after a number of battles in both 
Banking Committees, a compromise has been reached that is far 
short of repeal. 

I believe that it took Paul Douglas, the original sponsor of the 
Truth in Lending Act, 20 years to overcome the opposition of credi- 
tors to such things as having everybody calculate and disclose the 
annual percentage rate the same way, and I don't think there's a 
Member of Congress now who would want to change that provision 
and go back to the jungle of noncomparable credit rate disclosures. 

Any provision can be argued as the last straw, the one too many, 
but I think this one is common sense, and I don't think it's that — 
it is not that last straw regulation. 

Mr. McHuGH. I thank you. I don't want to dominate this. I would 
yield to the gentlelady from Michigan. Are there any questions or 
comments? 

Miss Collins of Michigan. No. 

Mr. McHugh. The vice chairman, Mr. Sanford of South Carolina. 

Mr. Sanford. Nothing. 

Mr. McHuGH. The gentleman from Texas, Mr. Green. 

Mr. Green. No questions. 

Mr. McHUGH. The gentleman from New York, Major Owens. 

Mr. Owens. No questions. 

Mr. McHuGH. You've said it all. 

Mr. SiLBERGELD. Thank you, Mr. Chairman. 

Mr. McHuGH. Thank you very much, Mr. Silbergeld. 

I mentioned earlier we would soon hear from the individual who 
really, more than any other, is responsible for the genesis of this 
legislation, and I'm pleased to call forward to the witness table Mr, 
Bruce Williams. 

[Witness sworn.] 

Mr. McHUGH. Thank you, sir. The record will show that the wit- 
ness responded affirmatively to the oath. 

Let me again welcome you, Mr. Williams. I feel a little formal, 
because everyone — around here, if you say the word, 'TSJewt," every- 
one knows who you're talking about. 

Mr. Williams. Yes, indeed. 



25 

Mr. McHuGH. And for those of us that drive after the sun goes 
down in our cars over large chunks of territory in our districts, the 
word, "Bruce," conjures up that same famiUarity. I feel as though 
I've known you for years and years. 

Let me, as a fan, say thank you for the hundreds and hundreds 
of hours of common sense that you bring to the airwaves and for 
helping people. We appreciate that, and I think we have, in this 
legislation that you have brought to our attention, the latest exam- 
ple of that exercise of common sense. 

We appreciate particularly your coming up from the sunny cli- 
mate of Florida to the Nation's Capital to present your views on 
this, and we welcome you and now give you the forum and the dais 
for any comments you would like to make. 

STATEMENT OF BRUCE WILLIAMS, TALKNET RADIO 

Mr. Williams. Thank you for your generosity and the generosity 
of your remarks. It's appreciated. I will spare you the introduction, 
in that you've introduced me — and why? I don't think there's any 
reason to go through my bona fides again. I'm in the radio busi- 
ness, I'm an entertainer. It's simple as that. 

Mr. Chairman, I would commend you for introducing H.R. 1963, 
and I express my sincere appreciation for having the opportunity 
to appear here. You and the 35 co-sponsors of the bill have shown 
the American people your resolve to remedy a problem that I be- 
lieve plagues millions of Americans. 

At a point in history when so many Americans question the com- 
mitment of their government, you and the co-sponsors of H.R. 1963 
are sending a message, a message that democracy does work for 
the people. The legislation is truly a grass-roots initiative. It 
worked its way into the legislative process. It's not a product of any 
special interest group. No highly paid lobbyist is promoting this 
legislation. 

The bill had its genesis where much good legislation does, in the 
public. H.R. 1963 addresses a concern reflected in my conversations 
with many people over the last few years. During the course of a 
week, I do have the opportunity to speak to some several millions 
of people. 

Now, not so many years ago, if you borrowed the money for an 
automobile, took out a mortgage or some other type of consumer 
loan, the overwhelming likelihood is you did it in your own neigh- 
borhood, and when it came time for the monthly pa3mient, you 
strolled down to the bank, the loan office, or whatever. You 
dropped off your check. That was the end of it. That's the way it 
was. 

Today, you can take out a mortgage on Tuesday, and by Thurs- 
day afternoon, the mortgage is sold to a company 2,000, 3,000 
miles away. Now, the company has no personal knowledge of you, 
and understandably, they wish to be paid. The problem is getting 
the payment to them on a specified due date. 

Now, under most current contracts, the obligation is not consid- 
ered met in a timely fashion until the check is in the lender's 
hands. Now, while that was appropriate when you could drop it off 
at the office or depend on the U.S. mail to deliver it the following 
day, neither is the case today. In the first instance, your loan may 



26 

be payable across the Nation; the second, the post office, to say the 
least, is less efficient than it once was. 

Let's follow the Federal model currently in place. When we pay 
our income tax, the postmark on the envelope is demonstration of 
timely payment, hence the rush on the 15th of April. 

If it works for the U.S. Government, as well as some States — my 
home State of Florida accepts taxes paid by the postmark, not by 
when they receive it — ^why not do the same thing? Metered mail, 
of course, would not be accepted, for obvious reasons. If the sender 
so desires, FedEx, United Parcel, and similar services should be ac- 
cepted as payment on time if put in their hands on time. 

You see, under the current system, if the check is delayed in the 
mail, the debtor is penalized with late charges and, as noted before, 
his credit record could be damaged through absolutely no fault of 
his or her own. He or she may have posted the letter a week, 10 
days early, but for whatever reasons, the letter gets there a couple 
of days late. 

Not only are they penalized with late charges, but on top of this, 
their credit reputation may be damaged. Of course, this is a lever 
that many companies will use to extract the late charges, i.e., "We 
will damage your credit." And we all know, many folks would rath- 
er sacrifice their first-bom child than have a poor credit record. 

In addition, there is a temptation for some lenders not to pick 
up their mail on the last day. Again, if the mail only reaches them 
on the following day, they're in a position to extract late charges 
from their customers, charges that are unwarranted. 

I can't begin to tell you how many complaints I've listened to 
about this. Clearly, if a creditor makes a sufficient fuss and reaches 
a sympathetic officer, at times, the charges can and will be waived. 
But this places a premium on persistence and negotiating abilities. 
Or, put another way, the less gifted are then penalized. 

I am suggesting legislation that will require the lenders across 
our country to uniformly accept the postmark as the appropriate 
pajTTient on time. Now, it could be argued that sending the letter 
certified mail would work, but it doesn't. That only proves the let- 
ter got mailed. There is nothing binding about the postmark. 

The suggestion is simple. In order for the lender to be entitled 
to a late charge, he would be required to provide a photocopy of the 
payment envelope. 

I would like to go a little bit away from my prepared remarks. 
I note, in the American Bankers Association petition — for lack of 
a better term — they address this. And while they do make, as 
you've pointed out, some interesting points, I'm embarrassed, be- 
cause I am a part of institutions that belong to the agency, that 
they make comments such as they have made here without a little 
more thought in depth. 

As an example, they say there is no way they could sort these 
things out, and whatever. Well, most of the obligations that I 
have — and perhaps that you fellows have — they put an envelope in, 
a return mail envelope. Well, if the envelope is provided to you, it 
would be a simple matter to put a bar code in for the different 
dates the thing is due. It would be spit right out by their automatic 
sorting machine, or it could be color coded or some other way iden- 
tified. It would not be a hard thing to overcome, technologically. 



27 

Further, they go on to say, "Supporters of the bill allege, without 
documentary evidence, that, unscrupulous creditors deliberately 
delay crediting an account on the" payment date in order to receive 
charges. Then they went on to note that, under Section 164 of the 
Truth in Lending Act, so on and so forth, they "must post pay- 
ments on the date of receipt." 

Well, that answers the question. I apologize. All you have to do 
is pass a regulation. I have to believe, in every one of those towns 
where these banks are located, they have a law that says you can't 
rob a bank. So we can get rid of all the security people in those 
banks. We have a regulation against that. I mean that's nonsense 
to say there's a regulation, therefore, the problem is cured. I will 
talk about that in just a moment. I think that's just such a spe- 
cious argument, it's embarrassing that an institution would make. 

I have mentioned this idea in my program. I've invited listeners 
to comment, and the evidence is — well, my goodness, somebody 
highjacked my postcards. Oh, OK. There are several thousand post- 
cards here. I don't know how many. I think the last time they told 
me, it was something like 4,000 or 5,000. 

I think every section of the country — certainly all 50 States, 
Guam, Puerto Rico, the Virgins — all are included, because this is 
the area where my show goes — and that was just with a few men- 
tions on the show. I think if we really wanted to stir things up, 
more people would respond. 

To get people to respond to a positive action is far more dif- 
ficult — and I'm sure you fellows and gals have found that in your 
legislative lives. People respond to the negative far more easily 
than the positive. Now, there could be some objections, clearly, and 
let me anticipate a couple. 

The first, the additional paperwork involved. Well, the alter- 
native is to libersdize their policy and not to attempt a late fee or, 
alternatively, accept the inconvenience. A second argument that 
could be put forward was the loss of the float. 

Now, it should be noted that no lender, to my knowledge, gives 
credit when you make a payment early. If you're going on vacation, 
you send your check in 3 weeks early. I've never received a check 
from them or a credit saying, "Well, we got your money early, so 
we're going to forgive the interest for that 3 weeks." The next time 
that happens will be the first time. 

Put another way, if they're entitled to a fee when payment is 
made late, why shouldn't the creditor receive the same amount of 
interest if the payment is received early? And interestingly, it has 
been brought to my attention by bankers that when they send in- 
terest pa3mients out, rather than crediting to account — for example, 
on a certificate of deposit — it is mailed on the day the interest is 
finished earning. 

And if you ask them, "Well, gee, it took a week to get here," — 
"Well, that's not our problem. We postmarked it on time." And you 
can test that theory. That is the way the banks operate in today's 
business climate. It seems to me the old goose and gander thing 
would apply here. 

Now, some of my critics have said something to the effect that 
"You guys in the media are anti-business." Now, I can talk in theo- 
retical terms, but let me note the following. I have an active inter- 



28 

est in a Visa/MasterCard program where I promote the use of a 
particular institution's credit cards. I am paid on the basis of prof- 
itability and interchange. I get a piece of the action. Clearly, if I 
felt this was to the bank's detriment, I would think about this 
again. 

Additionally, I have what for me is a fairly large investment, in 
six figures, in the stock of a relatively small bank, and further, I 
have pledged an additional six-figure investment in a bank that's 
currently organizing. Clearly, I am not anti-bank. 

Further, I have been in the radio business for 30 years, but I 
have been an entrepreneur all of my adult life, and I operate busi- 
nesses in, I think, about six States. It might be five. I have looked 
at that. I'm not sure if it's five or six, but at least five. 

The legislation, if adopted, will simply level the plajdng field and 
clearly spell out the ground rules, and right now, the ground rules 
are about whatever any institution decides they should be. 

Finally, if the Federal model is a poor one, then it occurs to me, 
two things should be happening very quickly now that this has 
been brought to the attention of the Congress. First, public-spirited 
organizations, like the Bankers Association, like Visa and 
MasterCard, should spend at least part of their resources petition- 
ing you to change the Federal model, change the Internal Revenue 
system, because if it's a bad business, clearly it's their responsibil- 
ity to point that out. 

And second, if a legislator feels this is bad business, I certainly 
think he or she should go on record as endorsing the Federal model 
change. Now, clearly, my tongue is clearly in my cheek, because I 
believe this is good business. It's good for everyone involved. 

In 14 years on the network — ^with the exception of, I do an IRS 
special every year, and that's on a weekend — I have never had a 
guest. I have turned down a great many Congress people, Senators 
and Representatives, and a couple of seated Presidents, and Bob 
Hope. No guests on my show. I don't want the camel to get his nose 
under my tent. It's just me and the audience; that's it. No guests. 
I will take, clearly, telephone calls. 

So I'm inviting — and I will invite on the air and by mail — the 
folks that didn't come here today — I would like to meet them — who 
were opposed to this. I will give them a special telephone number 
so they can get right through. They don't have to sort through our 
screening process, and I will allow them to present their views on 
the air, however many, 15 million people, whatever the number is. 

Now, that will get their point of view out. Now, I suspect that 
some of their customers might not be real happy with that, but 
we're going to find out. But I always give people a shot at me. If 
I criticize someone, I have never, on any occasion, denied them the 
right to shoot back on my show, and I think that's necessary here. 

So I'm issuing a public invitation now, and I will do so this 
evening on the program. And further, I'm going to read extracts of 
their presentations on the air, because I said when I mentioned 
this on the show, both sides should be allowed to comment. I think 
that's appropriate. Nobody's perfect. But I would like to face them, 
I really would enjoy that. 

I thank you very, very much for your graciousness in allowing 
me to appear this evening. 



29 

[The prepared statement of Mr. Williams follows:] 

Prepared Statement of Bruce Williams, Talknet Radio 

Mr. Chairman, and members of the Subcommittee, I am Bruce WiUiams. My pro- 
gram is heard on approximately 400 radio stations in all 50 states, Guam, the U.S. 
Virgin Islands, and Puerto Rico. I will soon be starting my 15th year in talk radio. 
My program is the longest running national talk show in the country, and I am told 
is the most listened to nighttime long form show in the nation, and the second most 
listened to telephone talk show overall. Unlike many other talk show presentations, 
it is almost entirely non-political. I deal with the everyday problems that folks have 
with their lives and, hopefully, in some way help people solve them. 

Mr. Chairman, I want to commend you for introducing H.R. 1963, the Postmark 
Prompt Payment Act of 1995, and express my sincere appreciation for having the 
opportunity to appear before you today to testify in support of this bill. You and the 
35 cosponsors of the bill have shown the American people your resolve to remedy 
a problem that plagues millions of Americans. At a point in our history when so 
many Americans question the commitment of their government, you and the cospon- 
sors of H.R. 1963 are sending a clear message that our representative democracy 
is working for the people. This legislation is truly a grass roots initiative that has 
worked its way into the legislative process. H.R. 1963 is not the product of any spe- 
cial interest group or any highly paid lobbyist promoting a special interest. 

The bill had its genesis where so much good legislation does — from the public at 
large. H.R. 1963 addresses a concern reflected by my conversations with many peo- 
ple over the last few years. During the course of a week, I have the opportunity to 
speak to millions of people. 

Not so many years ago, if you borrowed money for an automobile, took out a mort- 
gage or some other type of consumer loan, the overwhelming likelihood is that you 
would do it in yoiir own neighborhood. When it came time for the monthly pa3rments 
you could stroll down to the bank, loan office, or whatever and drop off your check. 
That was the end of it. That's the way it used to be. Today, you can take out a mort- 
gage on Tuesday, and on Thursday afternoon the mortgage is sold to a company two 
or three thousand miles away. This company has no personal knowledge of you. Un- 
derstandably, they wish to be paid. The problem is getting the pa3Tnent to them on 
a specified due date. 

Under most current contracts, the obligation is not considered met in a timely 
fashion until the check is in the lender's hands. While that was appropriate when 
you could drop it off at the office or depend upon the U.S. Mail to deliver it the 
following day, neither is the case today. In the first instance, your loan may be pay- 
able across the nation; the second, the Post Office, to say the least is less efficient 
than it once was. Let us follow the Federal model currently in place. When we pay 
our income tax, the postmark on the envelope is demonstration of timely pa)rment, 
hence the rush on April 15th. It works for the U.S. Government and some state gov- 
ernments as well. Why not require that all lenders accept as timely payment, the 
postmark date rather than the date they ostensibly received the payment by mail? 
(Metered mail would not be acceptable for obvious reasons.) If the sender so desires. 
Federal Express, United Parcel Services or similar services, should be accepted as 
well as payment on time if put in their hands on or before the due date. 

Under the current system, if the check is "delayed" in the mail, the debtor is then 
penalized with late charges and his credit record can be damaged through abso- 
lutely no fault of his/her own. He or she may have posted the letter a week or ten 
days early but, for whatever reasons the letter gets there a couple of days late, not 
only are they penalized with late charges, but on top of this their credit reputation 
may be damaged. Of course, that is a lever that many companies will use to extract 
the late charges, i.e., "we will damage your credit". Many folks would rather sac- 
rifice their first bom child than have a poor credit record. In addition, there is a 
temptation for some lenders to not pick up their mail on the last due day. Again, 
if the maU only "reaches" them the following day, they are in a position to extract 
late charges from their customers, charges that are not warranted. I cannot tell you 
how many complaints I have had about this. Clearly, if a creditor makes a sufficient 
fuss and reaches a sympathetic officer, at times the charges would be waived. This 
of course places a premium on persistence and negotiating abilities, and the less 
gifted are then penalized. 

I am suggesting legislation that would require the lenders across the country to 
uniformly accept the postmark as the appropriate pa5Tiient on time. It could be ar- 
gued that sending them a letter Certified Mail may do, but that doesn't help either. 
If the Certified letter is received the day after the "due date", a late charge is none- 



22-103 96-2 



30 

theless assessed. All this ensures is that there is a receipt for the check having been 
delivered. 

My suggestion is simple, that the postmark date would obtain. In order for the 
lender to be entitled to a late charge, the lender would be required to provide a 
photo copy of the pajonent envelope showing a postmark beyond the stated grace 
period. Simple, reasonable, benefiting everyone, non-poUtical and bipartisan. For 
what more could you ask? 

I have mentioned this idea on my program and invited listeners to comment. To 
date, I have received many thousands of postcards supporting this idea and only a 
handful of criticisms, mostly from those people who perceive that their businesses 
will be adversely affected or, alternatively, have to expend extra effort. It is under- 
standable that they would have concerns, but the overall benefit to the public cer- 
tainly outweighs any inconvenience to these companies. While clearly, it is difficult 
to anticipate all of such objections, let me anticipate one or two. 

The first will be the additional paper work involved in keeping the envelopes on 
pajTnents that were posted late. The alternative there is to liberalize their poUcies 
and not attempt to collect a late fee or, alternatively, accept the additional inconven- 
ience. 

A second argument that could be put forward would be a loss of some float. It 
should be noted that no lender, to my knowledge, gives credit when a payment is 
made early. Put another way, if they are entitled to a fee when a payment is made 
late, why then should not the creditor receive the same amount of interest if a pay- 
ment is received two, three or four days early? It has been brought to my attention 
that when many banks forward interest to the depositor, as contrasted with credit- 
ing the accounts, they mail out the interest check at the end of the agreed upon 
period. While the depositor may not receive the check for several days, the banks 
position was that it was paid on time since the dividend check was postmarked on 
the appropriate day. 

One or two of my critics have said something to the effect that you people in the 
media are anti-business. Rather than talk in theoretical terms, I would note the fol- 
lowing: I have an active interest in a Visa/Mastercard program where I promote the 
use of a particular institution's credit cards and I am paid on the basis of its profit- 
ability and interchange. Clearly, if I felt this was very much to the bank's det- 
riment, I'd have second thoughts about this whole proposition. Additionally, I have 
what is for me, a fairly large investment (some six figures) in the stock of a rel- 
atively small bank (under 30 offices) and fiirther have pledged an additional six fig- 
ure investment in a bank that is currently organizing. Obviously, I am not anti- 
bank. Further, while I have been in the radio business for 20 years, I have been 
an entrepreneur for all of my adult Ufe and currently operate several businesses in 
half-a-dozen states. 

This legislation, if adopted, wiU level the playing field and clearly spell out the 
ground rules which are currently a matter of what any individual institution or 
agency decides they will be. Further, it will eliminate the temptations to manipulate 
the receipt of payments to the detriment of the debtor and finally, correct an anom- 
aly which was nothing more than a product of the changing business climate, i.e., 
the multi-state activity by banks, credit card issuers and other extenders of credit. 

Finally, if the Federal model is a poor one, then it occurs to me that two things 
should be happening very quickly now that this has been brouqht to the attention 
of the Conqress. 

First, public spirited organizations who may object to this proposal should at least 
invest part of their resources petitioning the government to change the Internal 
Revenue Code and eliminate the Federal model to which I have alluded to. 

Secondly, if a legislator feels my proposal is a bad business practice, then it cer- 
tainly should be eliminated from the Federal model because no legislator would go 
on record as endorsing a poor business practice for the government. Obviously, I 
suggest the latter with my tongue firmly in my cheek. The Federal model does work. 
It is beneficial to everyone concerned and if the Internal Revenue Service, who cer- 
tainly receives in volume as much mail as any individual corporation can handle, 
I can envision no reasonable objection. 

Mr. Chairman and Members of the Subcommittee thank you for this opportunity 
and your consideration of this legislation. 

Mr. McHUGH. Well, Mr. Williams, thank you for being here. All 
of the buzzers that you've heard and the beepers going off mean 
that we have been called for a series of votes, and given your busy 
schedule, I think when we leave for the vote, we will not come back 
because it will be such a long period of time. 



31 

I do want to say that with the unanimous consent, without objec- 
tion, we have statements from Congressman King, Representatives 
Walsh and Davis, to be included in the record. As I said, we will 
keep the record open until the close of business on October 27, but 
let me know. 

[The prepared statements of Hon. Peter T. King, Hon. James T. 
Walsh, and Hon. Thomas M. Davis follow:] 

Prepared Statement of Hon. Peter T. King, a Representative in Congress 
From the State of New York 

I greatly appreciate the opportunity to testify before the Subcommittee on the 
Postal Service in support of the Postmark Prompt Pa5anent Act of 1995 (HR 1963). 
I would like to thank and congratulate the Chairman of the Subcommittee, my good 
friend and colleague from the great State of New York, Rep. John McHugh, for hold- 
ing this important hearing. Chairman McHugh has taken the lead by introducing 
this long-overdue legislation and by holding this informative hearing to seek a solu- 
tion to the "payment due problem" faced by milhons of American families. 

As an original cosponsor of HR 1963, I am proud to be taking an active role in 
trying to relieve the burden that is inflicted upon honest citizens who pay their bills 
on time, but through no fault of their own, are unfairly penalized with late fees 
when their pa3mients are not received on time as a result of the delays of others. 

Throughout my years in Congress, I have been contacted countless times by con- 
stituents who have had difficulties as a result of payments they mailed, but were 
not delivered on time. It is unfortunate that the credit ratings of conscientious citi- 
zens can be affected as a result of this imfair situation. 

I believe that approving this long-overdue legislation is the least we can do to help 
oxir constituents who value their good credit history and do not want to see it tar- 
nished as a result of this inequity. The passage of this legislation would ensure that 
the American consumer can take comfort in the fact that once the check is in the 
mail, the bill has been paid. 



Prepared Statement of Hon. James T. Walsh, a Representative in Congress 
From the State of New York 

Mr. Chairman: I'd like to thank you for the opportunity to submit this brief state- 
ment for the record on H.R. 1963, the Postmark Prompt Payment Act of 1995, which 
I was proud to cosponsor. This is sound bi-partisan legislation designed to solve a 
long-standing problem in our country. This measure should be passed. 

As citizens and taxpayers, we know that the Internal Revenue Service (IRS) ac- 
cepts the postmark date as proof of timely payment of our annual income taxes. The 
U.S. Postal Service in our local communities makes special arrangements each year, 
in cooperation with the IRS, for people mailing their taxes just before the April 15th 
deadline so that the postmark on the envelope will indicate prompt payment. The 
IRS first formulated this procedure to assist U.S. taxpayers. It was a good idea. I 
submit to you that if this concept is good enough for the IRS, it is good enough for 
the people of my congressional district for payment of their bills and invoices. 

Our constituents' good credit ratings are hard-earned through a continuing con- 
scious effort to do the right thing and pay their biUs on time. These ratings should 
not be unfairly damaged. And citizens should not have to be responsible for late 
payment fees because the bill or invoice, properly addressed with proper postage, 
arrives late at the credit card company or bank through no fault of their own. When 
this occurs — and it happens all too frequently — people are slapped with unneces- 
sary, unfair high interest charges. 

Mr. Chairman, the 104th Congress has committed to the people of our country 
that they can feel confident we are promoting their welfare, not penalizing them. 
This legislation reaches that goal. I urge prompt passage of H.R. 1963 for the simple 
peace of mind of the hard-earned good credit of all our constituents. 

Thank you. 



Prepared Statement of Hon. Thomas M. Davis, a Representative in Congress 
From the State of Virginia 

Mr. Chairman, thank you for giving me the opportunity to speak in support of 
this important legislation I think I speak for many of my colleagues when I ask who 



32 

has not placed payment for a bill in the mail on time, only to find that the bill was 
a few days late in arriving at its destination. Hopefully, this legislation will lead 
to a solution with which all sides of this issue can agree. 

As a representative in local government for fifteen years, I experienced first hand 
how the federal government sometimes passed laws that were well intentioned; but, 
once appUed, actually did more harm than good to citizens. Legislation of this t5T)e 
follows what I refer to as the "Law of Unintended Consequences." In order to com- 
bat this phenomena, I am proud to be an original cosponsor of the Postmark Prompt 
Payment Act, H.R. 1963, which I believe will have the opposite effect on citizens. 
Instead of burdening people with government regulations that could tie their hands, 
this legislation will free people from the worry that payments may not reach their 
creditors on time. 

H.R. 1963 will require the postmark on the outside of an envelope to serve as 
proof of timely payment of bills, invoices, and statements of account due. The citi- 
zens of this nation should be able to rely on consistency in the dating of their finan- 
cial transactions. They have the right to know that when their bill is mailed on 
time, their payment will be considered on time. This "mail box" rule is applied to 
most civil contracts corporations enter into and should now be applied to the mort- 
gage and credit card payments of the average American citizen. A properly ad- 
dressed postmarked envelope with adequate postage serves as proof of timely pay- 
ment for the Internal Revenue Service, so why can it not for banks and credit card 
companies as well? 

The plain truth is that financial institutions resist this plan because it prevents 
them from charging interest on payments citizens place in the mail in a timely man- 
ner. However, this legislation does not place a burden on financial institutions; 
creditors retain the option of moving a bill's due date to compensate for this policy. 
The question we must answer is who should pay for a piece of mail that was de- 
layed? The small debtor is the party least equipped to handle this situation. Lost 
mail is not always the fault of the Postal Service; but, the risk of lost, delayed, or 
misplaced mail should not fall on the small debtor who relies on the prompt delivery 
of mail. This legislation wiU properly reallocate the risks of delays in the postal 
service, and better aid the average citizen. 

Again, thank you Mr. Chaiman. I hope my colleagues will join with me in support 
of this sensible proposal. 

Mr. McHuGH. If there is any doubt about the very responsible 
attitude of the good people who wrote Mr. Williams, flushing 
through the letters and postcards, we found a penny postcard, on 
which this particular person expressed his interest in this bill. 

It's interesting to note that the penny postcard was used in the 
United States from 1873 to 1917 and has not been in use since 
then, and this person kept this postcard and properly posted it to 
mail to you. So you've got some very frugal and, evidently, some 
very healthy and long-living listeners out there. 

Mr. Williams. A testimony to the demographics of my program. 

Mr. McHuGH. Well, I think that's only partly it. Until October 
27, the record will be kept open. 

We do appreciate your being here. I will note that the majority 
of members of the subcommittee have joined in co-sponsorship of 
this legislation, which I think shows my colleagues' dedication to 
this issue. And I know you heard, as the Members came in, in rath- 
er significant numbers, to testify in support of this, there is wide- 
spread and bipartisan interest. And we look forward to working 
with you in pursuing this very important legislation, 

I would like to know if any of my colleagues have further com- 
ments or quick questions. 

Mr. Green. Mr. Chairman, just again to welcome Bruce, and 
also, that constituent, or your listener, who said that lowered the 
value of that postcard by mailing it in the U.S. mail, since it was 
so old, but I'm glad they're dedicated. 

Mr. Williams. Indeed. Thank you, sir. 



33 

Mr. McHuGH. Well, we thank you, and we will be working with 
you, and again, all of us appreciate your support and effort. 

Mr. Williams. Thank you very much, Mr. Chairman. 

Mr. McHuGH. With that, we will adjourn. 

[Whereupon, at 11:10 a.m., the subcommittee meeting was ad- 
journed.] 

[Additional material submitted for the record follows:] 

Prepared Statement of Benjamin A. Oilman, a Representative in Congress 
From the State of New York 

Mr. Chairman, I thank you for calling this hearing to discuss H.R. 1963, the Post- 
mark Prompt Payment Act of 1995, a measure which I have enthusiastically cospon- 
sored. This legislation is a common sense proposal to protect conscientious consum- 
ers who attempt to pay their bills in a timely fashion. H.R. 1963 provides that the 
Eostmark on envelopes carrying payments be considered proof that the pa5rment had 
een within the time period required. The use of the postmark to prove timely ac- 
tion has precedence in contract law and is present in Internal Revenue Service regu- 
lations pertaining to timely filing of income tax returns. I cannot overstate my sup- 
port for this proposal to protect consumers who do their best to honor their financial 
commitments. 

I welcome my distinguished colleagues, Mr. Boehlert, Mr. Jacobs, Mr. Stockman, 
Mr. Barrett, Mr. Blute and Mr. Romero-Barcelo to our subcommittee, as well as, Mr. 
Bruce WiUiams, the host of Talknet and Mr. Mark SUbergeld, from the Consumers 
Union. I look forward to hearing their testimony. Thank you Mr. Chairman. 



Prepared Statement of Hon. Rick Lazio, a Representative in Congress From 

THE State of New York 

Mr. Chairman, there is nothing more disheartening than to be penalized for doing 
nothing wrong. Many citizen's and businesses are, however, punished in just such 
instances. They send in timely pajrments to pay for goods and services, only to learn 
that because of circumstances outside of their control, the pajonent was received 
late. Even the U.S. Postal Service advertises that nearly 20% of letters are not de- 
livered on time. 

One of oiu" nation's most cherished principles is the belief that every citizen is in- 
nocent until proven giiilty beyond a reasonable doubt. Unfortunately, that doctrine 
has not extended to disputes with creditors over late payments, and all too often, 
hard working men and women have been subjected to excessive inconvenience and 
high legal fees in an attempt to prove that they did nothing wrong. They mailed 
the check in a timely fashion, but it failed to arrive on time. 

We have the opportunity, and an obligation to the American people to correct this 
injustice. If Uncle Sam can use the postmark on the envelope as proof of timely pay- 
ment, why can't creditors? I am proud to be a co-sponsor of H.R. 1963, which will 
do just that. H.R. 1963 would recognize the postmark as proof of timely pa5Tnent 
of a bill, invoice or statement of account due, made through the mail, provided that 
the envelope was correctly addressed to the payee, and the adequate postage was 
affixed. 

Credit issuers impose fees and higher interest charges for those who make even 
a few late pajonents, while late-payment data remain on credit records for several 
years, jeopardizing that future car loan or mortage application. 

Congress is working to define a new path for America's future; Trying to move 
people toward self-sufficiency and personal responsibility, but this may be difficult 
without leveling the paying field. 

It is difficult enough for people to acquire and live out the American Dream, with- 
out the additional burdens imposed on hard-working citizen's who are penalized be- 
cause the maU was slow. 

H.R. 1963 is a good step in resolving the pajmaent due problem, and I look for- 
ward to working with you in passing the Postmark Prompt Payment Act. 



Prepared Statement of the Countrywide Funding Corporation 

Countrjrwide Funding Corporation appreciates the opportunity to submit our 
statement for the record on H.R. 1963, the "Postmark Prompt Payment Act of 1995." 



34 

Countrywide Funding Corporation, headquartered in Pasadena, California, is the 
nation's largest mortgage lender and servicer. Countrjrwide primarily originates and 
services single-family home loans, which have been sold to the secondary market. 
Countrywide's parent corporation. Countrywide Credit Industries, is a publicly trad- 
ed entity on the New York Stock Exchange ("CCR"). 

H.R. 1963 amends title 39 of the United States Code "to provide that pajTnent 
of a bill, invoice or statement of account due, if made by mail, shall be considered 
to have been made on the date as of which the envelope which is used to transmit 
such payment is postmarked." Although we understand the sentiment underlying 
the legislation, and can sympathize with customers who have paid late charges due 
to slow or unreliable mail service. Countrywide strongly opposes this bill because 
it is burdensome and costly, disruptive to the secondary mortgage market, and un- 
necessary. The minimal beneficial effects gained by a few consumers will be out- 
weighed by the overall increase in the cost of credit which will be passed on to all 
consumers as a result of this policy. 

H.R. 1963 imposes an overwhelming burden upon all creditors as processing costs 
will skyrocket. For example. Countrywide collects payments from over 1.1 million 
families each month. Ciurently, payment processing is highly automated with use 
of envelope cutters, computer-read remittance slips and machine facilitated check 
routing. H.R. 1963 effectively renders oiu- sophisticated payment processing oper- 
ations obsolete. In essence, passage of this bill would mandate the return to the use 
of manual processing and account revision which is slow and costly with increased 
possibility of human error. Requiring envelopes of all shapes and sizes to be proc- 
essed, photocopied, and stored with the postmark recorded will impose further tech- 
nology costs and loss of efficiency. Moreover, a certain percentage of postmarks are 
unreadable even by the human eye, making this an extremely difficult requirement 
with which to comply. 

Moreover, the provisions of H.R. 1963 have unintended consequences with nega- 
tive macroeconomic effects. When a payment is late, it impedes Countrywide ability 
to fulfill its contractual agreements with the secondary market. Countrywide, like 
many mortgage companies, sells most of our mortgages to government sponsored en- 
terprises such as Fannie Mae and Freddie Mac who in turn create financial instru- 
ments which are sold to secondary market investors. This market, which is com- 
prised of millions of mortgage loans worth literally trillions of dollars of principal 
amount, has been built on a foundation of standardized documents and payment 
time frames. This market cycle enables capital to flow continuously and at minimal 
cost to the consiuner. When a consumer is tardy with his or her payment beyond 
the 15-day grace period, and this "lateness" is sanctioned by the government as H.R. 
1963 dictates, the flow of monies is disrupted and results in an increased cost of 
credit for homeowners and all consumers. Not only does H.R. 1963 improperly in- 
trude into the voluntary contractual agreements between Coimtrjnvide and our bor- 
rowers, but it disrupts our contractual agreement with the secondary market with 
greater, more harmful macroeconomic consequences. 

H.R. 1963 shifts the consequences of unreliable postal delivery to the business sec- 
tor. Yet this is unnecessary as Countrywide, hke most creditors, has already pro- 
vided the consumer with a grace period to allow for slow mail delivery. At Country- 
wide, all payments are due on the first of the month and the contractual agreement 
states the payment must arrive by the fifteenth to avoid a late fee. In almost every 
case, 15 days is more than adequate to allow for slow delivery or other problems. 
In the event a pa5rment is lost in the mail for more than 15 days and late charges 
are assessed. Countrywide extends both flexibility and understanding in that we 
wiU waive the fees provided the consumer has a reasonable excuse. We understand 
that poor postal service can be the root cause in certain instances that are neither 
the fault of the consumer nor the corporation, and we believe we sufficiently accom- 
modate consumers in such circumstances. Countrywide also offers electronic pay- 
ment options (at no additional cost to the customer) to reduce customer reliance on 
the mail for their pajmients. 

Imposing more paperwork burdens and regulatory constraints is hardly in the 
spirit of the 104th Congress. Countrywide strongly opposes H.R. 1963 as an unnec- 
essary intrusion into voluntary contractual agreements. The bill wreaks havoc in 
the secondary capital markets and imposes immediate and expensive technology and 
efficiency costs. And, H.R. 1963 does all of this to address a problem which has al- 
ready been solved. The consumer does not benefit whatsoever from this legislation. 
Instead, the consumer pays even more as these costs are passed on. 



35 

Prepared Statement of James C. Drozanowski, PREsroENT, Chase Manhattan 

Bank (USA) 

The Chase Manhattan Bank USA ("Chase") desires to place on record its views 
regarding H.R. 1963. Because Chase beUeves that the Congress and the Federel Re- 
serve Board have ah-eady sufficiently addressed the interests of consumers in this 
area in the current versions of the Truth-in- Lending Act (15 USC 1601 et seq.) and 
Regulation Z (12 CFR 226), Chase opposes the adoption of H.R. 1963. 

Chase is the creditor on several miUion credit card and other consumer revolving 
revolving credit accounts. Consumers holding such accounts are entitled to a state- 
ment each month diuing which a debit or credit to the account has occurred.^ 
Chase, like many creditors, offers a period of time during which payment in full 
may be made to avoid additional finance charges. Under these circumstances, the 
statement must be sent to consumers at least 14 days before the date such a pay- 
ment is due.2 This advance notice provides consumers with ample time, even consid- 
ering a delay in mail delivery, to both review the statement and remit payment be- 
fore any adverse consequences may occur. 

Moreover, Chase and all other creditors on consumer open-end accounts are re- 
quired to credit payments received fi"om consumers to those consumers' accounts on 
tne day on which such payments are received, provided consumers follow the in- 
structions which must accompany each and every bill sent to them and which must 
be reasonable, 3 This requirement applies despite the fact that the vast majority of 
pa)Tnents are tendered in the form of checks or other negotiable instruments for 
which the creditor will not receive collected funds (and for which the consumers' ac- 
counts will not be debited) for three or more business days. Consumers are therefore 
already benefiting from a cessation of interest accrual even though no deduction 
from their accounts has been made. While no figures are available, Chase believes 
it reasonable to quantify this benefit to consumers as millions of dollars per year. 
Chase does not believe that any further benefit consumers is warranted. 

On the other hand enactment of H.R. 1963, would impose substantial additional 
financial burdens on Chase and other creditors of open-end accounts. First, the tech- 
nology necessary to scan in-coming mail to determine the date of its postmark does 
not presently exist in a commercially usable form. As performing this task manually 
would involve prohibitive cost. Chase and other creditors would be faced with the 
oppressive task of either developing it in-house or commissioning its development. 
Furthermore, because of the requirements for timely crediting of pajrments dis- 
cussed above. Chase has expended significant sums to purchase machinery which 
opens and discards the envelopes containing pajmaents so that their contents can 
be promptly processed. This process is likely to be incompatible with scanning post- 
marks. Accordingly, enactment of H.R. 1963 would not only require an investment 
in new technology but a replacement of existing technology which presently func- 
tions qmte adequately. 

Second, enactment of H.R. 1963 would fiuther burden Chase by effectively in- 
creasing the float made available to consumers. By definition, a postmark reflects 
the date the Postal Service receives a piece of mail. This is almost always prior to 
the date on which that piece of mail is delivered to the addressee. If the posting 
of a payment on the date of the postmark is required. Chase would be required to 
cease accruing interest on accounts even before Chase has received that payment, 
much less had the opportunity to begin the collection the actual funds represented 
by the check or other instrument. While it may be argued that crediting payments 
on the day they are received is an appropriate consumer benefit, H.R. 1963 would 
result in nothing short of a consumer windfall to be financed by creditors. 

I trust you will find these comments helpful in your considerations. Please feel 
free to contact me should you need further information or discussion. 



Prepared Statement of the Consumer Bankers Association 

The Consumers Bankers Association ("CBA") ^ thanks the Subcommittee on Postal 
Service for the opportunity to submit a statement for the record on H.R 1963, the 
"Postmark Prompt Payment Act of 1995." 



1 12 CFR 226.5(b)(2Xi). 

2 12 CFR 226.5(b)(2Xii). 

3 12 CFR 226.10 

^CBA was founded in 1919 to represent retail banks nationwide. Today it represents approxi- 
mately 750 federally insured bank holding companies, banks and thrift institutions that hold 
nearly 80 percent of all consimaer deposits and more than 70 percent of all consumer credit held 

Continued 



36 

H.R. 1963 would mandate that bills be considered paid on the date that the pay- 
ment is postmarked by the U.S. Postal Service, rather than the day pajonent 
reached the recipient. This legislation, if adopted, would create a myriad of technical 
and logistical difficulties for the banking industry. Ultimately, consumers nation- 
wide could be forced to pay more for their banking services due to the new tech- 
nology and additional processing that H.R. 1963 would impose upon the industry. 
In addition, sufficient industry safeguards already exist to protect consumers from 
the uncertainty of postal delivery. CBA believes that passage of this bill would hurt 
banks and their consumers, and therefore strongly opposes H.R. 1963. 

It is important to recognize that automated equipment currently performs vir- 
tually all of the steps involved in payment by mail, ensuring speedy processing and 
crediting for bank customers. The efficiency of todays electronic processing would 
be compromised by the passage of H.R. 1963, resulting in increased cost to the cus- 
tomer. Crediting payments according to postmark date would add two new steps to 
payment processing; electronic reading of the postmark on the envelope, and elec- 
tronic transfer of the date of the postmark onto the check. The development and im- 
plementation of this technology would be costly to banks, and therefore to their cus- 
tomers. Many institutions that process payments electronically do not use machin- 
ery that can backdate payments, a situation that would have to be corrected by in- 
stalling new, expensive systems. Replacement of technology would constitute an 
enormous one-time cost, but the extra processing steps required by H.R. 1963 would 
be a continuing expense, these costs would ultimately be absorbed by consumers. 

The efficiency of any future technology of this type is doubtftil in light of the com- 
mon irregularities in postmarks. Postmarks are often illegible due to multiple post- 
marks, misapplication, and the wear and tear of delivery. Correct electronic recogni- 
tion would probably be impossible or flawed in cases like these, resulting in delays 
and confusion. Any technology developed to meet the new processing demands of 
H.R. 1963 would be useless unless it could deal with these problems. 

Although the provisions of H.R. 1963 may seem similar to the Internal Revenue 
Service's policy of accepting returns postmarked by the April 15 deadline, the situa- 
tions are not comparable. Since there is one annual deadline for these income tax 
returns, the I.R.S. handles most returns within a time window of a few weeks. 
Those returns that arrive after April 15 can be processed by hand diuing those few 
days. On the other hand, the billing cycles of private businesses vary widely by type 
of account and by individual customer, therefore, it would be impossible to establish 
a limited time window within which all payments can be processed according to 
postmark. H.R. 1963 would require banks to engage in extra processing steps on all 
payments at all times, although only a small percentage of those pa5Tnents would 
be affected by the date of postmark. Processing would be complicated and protracted 
for aU banking customers, not only those who pay at the billing deadline. 

In addition, it should be noted that the I.R.S. does not offer any flexibility in its 
payment schedule, as banks t)T)ically do. Most financial institutions have official 
grace periods of two to three weeks to allow their customers sufficient time to make 
payments. Sufficient safeguards are therefore already in place to provide consumers 
with enough time to make payments, and to protect them from the possibility of late 
delivery. Safeguards like these make H.R. 1963 an unnecessary intrusion into the 
banking industry, and into private business in general. 

Laws also exist to prohibit any intentional pajrment processing delay by creditors 
in order to reap late fees or interest. Under Section 164 of the Truth in Lending 
Act (Section 226.10 of Regulation Z), credit card issuers are required to post pay- 
ments on the date of receipt. The fact that this issue is already covered under the 
Truth in Lending Act, as well as the extended grace periods that many banks offer, 
render H.R. 1963 unnecessary and unwise. The bill, if approved, will lead to more 
expensive and less efficient processing of payments, ultimately, consumer confusion 
and higher charges for banking service, are the likely results of this legislation. 
CBA strongly opposes H.R. 1963 as an unwarranted intrusion into the banking in- 
dustry, and one that will ultimately hurt the consumers it seeks to protect. 

CBA appreciates the opportunity to submit this statement for the record. 



by federally insured depository institutions. CBA's focus is on retail issues, including deposit, 
investment, and lending products and services. Its membership includes bank holding compa- 
nies, regional, super-regional, and money center banks, thrifts, and credit unions. 



37 

Prepared Statement of the Mortgage Bankers Association of America 

The Mortgage Bankers Association of America (MBA) ^ appreciates the oppor- 
tunity to submit this statement for the record on HR 1963, the "Postmark Prompt 
Payment Act of 1995." At such time as the Subcommittee holds another hearing, 
MBA would like to request to testify. 

On June 29, 1995, Representative McHugh (R-NY), Chairman of the House Postal 
Service Subcommittee of the Government Reform and Oversight Committee, intro- 
duced HR 1963, which would provide that payment of any bill, invoice, or statement 
of account due, shall be treated as having been made on the date of the postmark 
if the payment is made by mail. This legislation, which amends the Postal Service 
Code, would affect most types of payments that are sent by mail. MBA would like 
to express deep concerns about this legislation for the following reasons: 

• A generous grace period already exists for virtually all mortgages. 

• There are significant technological and logistical difficulties that would be pre- 
sented by the requirement to reaa envelopes and log in payments as of the post- 
mark date. 

• The proposal imposes regulatory burdens on mortgage servicers that will in- 
crease costs due to the delay in receiving funds owed as well as compliance costs. 

• Mortgage servicers are presently subject to investor requirements to credit pay- 
ments promptly upon receipt. 

generous grace periods already exist for mortgages 

The contractual language of standardized industry mortgage docvmients provides 
that mortgage payments are due on or before the first day of the month. But a grace 
period of as much as two weeks is generally allowed under the language of most 
standard mortgage dociunents and in many instances is required by state law. Mort- 
gage lenders cannot retroactively change this grace period in their mortgage con- 
tracts. If state law stipulates the length of the grace period, mortgage lenders are 
subject to that provision unless the law is changed. Late charges are never imposed 
until after this grace period elapses. By changing the definition of the date of receipt 
to the date that a payment is postmarked, this legislation would further lengthen 
the already generous grace period accorded to mortgage borrowers. 

Borrowers are not generally charged additional interest on their payments during 
this grace period, except for simple interest loans, which are not prevalent in the 
industry. In essence, on the bulk of mortgage loans, borrowers are already receiving 
an interest-free loan for the up to two weeks represented by the standard grace pe- 
riod. If all borrowers took advantage of the provisions of HR 1963, it would add at 
least three days (which is the U.S. Postal Service delivery goal for mail to another 
city) delay in receiving payments. This three-day delay translates into a potential 
loss of $1.5 billion annu^y for the mortgage servicing industry. 

Furthermore, delaying the receipt of ftinds would directly impose substantial 
losses on lenders who are required to make payments to investors on a specified 
date. As part of the security holder agreements for any mortgages that are held in 
mortgage backed securities, the lender must send the payment to the investor by 
an agreed upon date at mid-month. The lender is obligated to send the payment, 
even if it has not yet been received from the borrower. 

Ultimately, lenders would have to pass the increased cost of making payments on 
behalf of delinquent borrowers along to all borrowers. Thus, future borrowers, many 
of whom pay their obligations when due at the beginning of the month, will have 
to pay higher interest rates to cover increased costs incurred on behalf of dilatory 
borrowers, if this proposal is implemented. 

substantial investments in automated servicing technology would be 

required 

Lenders have reduced the cost of servicing loans substantially by maximizing 
technology. In the last three years, direct expenses on a per loan basis have declined 



1 The Mortgage Bankers Association of America is a nationwide organization devoted exclu- 
sively to the field of residential and commercial real estate finance. MBA's membership com- 
prises nearly 2,700 mortgage originators and servicers, as well as investors, and a wide variety 
of mortgage industry-related firms. Mortgage banking firms, which make up the largest portion 
of the total membership, engage directly in originating, selling, and servicing real estate invest- 
ment portfolios. 

Members of MBA include: Mortgage Banking Companies, Commercial Banks, Mutual Savings 
Banks, Savings and Loan Associations, Mortgage Insurance Companies, Life Insurance Compa- 
nies, Mortgage Brokers, Title Comp£uiies, State Housing Agencies, Investment Bankers, and 
Real Estate divestment Trusts. 



38 

from $123 in 1992, to $112 in 1993 and further down to $95 in 1994.2 The econo- 
mies of scale show up even more dramatically in large volume servicers, who employ 
the most sophisticated forms of technology. Servicers handling 100,000 loans or 
more had average per loan servicing expenses of $118, $94, and $83 in the same 
three years of 1992-94. Because servicing represents a major profit center for the 
industry, keeping the cost of servicing as low as possible is key to ensuring afford- 
able mortgage interest rates for borrowers. 

Mortgage servicers would encounter significant logistical problems and expense to 
purchase automated equipment in order to comply with the requirements of HR 
1963. Each month 47 million pajonents are processed by the mortgage servicing in- 
dustry for an annual total of 564 million pajonents. 

If the postmark date is to be used, rather than the actual date of receipt of funds, 
mortgage payments received after the grace period has expired would have to be 
processed differently. Special equipment would have to be purchased to read post- 
marks, or payments received afler a certain date would have to be hand processed. 
Additionally, servicers would have to store envelopes to prove the date of postmark 
for any loan payment where a late fee was charged. Currently, lock boxes are used 
and the financial institution records the receipt of payment. 

COMPLIANCE COSTS WOULD INCREASE SUBSTANTIALLY 

Reducing burdensome paper retention requirements, where possible, is another 
way that mortgage servicers have sought to cut costs. The "paperless" mortgage, 
where most documents are stored electronically, promises to reduce costs further for 
mortgage servicers. Even where there are statutory requirements for maintaining 
records for a period of time, many of these laws recognize electronic storage medium 
and allow servicers to retrieve documents electronically whenever required. 

The industry standard presently is to provide borrowers with a booklet of pay- 
ment coupons once a year, rather than to bill borrowers on a monthly basis. Gen- 
erally, envelopes are not provided with the pa5anent coupons. If HR 1963 is adopted, 
in order to automate payment processing, servicers would have to provide borrowers 
with standardized envelopes and hope that the borrowers retain and use those enve- 
lopes for the full year. Otherwise, servicers will be forced to hand-process pajmaents 
received in non-conforming envelopes. 

Given the low visual quality of most postmarks, which wiU be difficult to photo- 
copy or store electronically, mortgage servicers will have to incur the expense to 
store the actual envelopes themselves as proof of postmark. If there is no return ad- 
dress the mortgage servicer will have to affix identif3dng information on the enve- 
lope. They would also have to develop systems for indexing by loan number and re- 
trieving envelopes when asked to by auditors or consumers. 

These increased compliance costs will be passed along to borrowers. While the 
borrowers who are tardy in making payments may benefit from this proposal, those 
borrowers who are conscientious and make their payments when due will suffer be- 
cause they will also have to shoulder these higher compUance costs. 

PROTECTIONS CURRENTLY EXIST TO ENSURE THAT PAYMENTS ARE PROMPTLY CREDITED 

Mortgage servicers have incorporated consumer protections in their procedures for 
payment receipts. Generally, pajonents are sent directly to a lock box system at a 
financial institution, which logs in the receipt of the pajmient. The date of receipt 
is, therefore, verifiable and subject to audit. Investor requirements mandate that 
pajTnents be processed in a timely fashion. Fannie Mae and Freddie Mac, as part 
of their seller/servicer guidelines, require that payments be posted on the same day 
as received. 

SUMMARY 

There is no demonstration of systemic processing delays in handling mortgage 
payments that would warrant the significant governmental encroachment into pri- 
vate contracts represented by HR 1963. This legislation would directly impose sig- 
nificant costs on the mortgage servicing industry, as well as reduce profitability by 
delaying receipt of payments. Mortgage borrowers are already protected by the 
grace periods that have been built into standardized mortgage documents. 

MBA would like to thank the Subcommittee for this opportunity to present our 
views on HR 1963. We would be pleased to provide further information, as nec- 
essary, for the record. 



2 Source: "1994 Cost Study: Income and Cost for Origination and Servicing of 1- to 4-Unit Res- 
idential Loans." Operations Report No. 17, prepared by the Economics Division of the MBA. 



39 

Prepared Statement of GE Capital Mortgage Services, Inc. 
i. introduction 

Mr. Chairman. GE Capital Mortgage Services, Inc. appreciates this opportunity 
to submit a statement for inclusion in the hearing record of the Subcommittee's Oc- 
tober 19th hearing on H.R 1963, the "Postmark Prompt Pa)anent Act of 1995." As 
one of the nation's largest servicers of residential mortgage loans (and processor of 
related monthly mortgage payments), we have an immediate interest in this legisla- 
tion. While we appreciate the Subcommittee's weU-intentioned concern over issues 
relating to H.R. 1963, we believe that the Subcommittee's proper focus, and that of 
any related legislation, should be on the operations of the United States Postal 
Service. For the reasons outlined below, we believe that the mechanisms con- 
templated by H.R. 1963, while potentially having some popular appeal, will in the 
end have serious adverse consequences for industry and consumers. 

In order to better understand our position, we thought it is worthwhile to describe 
some of the more recent developments in the mortgage finance industry. Ultimately, 
while a mortgage borrower may obtain its loan from the local bank, the efficiencies 
of our nation's housing finance system have led to the development of mortgage 
servicers. This facilitates the sale of mortgage loans into the secondary market (in 
what are known as mortgage-backed securities) which has developed since the mid- 
1980's and this makes more capital available for further mortgage loans to individ- 
ual borrowers. One servicer may track pajrments for millions of loans on behalf of 
the secondary market investors. These investors include large pensions funds and 
other institutions that depend on reliable handling of mortgage pajmients to safe- 
guard the return on the investment of pension funds or other assets. There are very 
detailed contracts between servicers and investors that establish the amount, man- 
ner and timing for passing through mortgage payments to investors. H.R. 1963 
would seriously put at risk the economic assumptions underljdng these existing con- 
tracts and could have a very negative impact on the efficiencies of the system. 

Mortgage servicers have aligned their operations to benefit ft-om the efficiencies 
afforded by batch processing of the tremendous number of payments received each 
day from the Postal Service. To require a manual review of postmarks will destroy 
the efficiencies currently existing and add new and unjustifiable costs. In the end, 
all of this will be reflected in the cost of mortgage capital. 

The Subcommittee on the Postal Service can better address its concerns by focus- 
ing on the efficiency of Postal Service delivery systems. The vast majority of existing 
mortgage contracts require that a borrower's payment be received on the first of 
each month. These mortgage contracts also provide a fifteen day grace period, how- 
ever, before any late charge is assessed. By addressing the root cause of the con- 
cerns of borrowers (that is, confidence that they can rely on the Postal Service to 
get their pa3rment to the creditor on a timely basis rather than go to the expense 
of say, private overnight delivery services), the Subcommittee can accomplish its ob- 
jectives without causing unintended adverse consequences. 

As described below, H.R. 1963 would require operational procedures that would 
destroy the economic efficiencies afforded by todays mortgage servicers and would 
undermine the expectations of the parties to existing mortgage contracts and mort- 
gage-backed securities agreements. Now is not the time for creation of a new federal 
regulation that would impose extraordinary and expensive burdens on industry (at 
the ultimate cost of consvuners in the form of higher interest rates on home mort- 
gages to pay for the costs this legislation would create). Insertion of the federal gov- 
ernment into the realm, of existing private contracts is equally inappropriate. In ad- 
dition, recent experience has shown that this type of technical regulation invariably 
leads to litigation, most often prompted hot by borrowers but by trial lawyers. There 
is Little doubt that the Postal Service itself will get dragged into this type of Utiga- 
tion. A more detailed description of these issues is provided below. 

II. COST OF IMPLEMENTING WOULD FAR EXCEED THE ILL-DEFINED BENEFITS 

The costs of any regulation are justifiable up until the point they exceed the bene- 
fits derived. The substance of H.R. 1963 would unfortunately have the effect of im- 
posing costs that fi-om the outset exceed any benefits. In such a case, the legislation 
is simply not justifiable. The costs of servicing a mortgage loan are paid for by the 
investor out of the interest payments on the loan and accordingly any increased 
costs must ultimately be reflected in higher mortgage loan interest rates. In the ab- 
sence of compeUing governmental interests, additional burden, on industry and con- 
sumers are not supportable. The costs created by H.R 1963 in the mortgage services 
industry would include: 



40 

Inefficiencies Imposed on Mechanized Payment Handling Systems 

Most mortgage servicers utilize lock box operations and batch processes to receive 
and handle payments. This is a very mechanized and cost efficient process. We esti- 
mate that the additional cost of a manual process to verify postmark dates would 
be at least $1 per item. We handle payments on approximately 1.1 million individ- 
ual mortgage loans a month. Because almost all loans give borrowers a 15 day grace 
period after the due date before a late charge is imposed, the concerns over receipt 
of payment revolve primarily around those people who choose to pay immediately 
before or even after the late charge date at the end of the grace period. This rep- 
resents over 25% of our portfolio. Even assuming conservatively that the legislation 
would necessitate tracking envelopes for only people who pay at the end of the grace 
period, this would still cost around one-quarter of a million dollars per month for 
our portfolio alone. 

Impact on Secondary Market and Operational Changes 

H.R. 1963 would require massive reprogramming and maintenance of two "pay- 
ment received" dates, one for purposes of law and one for purposes of reporting and 
remitting to investors under mortgage-backed securities agreements. Generally, we 
are required to move funds to investor accounts within 24 hours of "receipt". In ad- 
dition, we have specified investor cut-offs and have to report payments "received" 
by these dates to investors within 2-3 business days. It would not be feasible to use 
dates required for purposes of law for the "date received" reported, etc. to investors. 
Some investors have daily cut-offs. The FHLMC has a 15th day of the month cut- 
off All of this will require fundamental changes to reporting and remittance proce- 
dures at sigmficant cost. Moreover, it may create additional shortfalls in interest 
payments for loan payoffs that have been "received" from borrowers that must be 
passed along to investors and this burden would fall unfairly on the mortgage 
servicer contrary to economic expectations under existing investor conracts. 

Certain mortgage loans (also often owned by institutional investors) are simple in- 
terest loans which means that interest on outstanding principal accrues until pay- 
ment is "received" by the servicer. H.R. 1963 would not permit a servicer to charge 
interest up until the date the pajonent is received (but rather the postmark date) 
yet under existing investor contracts institutional investors would be entitled to that 
interest and this burden would also fall unfairly on a servicer. 

Storage Costs 

Given the existence of a federal regulation, prudence would dictate that we store 
and somehow index envelopes for retrieval in case of disputes with borrowers. Stor- 
age and indexing of 1 1 million pieces of paper a month would lead to extraordinary 
costs. Even viewing this from a conservative posture, we would have to store enve- 
lopes for every simple interest loan and envelopes received after the late charge date 
on standard first mortgages, or at least 300,000 envelopes a month. 

Damaged Mail and Illegible Postmarks 

H.R. 1963 assumes that every piece of mail arrives in pristine condition. As every- 
one knows, this is regrettably far from the case. An illegible post mark or destroyed 
envelope will require inefficient manual investigation at tremendous expense. More- 
over, some envelopes would not have the return address so we would have to mark 
them with identifiers which would also increase processing costs. 

III. EFFECT OF LEGISLATION WOULD BE TO ALTER CONTRACTUAL RELATIONSHIPS 

Any consumer concern over unnecessary late charges for delayed delivery of pay- 
ments is well safeguarded by the 15 day grace period following the pa5maent due 
date. The standard first mortgage note provides, "I wiU make my monthly payments 
on the 1st day of each month beginning on X ... I will make my monthly pay- 
ments at X or at a different place if required by the mortgate holder. ... If note 
holder has not received the final amount of any monthly payment by the end of 15 
calendar days after the date it is due, I will pay a date charge to the note holder." 
In any case, the effect of H.R. 1963 would be to alter the contractual agreement be- 
tween the borrower and lender (e.g., substitute any US post office as the address 
for receipt of payments). The long tradition of contract law and the actual contracts 
themselves provide that payments are applied when received and H.R. 1963 flies di- 
rectly in the face of these contractual expectations of private parties. In the absence 
of the compelling interests of the federal government to the contrary, legislation 
should not be used to affect private contract rights. 

Not only are individual mortgage contracts affected but the economic expectations 
underlying the rights and obligations of servicers and investors under mortgage- 
backed securities contracts will be altered by H.R. 1963. The economics of existing 



41 

contracts will be seriously undermined and for future transactions the costs of mort- 
gage capital will likely be driven up. These unintended effects of H.R. 1963 would 
have a serious negative impact on both industry and consumers aUke. 

CONCLUSION 

For all the reasons outlined above, we believe H.R. 1963 will increase costs to all 
consimiers (ultimately to be reflected in mortgage interest rates from which servic- 
ing costs are paid). Any perceived problems under current commercial practices are 
more properly addressed by examining the delivery standards of the United States 
Postal Service. If those operations are run effectively, borrowers can maintain real- 
istic expectations of when they need to mail their payments in order to be received 
when due. In any case, with the vast majority of mortgage contracts, borrowers are 
afforded a fifteen day grace period fi-om the due date before any late charge will 
be assessed. Once again, we appreciate the opportunity afforded by the Subcommit- 
tee to address this important matter. 



Prepared Statement of VISA U.S.A. Inc. and MasterCard International 

Incorporated 

MasterCard International Incorporated ("MasterCard") ^ and VISA U.S.A. Inc. 
("VISA") 2 appreciate the opportunity to submit this joint statement to the Postal 
Service Subcommittee of the House Committee on Government Reform and Over- 
sight for the hearing record on H.R. 1963, the Postmark Prompt Payment Act of 
1995 

VISA and MasterCard strongly oppose H.R. 1963. Simply put, H.R. 1963 would 
undermine the effectiveness and efficiencies of today's highly automated payments 
processing systems which are used by tens of thousands of creditors, retailers, utili- 
ties and other providers of consumer goods and services throughout the country. 
Higher prices would result and consumers would be the ultimate losers. 

H.R. 1963 is a profound infringement on the way that America does business. It 
provides that a pajonent must be treated as received on the postmark date regard- 
less of when the payment actually is received and regardless of the consequences 
that may be caused by the delay. The bUl also would override hundreds of millions 
of contractual agreements between U.S. businesses and consumers which already 
specify when payments are timely. Such federal government interference in the fun- 
damental payment arrangements between businesses and consumers is entirely in- 
appropriate under any circvunstances, and particularly in a free market economy 
such as ours. 

In addition, H.R. 1963 would create enormous operational difficulties for the cred- 
it card industry and for all other companies that use automated payments process- 
ing. The processing of consiimer payments has become almost entirely automated 
using specialized machinery to open envelopes and then scan, sort and process pay- 
ment stubs and checks. The bill would require that payment processing systems be 
modified to identify the postmark date on every pa5mient envelope to determine the 
timeliness of the payment. Because there is no equipment on the market that can 
electronically read postmark dates, the bill would actually require that each and 
every one of the millions of pa)maent envelopes which are mailed daily be manually 
examined to determine the postmark date. The process of manually examining each 
payment envelope would be extraordinarily expensive. Moreover, in many cases, the 
process would be entirely useless because postmarks often are illegible or simply do 
not appear on the envelope at all. 

In addition, H.R. 1963 is entirely unwarranted. Modem pajrments processing sys- 
tems are extraordinarily successful in ensuring that payments are posted quickly 
when they are received. In fact, under Regulation Z, which implements the federal 
Truth in Lending Act, creditors must post payments on the date of receipt. 12 C.F.R. 
§226.10 (1994). While isolated payment problems may occur, they simply cannot 
justify the enormous costs, difficulties and inefficiencies this biU would create. Fur- 
ther, while delays in payments being posted are far more likely to be the result of 
postal inefficiencies than of creditor mishandling, H.R. 1963 does nothing to address 



^ MasterCard is a membership organization comprised of financial institutions which are li- 
censed to use the MasterCard service marks in connection with payment systems, including 
credit cards. 

2 VISA is a membership association comprised of financial institutions in the United States 
which are licensed to use the VISA service marks in connection with payment systems, includ- 
ing credit cards. 



42 

postal problems. Instead, the bill shifts all of the costs and burdens of postal ineffi- 
ciency onto creditors, utilities and any others who receive payments by mail. 

Ultimately, H.R. 1963 would do the most harm to consumers. The enormous com- 
pliance costs created by the bill would be passed on to consumers through higher 
prices for utilities, retail goods, credit and the products and services of every other 
company that receives large numbers of payments by mail. Moreover, those consum- 
ers who pay their bills in a timely fashion would pay higher costs created by other 
consimiers who deliberately waited until the payment due date to have their pay- 
ment postmarked knowing that it would be impossible for the payment to be re- 
ceived on time. Many creditors and others faced with complying with the bill would 
seek alternatives such as eliminating grace periods altogether, or requiring that 
payments be made through electronic methods, or in person, rather than through 
the U.S. Mail, effectively making the U.S. Mail a second-class delivery system. Con- 
sumers who chose to pay by mail could actually be required to pay a fee to do so 
to help offset the costs that would be caused by this bill. 

In order to avoid creating such significant and unwarranted problems for busi- 
nesses and consumers alike, MasterCard and VISA urge the Postal Service Sub- 
committee to reject H.R. 1963. Once again, VISA and MasterCard appreciate the op- 
portunity to present our views concerning H.R. 1963. 



Prepared Statement of USAA 

USAA appreciates the opportunity to comment on H.R. 1963, the Postmark 
Prompt Payment Act of 1995. We particularly thank you for your willingness to 
hear from those organizations with concerns about the implications of this legisla- 
tion. 

By way of introduction, USAA is a worldwide insurance and diversified financial 
services association headquartered in San Antonio, Texas. The 1995 Fortune 500 
ranks USAA 189th among the largest U.S. corporations in terms of assets. The 
USAA famUy of companies provides insurance and other financial products to in- 
clude property and casualty insurance, life and health insurance, annuities, no-load 
mutual funds, and a discount brokerage service. The USAA Federal Savings Bank 
offers both VISA and Mastercard credit cards, consumer loans, mortgage loans and 
home equity loans. USAA members — primarily present and former military officers 
and their dependents — insure one another and share in any profits realized by 
USAA. 

While the Association conducts most of its business by mail or telephone from its 
San Antonio home office, USAA is at the forefront of insurance and financial serv- 
ices organizations due to its emphasis on quality service and information technology. 
It is a pioneer in the use of computers, telecommunications, image processing, and 
other information management tools that have significantly increased the productiv- 
ity of 16,500 employees worldwide and provided superior service to USAA members. 
The United States government and companies around the world have studied 
USAA's success in using technology to provide superior customer service and cost- 
effective products. 

These advances in our technology capabilities and the resulting benefits to our 
customers are at the very heart of our concerns regarding H.R. 1963. 

Currently, USAA receives and processes over four million pa3Tnents per month 
across all business Unes. In most cases, through use of high-speed mail extractors 
and state-of-the-art computer equipment, no human intervention is necessary to 
process these pa3Tnents. This streamlined approach to payment processing results 
in greater efficiency which ultimately leads to lower operating costs and greater 
shared profits with our members. 

Under H.R. 1963, however, the complex paper trail and human intervention nec- 
essary to comply with the postmark capture and verification requirements would 
hobble the great strides USAA has made towards becoming a paperless office — and, 
perhaps more devastatingly, would nullify most of the efficiencies USAA has in 
place to compensate for occasional U.S. mail delays. 

Some witnesses at the October 19 hearing on H.R. 1963 commented that this leg- 
islation would encourage businesses to use their leverage within the community to 
improve U.S. Postal Service (USPS) processes. USAA nas, in fact, already estab- 
lished such a cooperative relationship with the USPS, as a result of existing incen- 
tives to improve our incoming and outgoing mail procedures. 

In the interest of furthering the dialogue on this legislation between the Sub- 
committee and the business community, I would Uke to invite you and your staff 
to tour USAA's Communication Center in San Antonio at a time convenient to you. 
I beUeve this would give you an opportunity to view the devastating implications 



43 

of this legislation for modem business processes, as well as to learn about several 
proactive initiatives of the USPS and the business community to achieve timely 
mail deUveries. 

In fact, expanding the USPS' ability to offer incentives to its business customers 
to undertake initiatives to speed mail deliveries may be an attractive alternative so- 
lution for the Subcommittee to consider in resolving problems incurred by delays in 
the U.S. mail. 

Again, USAA appreciates the opportunity to comment on H.R. 1963 and respect- 
fully encourages you to consider our offer to visit the USAA Communications Cen- 
ter. 



Prepared Statement of the National Retail Federation 

The National RetaU Federation appreciates the opportunity to submit this state- 
ment for the record on H.R. 1963, the "Postmark Prompt Pajonent Act of 1965." 

By way of background the National Retail Federation is the world's largest retail 
trade association with membership that includes the leading department, specialty, 
discount, mass merchandise and independent stores, as well as 32 national and 60 
state associations. NRF members represent an industry that encompasses over 1.4 
million U.S. retail establishments, employs nearly 20 million people, 1 in 5 Amer- 
ican workers, and registered 1994 sales of more than $2.2 trillion. NRF's inter- 
national members operate stores in more than 50 nations. Collectively, the compa- 
nies we represent extend retail credit to hundreds of mUhons of consumers. The pro- 
posal advanced in this bill, however well intentioned, would have a serious adverse 
effect on those retailers' abUity to continue to extend that credit in an effficient, cost 
effective manner. Unfortunately, the Subcommittee's expeditious schedule prevented 
industry expert representatives for NRF Gcom being able to testify in person at this 
proceeding. 

H.R. 1963 would provide that the U.S. Postal Service postmark stamp date would 
be the presumed date of receipt whenever a mailed pajonent actually was delivered 
after the time established for payment. This proposal will create difficulties and un- 
fairness for businesses and for consiuners. 

The genesis for this proposal appears to be the use of the April 15 postmark to 
establish the timely filing of individuals' income tax returns with the federal govern- 
ment. H.R. 1963 seriously overextends that analogy. Virtually all individual tax re- 
turns are due on the same date. Those received within a relatively short, several 
day window after April 15 can be hand sifted for timeUness without the Internal 
Revenue Service incurring an expensive on-going obligation. Furthermore, the U.S. 
Postal Service (and its predecessor the Post Office) is, in all respects, the federal 
government's agent for the receipt of tax returns. Dehvery to one arm of the govern- 
ment is tantamoimt to delivery to the other, just as delivery of a cash pajrment at 
a utiUty compan^s service window is presumptive of payment to its back office fi- 
nancial operations. The speed with which the pa3rment is actually delivered is a 
matter under the principal's direction, whether it be the government or the utility 
company. None of these is true in the case of mailed retail credit card payments. 

Rather than a single date, credit card accounts are on billing cycles with different 
due dates for different consumers throughout the month. This spreads the workload 
burden more evenly and allows consumers' credit card payment to be processed 
more efficiently. However, it precludes the estabUshment of a limited time window 
within which all payments must be received. H.R. 1963 would require credit 
grantors to be continually on the lookout for payments that would be late, but for 
an early postmark. 

The slowing in the processing of consumers' payments that this legislation could 
entaU is directly contrary to retail credit grantors' efforts to speed up their receipt 
of customers' payments. Retailers want the checks they receive to clear as soon as 
possible. Many arrange for expedited delivery of their mail fi"om the destination post 
office and make as many as five trips per day to pick up payments. Federal law 
requires that those credit card payments be credited on the day received. Automa- 
tion facilitates this process. 

To reduce the cost of credit, with rare exceptions, customer payments are not 
manually processed. Automated equipment does virtually everything. However, 
under H.R. 1963, absent manual sorting of every letter, a credit grantor would not 
know that a payment was "late" until after it had opened the envelope, removed 
its contents, and sent the payment and statement through its automated processing 
equipment. The envelope would have long before been disposed. Thus H.R. 1963 
would require industry to create and credit grantors to buy new systems that would 
read the postmarked envelope and link that information with the payment data so 



44 

that it could be used in the event the payment were determined to be late. This 
would be an extraordinarily costly burden to impose on consumer credit. 

Expensive as the creation and purchase of new equipment would be, manual proc- 
essing would be an even worse alternative. Some of NRF's members process more 
than one half million customer payments every business day. The vast majority of 
those payments are timely. To slow those operations in order to manually sort for 
postmark data on those consumers who pay their bills at the eleventh hour would 
penalize the millions of consumers who pay their bills on time by hindering the 
processing of everyone's accounts. 

Ironically, despite the extra costs it would impose upon the system, and thus on 
timely payors, H.R. 1963 effectively would reward those consumers who pay late by 
guaranteeing them the financial "float" without risk for their delay. This could actu- 
ally encourage individuals to pay late. Congressional endorsement of this delay is 
particularly troubling in view of the efforts many retailers make to provide a postal 
grace period between their payment due date and the date on which the customers' 
next statements are prepared. For example, if a customer's statement is prepared 
on the first of each month, the customer might be given a "due date" of the three 
or four days earlier. That allows time for the delivery and processing of the payment 
prior to the customers' next statement date. 

However, if the payment is not received by the first of the month, H.R. 1963 
would leave the credit grantor with a dilemma. Suppose the customer has a $1,000 
line of credit of which $200 has been used. The retail credit grantor would like the 
customer to have the maximum purchasing ability commensurate with his or her 
ability to pay. Should the credit grantor issue a bilUng statement that assumes the 
retailer will receive the customers payment? And how much should it assume the 
customer plans to pay? How much credit should it tell the customer he or she has 
available? Would the customer's next finance charge-free grace period be shortened 
or would their billing cycle have to be changed each time they were "late." At what 
point could the creditor begin collection activities or report a nonpajonent to a 
consumer reporting agency? 

Retailers bear the cost of carrying financing for the goods they sell and, in many 
instances, those who offer credit have already provided customers with an extended 
grace period before their first pa3Tnent is due. For the Subcommittee to extend this 
period even further and to require retail credit grantors to invest millions of dollars 
in not yet developed equipment ostensibly to benefit the small percentage of con- 
sumers who pay late, is counterproductive. The likely result of the Subcommittee's 
action is to dampen credit availability, to raise the cost of credit and to encourage 
the replacement of retail credit cards with third party cards, debit cards and checks. 

Members of the Subcommittee should not overlook two significant advantages of 
the current system — customers are given a long period in which to arrange for time- 
ly mailing of their bills and the delivery of those payments is an "event certain" for 
processing purposes. 

Of course the actual target of H.R. 1963 may be the nation's mail delivery system. 
But the U.S. Postal Service is not the agent of the credit grantor. Retail credit 
grantors cannot force the Service to provide a faster deUvery. Despite its claim to 
quasi-independent status, the U.S. Postal Service is ultimately beholden to the fed- 
eral government. The government appoints its Board of Governors, scrutinizes its 
costs, regulates its operations and has oversight of its successes and failures. If the 
Subcommittee wishes to encourage faster delivery of the mail, it should do so di- 
rectly. Retailer credit grantors should not be held hostage as the putative means 
to an end they cannot control. 

In closing, there are numerous other practical and complex technological difficul- 
ties with this proposal that we have not addressed. The fact that many postmarks 
are unreadable and thus would make the bill unworkable for millions of consumer 
transactions is just one of the former. We note moreover, that retail credit grantors 
have many operational and legal issues in common with other financial institutions, 
such as banks. The written Statement for the Record of the American Banking Asso- 
ciation before this Subcommittee addresses a number of those issues and we endorse 
it. 

We appreciate the opportunity to express the views of the National Retail Federa- 
tion. We ask that the Subcommittee make them a part of your deliberations and 
of the record in this proceeding. Thank you. 



H.R. 1963, POSTMARK PROMPT PAYMENT ACT 



WEDNESDAY, FEBRUARY 28, 1996 

House of Representatives, 
Subcommittee on the Postal Service, 
Committee on Government Reform and Oversight, 

Washington, DC. 

The subcommittee met, pursuant to notice, at 10:15 a.m., in room 
2247, Rayburn House Office Building, Hon. John M. McHugh 
(chairman of the subcommittee) presiding. 

Present: Representatives McHugh, Sanford, Ehrlich, Owens, 
Green, and Meek. 

Staff present: Dan Blair, staff director; Jane Hatcherson, Robert 
Taub, Heea Vazirani-Fales, Steve Williams, professional staff; Jen- 
nifer Tracey, clerk; Denise Wilson, minority professional staff; and 
Jean Gosa, minority staff assistant. 

Mr. McHugh. If we could have the hearing come to order. Let 
me apologize for our lateness in starting, but as happens at any 
time in the Congress of the United States, particularly when we 
are back for the first time, people are trying to catch up with other 
parts of their agenda. 

I want to welcome my colleague, the gentleman from Texas, Gene 
Green, who has joined us. 

Gene, always nice to see you. 

Let me also welcome our witnesses here today to present testi- 
mony on the subcommittee's second hearing on H.R. 1963, the Post- 
mark Prompt Payment Act. This bill was introduced last year in 
response to concerns regarding the alleged unfairly assessed fees 
and interest charges for bill payments received after the due date, 
even though it was again alleged the billpayer may have made his 
or her payment on a timely basis. This bill is intended to remedy 
that situation by providing that the postmark on the envelope of 
the pajmnent stands as proof of timely payment. 

Last October, the subcommittee heard from a variety of the legis- 
lation's supporters. Those testifying included a bipartisan panel of 
six House members, Mark Silbergeld, director of the Washington 
office for Consumers Union, and Bruce Williams, who is, as per- 
haps most of you know, host of a nationally syndicated radio talk 
show. In addition, four of my colleagues submitted statements for 
the hearing record in support of 1963. Currently, the bill enjoys the 
bipartisan support of 33 co-sponsors. 

This morning, our first panel will be comprised of witnesses who 
represent credit and financial service organizations. I want to wel- 
come you gentlemen here this morning. On behalf of the sub- 
committee, let me thank you for taking time out of your schedules 

(45) 



46 

to join us and to present your views to us, and we certainly look 
forward to your testimony. 

Subsequent to the October hearing, the subcommittee heard from 
a number of representatives of the financial and lending commu- 
nity who voiced concerns regarding 1963. At that time, I promised 
that there would be an opportunity to air those views, as well, be- 
cause they are important to the subcommittee, certainly. Today's 
hearing is intended to place those concerns formally on the record 
and hopefully provide the subcommittee with constructive com- 
ments regarding the legislation. 

I particularly look forward to today's witnesses addressing the in- 
tent predicated in H.R. 1963, namely, protecting innocent citizens 
who submit their payments in a timely manner, but who, through 
no fault of their own, may be assessed late fees and interest 
charges because those payments are received or processed late. 

I cannot imagine any well-intentioned party taking issue with 
the intent inherent in 1963. Consequently, I would urge our wit- 
nesses to present the subcommittee with any proposals that they 
might envision to ameliorate any excessive burden imposed by H.R. 
1963, while perhaps still advancing the interests of billpayers from 
the unfair imposition of late fees and interest charges. 

Our second panel of witnesses today represent leading high-tech 
manufacturers of mail processing equipment. I want to, in advance, 
welcome these witnesses and note, of course, that the subcommit- 
tee looks forward to their testimony regarding the present and fu- 
ture availability of the equipment necessary to preserve and/or 
record the postmark on billpayers' envelopes. 

Opponents of the legislation have cited the lack of such tech- 
nology as one reason to oppose 1963, and I certainly look forward 
to this panel providing the subcommittee with a status report on 
the availability of such state-of-the-art equipment that creditors 
may utilize presently or in the future. 

In summary, the purpose behind toda/s hearing is to more fully 
assess all of these issues. Again, I appreciate both of our panels 
taking the time to be with us and presenting their views to the 
subcommittee. 

[The prepared statement of Hon. John M. McHugh follows:] 

Prepared Statement of Hon. John M. McHugh, a Representative in Congress 
From the State of New York 

Good morning. The Subcommittee will come to order. I want to welcome all our 
witnesses here today for the Subcommittee's second hearing on H.R. 1963, the Post- 
mark Prompt Payment Act. I introduced H.R. 1963 last year in response to concerns 
regarding creditors unfairly assessing late fees and interest charges for bill pay- 
ments received after the due date, even though the bill payer may have maUed his 
or her payment on a timely basis. Oiu" legislation is intended to remedy this situa- 
tion by providing that the postmark on the envelope of pa3Tnent stands as proof of 
timely payment. 

Last October, the Subcommittee heard from a variety of the legislation's support- 
ers. Those testifying included a bipartisan panel of six House Members; Mark 
Silbergeld, Director of the Washington Office for Consiuners Union, and Bruce Wil- 
liams, host of a nationally syndicated radio talk show. In addition, four of my col- 
leagues submitted statements for the hearing record in support of H.R. 1963. Cur- 
rently, the bill enjoys the bipartisan support of 33 cosponsors. 

This morning, our first panel will be comprised of witnesses who represent credit 
and financial services organizations. I want to welcome these witnesses here today 
and the Subcommittee looks forward to your testimony. 



47 

Subsequent to the October hearing, the Subcommittee heard from a number of 
representatives of the financial and lending community who voiced concerns regard- 
ing H.R.1963. At that time I promised that there would be an opportunity to air 
those views, as well. Toda/s hearing is intended to place those concerns formally 
on the record and hopefully provide the Subcommittee with constructive comments 
regarding the legislation. 

I particularly look forward to today's witnesses addressing the intent predicated 
in H.R.1963, namely protecting innocent citizens who submit their payments in a 
timely manner, but who through no fault of their own, are assessed late fees and 
interest charges because those payments are received or processed late. I cannot 
imagine any well-intentioned party taking issue with the intent inherent in 
H.R.1963. Consequently, I would urge our witnesses to present the Subcommittee 
with proposals that might serve to ameUorate any excessive burden imposed by 
H.R. 1963 while still advancing the interests of bill payers from the unfair imposition 
of late fees and interest charges. 

Our second panel of witnesses today represents leading high tech manufacturers 
of mail processing equipment. I want to welcome these witnesses as well and note 
that the Subcommittee looks forward to their testimony regarding the present and 
future availability of the equipment necessary to preserve and or record the post- 
mark on bill payers' envelopes. Opponents of the legislation have cited the lack of 
such technology as reason to oppose H.R. 1963. I look forward to this panel provid- 
ing the Subcommittee with a status report on the availability of such "state-of-the- 
art-equipment" for creditors to utilize. 

In summary, the purpose behind today's hearing is to more fully assess all these 
issues. Again, I appreciate both our panels for taking the time to bring their views 
before the Subcommittee and I look forward to hearing from our witnesses this 
morning. 

Mr. McHuGH. I welcomed the gentleman from Texas. Let me also 
welcome the gentleman from South Carolina, the vice chair of the 
committee, Mr. Sanford. 

Mark, thank you for being with us. 

I would yield to the gentleman from Texas for any opening com- 
ments he may have at this time. 

Mr. Green. Thank you, Mr. Chairman. 

I have a prepared statement I would like to present on the Post- 
mark Prompt Payment Act. I congratulate the chairman for intro- 
ducing it, and I am a co-sponsor of it. I have had numerous com- 
plaints from my own constituents about the problem where they 
have had their credit ruined as a result of late payments and also 
late fees and interest charges. 

Let me relate — it's not in my prepared remarks, Mr. Chairman — 
an experience I had just this last weekend. Like a lot of Members 
of Congress, often times we don't look at our weekly bills until late 
on Sunday night. I received, for the second time, an AT&T Univer- 
sal Card late fee. The fee was more than the bill that I owed. 

So I apologized to the clerk, whoever he was, for hearing from 
me at 10:30 or 11 on Sunday night, from Houston, saying, "This 
is the second month that I know we mailed it, and yet you assessed 
a $15 charge. I have a letter here showing a $20 charge. So there's 
some confusion, it seems." And he said, "Well, would you like us 
to cancel the account?" I said, 'TSTo, you don't have to do that. I'll 
pay it and send the cards back to you." 

We can do that, as Members of Congress, but a lot of our con- 
stituents can't do that, because they have much more in charges 
that they have. So that's why the need for, if it's not 1963, then 
some type of legislation to structuralize it because of the problems 
that are presented, obviously, not only in Houston where I rep- 
resent, but obviously in upstate New York, Mr. Chairman. 



48 

I look forward to the hearing today because, again, I'm a co-spon- 
sor of 1963 and, Uke the chairman, we recognize the problem, and 
hopefully we have other solutions from our panel today that we can 
hear from. 

Thank you. 

Mr. McHuGH. I thank the gentleman. Without objection, his full 
statement will be placed in the hearing record. 

[The prepared statement of Hon. Gene Green follows:] 

Prepared Statement of Hon. Gene Green, a Representative in Congress 
From the State of Texas 

As an original co-sponsor of H.R. 1963, The Postmark Prompt Pajmient Act of 
1995, I am glad to see that we are continuing these hearings. This legislation is long 
overdue. I have heard numerous accounts from many of my constituents whose cred- 
it has been ruined as a result of pajmients not being received on time through no 
fault of their own. As a result they were assessed late fees and interest charges and 
their credit ratings were negatively affected. I have also had my own personal expe- 
rience with sending in pa3mients on time and being assessed late fees. This legisla- 
tion is important because it will help those diligent consvuners who pay their bills 
on time, but through no fault of their own have encountered problems with their 
mail being received in a timely manner. I would like to commend Chairman 
McHugh for taking the initiative to introduce this important piece of legislation. 
Again, I would like to thank Chairman McHugh for holding these hearings and I 
look forward to hearing the testimony from todays witnesses. 

Mr. McHuGH. I would next yield to the gentleman from South 
Carolina, Mr. Sanford, for any comments, 

Mr. Sanford. I have no statement. 

Mr. McHUGH. Yielding back his time. 

With that, let us move to our first panel. According to the rules 
of the full committee, I would ask, first, that the panel members 
please rise and repeat after me for the oath that is required. 

[Witnesses sworn.] 

Mr. McHuGH. Thank you. The record will show that all wit- 
nesses responded in the affirmative. 

Our first panel, as I mentioned, represents a wide range of inter- 
ests that have stated, over the course of the past several months, 
concerns about H.R. 1963, and we are very much appreciative of 
their willingness to come forward and to publicly discuss those con- 
cerns with us. I will introduce them as we have them listed on the 
page, which will not in any way correspond to how the gentlemen 
are seated. 

We have the pleasure of being joined by Mr. Casimir Sewruk, 
chief executive officer of the Nest Egg Federal Credit Union, on be- 
half of the Credit Union National Association. I should note, al- 
though it doesn't say it here, that that Nest Egg Federal Credit 
Union is in beautiful Fulton, NY, which is in my district. 

We are also joined by Mr. Joseph Bracewell, chairman and CEO 
of Century National Bank. Mr. Bracewell is filling in for Mr. Lee 
Stenehjem, who was scheduled to join us this morning but was un- 
able to because of, I understand, a snowstorm in the northern part 
of the United States. 

Also, Mr. Mallory Duncan, who is vice president and general 
counsel for the National Retail Federation; Mr. Paul Reid, presi- 
dent of the Mortgage Bankers Association; and, last, Mr. Thomas 
Hughes, president and CEO of the Navy Federal Credit Union, on 
behalf of the National Association of Federal Credit Unions. 



49 

So gentlemen, again, thank you for being here. Having intro- 
duced you in that order, perhaps, out of fairness, we will also ask 
you to speak in that order, if that's agreeable to everyone there. I 
would now yield to Mr. Sewruk for the comments that he may wish 
to make. 

STATEMENT OF CASIMIR SEWRUK, CHIEF EXECUTIVE OFFI- 
CER, NEST EGG FEDERAL CREDIT UNION, ON BEHALF OF 
THE CREDIT UNION NATIONAL ASSOCIATION; JOSEPH 
BRACEWELL, PRESIDENT AND CHIEF EXECUTIVE OFFICER, 
CENTURY NATIONAL BANK; MALLORY B. DUNCAN, VICE 
PRESIDENT AND GENERAL COUNSEL, NATIONAL RETAIL 
FEDERATION; PAUL S. REID, PRESIDENT, MORTGAGE BANK- 
ERS ASSOCIATION; AND THOMAS J. HUGHES, PRESIDENT 
AND CHIEF EXECUTIVE OFFICER, NAVY FEDERAL CREDIT 
UNION, ON BEHALF OF THE NATIONAL ASSOCIATION OF 
FEDERAL CREDIT UNIONS 

Mr. Sewruk. Mr. Chairman and members of the subcommittee, 
thank you for the opportunity for the Credit Union National Asso- 
ciation, CUNA, to testify this morning on H.R. 1963, the Postmark 
Prompt Pa3rment Act of 1995. 

As earlier mentioned, I am Casimir Sewruk, chief executive offi- 
cer of the Nest Egg Federal Credit Union, in Fulton, NY. We serve 
approximately 6,000 members nationwide, and our total assets are 
just over $26 million, CUNA, which represents about 12,000 credit 
unions through its 52 State leagues, is pleased to comment on the 
ramifications of the legislation which would affect the ability of 
credit unions to provide low credit and good rates on loans and 
other financial services, by raising operational costs. 

I will summarize my testimony this morning and ask that my 
full written statement be included in the record. 

H.R. 1963 should not be passed, because it attempts to solve a 
problem that credit union borrowers rarely encounter. CUNA 
strongly opposes this bill because it would saddle credit unions 
with many additional compliance costs, both up front and ongoing. 
These include data processing costs, personnel costs, record storage 
and retrieval costs, low interest income, and fairly significant op- 
portunity costs arising from the inability to invest funds that might 
otherwise be available for this purpose. 

According to CUNA's recently completed 1996 Credit Union Fee 
Account Structure Survey, most credit unions do not charge late 
payment fees on their loans. About two-thirds of offering credit 
unions do not charge any late fees on most consumer installment 
loans. This means that most credit union borrowers whose pay- 
ments are delayed by the Postal Service are not faced with any fee. 

Furthermore, credit unions that charge fees for late payments 
tend to have extremely liberal grace periods. More than 96 percent 
of fee-charging credit unions give their members 7 or more days to 
pay before imposing fees, and more than 87 percent allow 10 or 
more days prior to imposing late fees. On average, credit unions 
allow their members' loan payments to be more than 14 days late 
before imposing fees. Thus, even members who belong to credit 
unions that charge late payment fees are unlikely to be charged 
when the U.S. mail service slows the receipt of payment. 



50 

As members of this subcommittee are well aware, credit unions 
are not-for-profit, consumer-owned financial cooperatives. Because 
of this relationship, credit unions consistently score high marks in 
service quality surveys. This suggests that most credit union bor- 
rowers wronged by slow postal service are likely to be accommo- 
dated by their credit union. Our philosophy is that each credit 
union belongs to its members. It would be counterproductive, bad 
business, and contrary to its nature for credit unions to impose nu- 
merous and/or excessive fees upon its members. 

Many of our State leagues collected specific examples from their 
member credit unions detailing how H.R. 1963 would adversely im- 
pact credit union operations. If I might read some examples. 

First Federal Credit Union, Tempe, AZ, $153 million in assets, 
representing 45,000 members: "We are a relatively small credit 
union with less than 100 employees, and we project two additional 
employees plus a slower posting time for current employees, which 
will cause an annual cost increase in the thousands." 

Fairwinds Federal Credit Union, Orlando, FL, $250 million in as- 
sets, representing 67,000 members: "This credit union would suffer 
loss of approximately $73,000 per year, based upon a loss of an av- 
erage of 3 days interest, at an average rate of 9 percent, on an av- 
erage of $100,000 in payments processed during a 1-year period. 
This extra paperwork would require much more time to process, 
and the added processing cost would be added to the cost of the 
transaction, and obviously passed on to the consumer." 

Federal Employees Credit Union, Kansas City, MO, $120 million 
in assets, 44,000 members: "We would need to add one-half of an 
employee, with a yearly payroll expense of approximately $7,500, 
plus benefits. Posting mail by hand not only increases costs, it in- 
creases the chance for errors. Also, what happens when an enve- 
lope is received that has no postmark or the postmark is 
unreadable?" 

United Credit Union, Mexico, MO, $31 million in assets, 10,000 
members: "We give our members a 15-day grace period to protect 
them from delays in the mail, and their credit report is not affected 
until they are over 30 days past due." 

Malheur Federal Credit Union, Ontario, OR, $13 million in as- 
sets, 5,000 members: "Since we have designed and maintained our 
own data processing system, I estimate an expense of between 
$5,000 and $6,000 just to modify the program. We would also have 
to begin storing all envelopes in some manner in order to prove 
when an item was postmarked, in the event of a dispute." 

Big Spring T&P Federal Credit Union, Big Spring, TX, $6 million 
in assets, 1,100 members: "If we have to credit the payment of 
these loans as of the postmark date rather than the actual date of 
receipt, we could see a reduction in interest income for the credit 
union of as much as $1,500 per month. The only way that we could 
afford this type of loss would be a reduction in our dividend rate 
to savers or a large increase in the interest rate we charge to the 
borrowers." 

Eddy Paper Employees, White Pigeon, MI, $545,000 in assets, 
212 members: "We are a small credit union with one employee, 
open 2 days per week, in which time we try to pack a week's worth 
of service, loans, mail, cleaning, et cetera. This legislation would 



51 

make it almost impossible for us to comply. We are unable to com- 
ment regarding fees because in no way can we afford to pay more 
hours. We would have to cut our service to our members in other 
ways." 

The common theme running through these examples is increased 
cost. The unique structure of credit unions, with members as equal 
owners and no intervening stockholders to absorb the costs, means 
that these costs would have to be passed on to all members of the 
credit union. Further, some credit union systems may not have the 
capacity or ability to make an automated system adjustment and 
would have to rely on manual calculations which, obviously, pre- 
sents the opportunity for possible human error. 

To illustrate how the costs might increase, we assume that all 
member borrowers will begin to pay on the due date to take maxi- 
mum advantage of the proposed law's provision. The CUNA survey 
indicates that 32 percent of credit union members use payroll de- 
duction at their credit unions. This means that approximately 68 
percent of member borrowers, holding about $24.8 million in loans, 
might engage in this behavior. 

Credit unions would incur several financing related costs. First, 
they would lose several days' interest on the first late payment be- 
cause interest charges would have to be calculated through the 
postmark date rather than the date of receipt. Second, since all 
payments would be several days late, they would lose the oppor- 
tunity to invest each and every receipt of principal and interest for 
several days. 

Data from the National Credit Union Administration indicates 
that the size of the average outstanding credit union loan is ap- 
proximately $4,500. For illustrative purposes, we assume that the 
average loan has a 3-year term and £in average interest rate of 8.79 
percent, and that all loan payments are postmarked on the due 
date and received 5 days after the postmark date. 

Given these assumptions, we find that the bill would cause credit 
unions to lose about $14 in interest income and forego invest in- 
come over the life of each loan of approximately $4.67 per year for 
each loan. This translates to a total annual loss of about $116 mil- 
lion in lost investment income. 

Of course, credit unions will need to cover the costs they incur 
to comply with the proposed bill. The increased costs that H.R. 
1963 would create for credit unions, regardless of size, would be 
passed on to the credit union members. One could argue that the 
most equitable way to cover costs would be to institute or increase 
loan origination fees and/or late fees. If this happens, then H.R. 
1963 would not save members of credit unions, or consumers in 
general, money; rather, it would increase their cost of borrowing. 

The American Heritage Federal Credit Union in Philadelphia de- 
termined that this legislation would cost them about $80,000 to 
$100,000 per year. This institution serves approximately 70,000 
members. Thus, H.R. 1963 would add an extra dollar per year for 
each account at that credit union. Extrapolating from these find- 
ings, it would mean that every credit union member in the United 
States, approximately 70 million, would incur an extra cost of $1. 
Thus, H.R. 1963 would cost the credit union movement about $70 
million in compliance costs. 



52 

When investment costs and compliance costs are combined, the 
potential impact on credit unions would be approximately $ 186 mil- 
lion per year, and these costs would have to be passed on to credit 
union members in the form of higher loan rates and/or lower divi- 
dends. 

One final cost consideration involves the space needed to store 
envelopes. Additional time and cost of storage would be needed to 
either store or microfilm envelopes to verify when each payment 
was postmarked. At the very least, a part-time employee would be 
required to handle storage and retrieval of the filed envelopes. The 
envelopes would have to be stored in the event a member questions 
the date of entry. This would necessitate extra storage boxes and 
space. 

At the Nest Egg Federal Credit Union, we have four different 
storage facilities which are geographically dispersed, and the cost 
of storage varies among each location. The increased cost of H.R. 
1963 could easily be illustrated using the smallest storage compart- 
ment, approximately 5x5, for all locations. The prices would range 
from $25 per month to $50 per month. That translates into annual 
costs ranging from $300 to $600 per location, or potentially $1,200 
to $2,400 more annually. If stored for 5 years, $6,000 to $12,000 
more. 

Just as an example, if I might interject here, I brought a sam- 
pling of just a couple weeks of mail that we receive, just for pay- 
ments, and this is roughly 350 to 450 pieces of mail that we would 
have to handle, in addition, daily. 

Mr, McHuGH. Have you processed those yet? Because I wouldn't 
want them to be late. 

[Laughter.] 

Mr. Sewruk. No, we're holding those. We'll post the due date. 

These projected costs do not include the additional incidental 
costs of more materials used — ^for example, staples, storage boxes, 
envelopes, et cetera. 

In summary, CUNA strongly opposes H.R. 1963. We believe that 
it is unnecessary for credit unions, because most credit unions al- 
ready provide some kind of grace period for late bills. 

Further, this measure would slow the processing of pajrments 
and add significant expense to credit unions and other financial in- 
stitutions. This Congress has stated its commitment to reducing ex- 
cessive and burdensome regulations on America's business. How- 
ever, this legislation is pushing the envelope, if you will, in the 
wrong direction. 

C.U.N. A. thanks the subcommittee for its opportunity to provide 
our views on the provisions of H.R. 1963 and additional matters. 

I will be happy to answer any questions, and I personally thank 
you very much. 

[The prepared statement of Mr. Sewruk follows:] 



53 



TESTIMONY OF THE CREDIT UNION NATIONAL ASSOCIATION 

ON THE POSTMARK PROMPT PAYMENT ACT OF 1995 (H.R. 1963) 

TO THE SUBCOMMITTEE ON THE POSTAL SERVICE 

OF THE COMMITTEE ON GOVERNMENT REFORM AND OVERSIGHT 

FEBRUARY 28, 1996 



Mr. Chairman and members of the Subcommittee, thank you for the opportunity for the Credit 
Union National Association (CUNA) to testify this morning on H.R. 1963, the Postmark Prompt 
Payment Act of 1995. I am Casey Sewruk, Chief Executive Officer of the Nest Egg Federal 
Credit Union (previously known as the Nestle's Employees FCU) in Fulton, New York. We 
serve 6,000 members, and our total assets are just over $26 million. CUNA, which represents 
about 12,000 credit unions through its 52 state leagues, is pleased to comment on the 
ramifications of the legislation which would affect the ability of credit unions and other financial 
institutions to provide low cost credit and good rates on loans and other financial services by 
raising operational costs. 

H.R. 1 963 should not be passed because it attempts to solve a problem that credit union 
borrowers rarely encounter. CUNA strongly opposes this bill because it would saddle credit 
unions with many additional compliance costs - both up-front and ongoing. These include data 
processing costs, personnel costs, record storage and retrieval costs, lost interest income, and 
fairly significant opportunity costs arising fi-om the inability to invest fiinds that otherwise would 
be available for this purpose. 

According to CUNA's recently completed 1996 Credit Union Fee and Account Structure Survey, 
most credit unions do not charge late-payment fees on their loans. As shown in the table below, 
about two-thirds of offering credit unions do not charge any late fees on most consumer 
installment loans. 





%ofCUs 


Loan type 


that offer 


New vehicle 


91.0 


Used vehicle 


90.1% 


Other loans 


87.9 


Other unsecured 


94.2 


Other real estate 


45.3 


1st mortgage 


41.9 


Credit card 


39.9 



Percent of offering 
CUs that don't charge 
fees for late payments 

64% 

64% 

64% 

63% 

50% 

41% 

26% 



This means that most credit imion borrowers whose payments are delayed by the postal service are 
not faced with fees. 



Furthermore, credit unions that charge fees for late payments tend to have extremely liberal grace 



54 



periods, otherwise known as late day allowances (these late day allowances essentially provide 
members with an "amnesty" period in which late payers are not charged fees.) More than 96% of 
fee-charging credit unions give their members seven or more days to pay before imposing fees 
and more than 87% allow ten or more days prior to imposing late fees. On average, credit 
unions allow their members' loan payments to be more than 14 days late before imposing fees. 

LATE-FEE-CHARGING CREDIT UNIONS 







% of late fee- 


% of late fee 




Average 


charging 


charging 




late 


CUs with 


CUs with 




day 


7+ days late 


1 0+ days late 


JLpan type 


aJlQw^ce 


allowance 


allowance 


Credit card* 


16.0 


N/A 


88% 


1 St mortgage 


15.0 


99% 


99% 


Other real estate 


14.8 


98% 


94% 


Other unsecured 


14.7 


97% 


90% 


Used vehicle 


14.7 


97% 


91% 


New vehicle 


14.4 


97% 


91% 


Other loans 


14.4 


97% 


90% 



'7-day sutistic not available for credit cards 

Thus, even members who belong to credit imions that charge late-payment fees are imlikely to be 
charged when the U.S. mail service slows the receipt of payment. 

As members of this Subcommittee are well aware, credit imions are not-for-profit, consumer-owned, 
fmancial cooperatives. Because of this relationship, credit imions consistently score high marks in 
service quality surveys. This suggests that most credit union borrowers "wronged" by slow postal 
service are likely to be accommodated by their credit union. Our philosophy is that each credit union 
belongs to its members, and it would be counterproductive, bad business, and contrary to its nature 
for a credit union to impose numerous and/or excessive fees upon its members. 

Many of our state leagues collected specific examples fi-om their member credit unions detailing how 
H.R. 1963 would adversely impact credit union operations: 



• First Federal Credit Union, Tempe, Arizona 

"Currently, we open payment envelopes with an electronic opener, an employee removes the 
contents, discards the envelope in the trash, posts the transaction, and stamps the received check "For 
Deposit Only." With a regulation like the one proposed, we would not use an electronic opener for 
fear of destroying the postmark, we would have to record the payor's name and account number on 
the envelope, we would have to either bundle it with the daily work or run copy on an optical disk 
for future reference, and we would have to attempt to read the postmark for the "proper" date of 
posting. Also, we would not be able to charge interest for the days the post office has the check, 
reducing our income....We are a relatively small credit union vdth less than 100 employees and we 



55 



project 2 additional employees plus a slower posting time for the current employees will cause an 
annual cost increase in the thousands." 

• Fairwinds Federal Credit Union, Orlando, Florida 

"The paperwork required would be monumental, not only in the time necessary to post a payment, 
but, the paperwork required by having to keep the envelope that hopefully would have a clear and 
readable postmark. As an example, a credit union our size forced to give the member credit for 
payment as of the postmark versus the date of actual receipt, this credit union would suffer a loss of 
approximately $73,000 per year based upon the loss of an average of three (3) days interest at an 
average of 9% on an average of $100,000 in payments processed during a one year period. This 
extra paperwork would require much more time to process and the added processing cost would be 
added to the cost of the transaction and passed on to the consumer." 

• Federal Employees Credit Union, Kansas City, Missouri 

"Our Credit Union's main office processes an average of 11,252 transactions (loan payments, 
deposits, etc.) via the mail each month. This accounts for approximately 10.3% of our total 
transactions. We have worked, over the past three years, to automate the processing of mail as much 
as possible. This has included the Credit Union purchasing loan coupon books for our members to 
use. The average cost of these books is $1 .86 for a 48-month loan. What the coupons allow us to 
do is to separate incoming mail into two stacks - one checks and the other coupons. Separate totals 
are calculated on each stack and balanced to each other. A machine then reads the preprinted 
information from the coupon to post to the members' account. This process takes approximately one 
tenth the time as posting transactions by hand. If we were required to post mail from the date of 
postmark, we would need to sort mail by postmark, then separate the coupons and checks and then 
post each batch separately, by hand. (The machine and program are not equipped to read postmarks, 
nor could they be.) Comparing a sampling of current process to what would happen under the 
proposed Act, we would need to add a half-time employee with yearly payroll expenses of $7,500 
plus benefits. Posting mail by hand, not only increases costs, it also increases the chance for errors. 
Also, what happens when an envelope is received that has no postmark or the postmark is 
unreadable?" 

• United Credit Union, Mexico, Missouri 

"We give our members a 1 5-day grace period to protect them from delays in the mail and their credit 
report is not effected until they are over 30 days past due." 

• Malheur Federal Credit Union, Ontario, Oregon 

"I can foresee a tremendous amount of extra expense for us to comply with this Act. Our entire data 
processing system would have to be modified to allow for "effective dating" of payments. This 
would include receipt and transfer programs, data bases that store historical information, and 
statement information to name a few. Since we have designed and maintain our own system I 
estimate an expense of between $5,000 and $6,000 just to modify the programs. We would also have 
to begin storing all envelopes in some manner in order to prove when an item was postmarked in the 
event of a dispute. This would create additional time and expense." 



56 



• Big Spring T&P Federal Credit Union, Big Spring, Texas 

"...[W]e have a total of 830 loans with an outstanding balance of $4,585,000. Of these loans over 
300 are cash payments (not payroll deduction). Using an average we have estimated that the balance 
of these cash pay loans is approximately $ 1 ,835,000. If we have to credit the payment of these loans 
as of the postmark date rather than the actual date of receipt we could see a reduction in interest 
income for the credit union of as much as $1 500.00 per month. The only way we could afford this 
type of lost income would be a reduction in our dividend rate to savers or a large increase in our 
interest rate we charge to the borrower's. Neither of the choices would be productive to the credit 
union nor the members of the credit union." 

• Eddy Paper Employees, White Pigeon, Michigan 

"We are a small credit union, with one employee, and open two days per week, in which we try to 
pack a weeks worth of service, loans, mail, cleaning, etc. This legislation would make it almost 
impossible for us to comply. We are unable to comment regarding fees because in no way can we 
afford to pay more hours. We would have to cut our service to our members in other ways." 

A common theme running through these examples is increased costs. The unique structure of credit 
unions with members as equal owners, and no intervening stockholders to absorb costs, means that 
these costs would have to be passed on to all the members of a credit union. 

To illustrate how the costs might increase, we assume that all member-borrowers wall begin to pay 
on the due date (i.e., get their payment postmarked on the due date) to take maximum advantage of 
the proposed law's provisions. The CUNA Survey indicates that 32% of credit imion members use 
payroll deduction at their credit unions. This means that approximately 68% of member-borrowers, 
holding about 24.8 million loans, might engage in this behavior. Credit imions would incur several 
financing-related costs. First, they would lose several days interest on the first "late" payment 
because interest charges would have to be calculated through the postmark date rather than the date 
of receipt. Second, since all payments would be several days "late," they would lose the opportunity 
to invest each and every receipt of principal and interest for several days. 

Data fi-om the National Credit Union Administration indicates that the size of the average 
outstanding credit union loan is $4,540. For illustrative purposes we assume the average loan has 
a three-year term at an average interest rate of 8.79% (i.e., the approximate rate on automobile 
loans), and that all loan payments are postmarked on the due date and received five days after the 
postmark date. 

Given these assumptions, we find that the bill would cause credit unions to lose about $14.00 in 
interest income and foregone investment income over the life of each loan ~ $4.67 per year for each 
loan. This translates to a total annual loss of about $116 million (i.e., $4.67 x 24,000,000 loans) in 
investment income (in an industry with only $3 1 billion in total assets). 

Of course, credit unions will need to cover the costs they incur to comply with this proposed law. 
The increased costs that H.R. 1 963 would create for credit unions, regardless of size, would be 



57 



passed on to the credit union members. One could argue that the most equitable way to cover costs 
would be to institute or increase loan origination fees andyor late fees. If this happens then H.R. 
1963 would not save members of credit unions, or consumers in general, money. Rather, it would 
increase their costs of borrowing. 

The American Heritage Federal Credit Union in Philadelphia determined that this legislation could 
cost them about $80,000 to $100,000 per year. This institution serves approximately 70,000 
members; thus H.R. 1963 would add an extra dollar per year for each account at that credit union. 
Extrapolating from these findings would mean that every credit union member in the U.S., 
approximately 70 million, would incur an extra cost of $1. Thus, H.R. 1963 would cost the credit 
imion movement about $70 million in compliance costs. 

When investment costs and compliance costs are combined, the potential impact on credit unions 
would be $186 million ($70M + $116M), and these costs would be passed on to credit union 
members in the form of higher loan rates and lower dividends. 

One final cost consideration involves the space needed to store envelopes. Additional time and cost 
of storage would be needed to either store or microfilm envelopes to verify when each payment was 
postmarked. At the very least a part-time employee would be required to handle storage and retrieval 
of the filed envelopes. The envelopes would have to be stored in the event a member questions the 
date of entry. This would necessitate extra storage boxes and space. The Federal Employees Credit 
Union in Kansas City stated, "Space requirements to house the envelopes would run, conservatively 
$ 1 5 per square foot." 

At the Nest Egg Federal Credit Union, we have four different storage facilities which are 
geographically dispersed, and the cost of storage varies among each location. The increased costs 
of H.R. 1963 can be easily illustrated -- using the smallest storage compartments (approximately 
5x5) for all locations, the prices would range fi-om $25 per month to $50 per month. That translates 
into annual costs ranging fi-om $300 to $600 per location or potentially $1200 to $2400 more 
annually. If stored for five years ~ $6,000 to $12,000. We would certainly consider microfilming 
and/or additional insurance coverage for those locations (added expenses). These projected costs 
do not include the additional incidental costs of more materials used ~ i.e., staples, storage boxes, 
envelopes, etc. 

In summary, CUNA strongly opposes H.R. 1963. We believe that it is unnecessary for credit unions 
because most credit unions already provide some kind of grace period for late bills. Further, this 
measure would slow the processing of payments and add significant expense to credit unions and 
other financial institutions. 

CUNA thanks the Subcommittee for this opportunity to provide our views on the provisions of H.R. 
1963 and additional matters. We will be happy to provide fiarther information and answer questions. 



58 

Mr. McHuGH. We thank you for your timely comments. 

Let me, before we go to our next presenter, acknowledge the 
presence of two more distinguished members of the subcommittee. 
We have been joined by another gentleman from New York, Major 
Owens. 

Congressman, are there any opening comments you would like to 
make? 

Mr. Owens. No. 

Mr. McHuGH. And also the gentlelady from Florida, Carrie 
Meek. 

Mrs. Meek. 

Mrs. Meek. Thank you, Mr. Chairman. I'm glad that you filed 
this bill, and I'm here to listen to comments and take both sides 
of the question. 

Mr. McHuGH. Thank you. I appreciate the gentlelad/s interest, 
as always. 

Next we have Mr. Joseph Bracewell, who, as I noted earlier, is 
chairman and CEO of Century National Bank. He is subbing, and 
we are happy he was able to join with us. 

Mr. Bracewell, our attention is yours. 

Mr. Green. Mr. Chairman. 

Mr. McHuGH. Yes. 

Mr. Green. Before Mr. Bracewell starts, I have known not only 
Joseph, but his family, and his dad, Serce, for many years. Serce, 
his dad, was a former State senator in Texas years ago and lit- 
erally a legend. So welcome to Washington. 

Thank you. 

Mr. Bracewell. Thank you. Congressman. 

Mr. Chairman and members of the committee, I appreciate the 
opportunity to testify today and would like to just introduce myself 
again for the record. 

I am Joe Bracewell, chairman of Century National Bank here in 
Washington, and also vice chairman of West University Bank in 
Houston. Both banks have less than $100 million in assets and 
have fewer than 50 employees. I am a board member of the Inde- 
pendent Bankers Association of America £ind a member of its Bank 
Operations Committee. As the chairman mentioned, I am subbing 
today for Lee Stenehjem, Jr., our president-elect, who is from 
North Dakota, and is snowed in there and couldn't attend because 
of a blizzard. 

I am testifying this morning on behalf of a coalition of financial 
services organizations, including not only the IBAA but also the 
American Bankers Association, America's Community Bankers, the 
American Financial Services Association, the Consumer Bankers 
Association, Master Card International, and Visa USA. I would like 
to submit written testimony for the record and take just a few min- 
utes to hit some high points, and, of course, would be happy to an- 
swer any questions. 

Mr. McHuGH. Without objection, the full statement will be sub- 
mitted for the record. 

Mr. Bracewell. Thank you very much. 

Mr. Chairman, we, in the financial services industry, share the 
subcommittee's frustration with mail delays. However, H.R. 1963 is 
not the answer to the problem. This bill attempts to shift the bur- 



59 

den of creating an efficient mail system from the Postal Service to 
the marketplace. A more appropriate legislative response would 
focus on the Postal Service's basic processes and deficiencies. 

We believe that the private sector already provides a significant 
amount of flexibility to deal with this issue and that a partnership 
of a legislative response dealing with the Postal Service and a free 
market response dealing with the flexibility and competition for in- 
dividual customers is the best way to deal with this problem. 

Proponents see this bill as helping consumers, and indeed it 
makes for good consumer rhetoric. However, consumer safeguards 
are already in place to protect consumers against uncontrollable 
delays. Equally important, costs to comply with the proposed legis- 
lation would be enormous, and these costs would be passed on to 
the consumer, as the previous witness described. 

Most creditors already provide consumers with a generous grace 
period before late payment fees are assessed. For example, mort- 
gage payments are t)rpically due on the 1st of the month, but pay- 
ment is considered timely as long as it is received by the 10th or 
15th of the month. Most creditors try to be flexible to ensure that 
consumers' pajrments are deemed timely. 

At my bank, we give a 10-day grace period for commercial and 
consumer loans and a 25-day grace period for credit card cus- 
tomers. Even then, we don't actually assess a late charge until 10 
days later. If this bill were to be enacted, these policies would have 
to be reassessed and grace periods might be seriously curtailed. 

Supporters of the bill allege that some unethical creditors delib- 
erately delay crediting £in account in order to impose additional 
charges. However, the Truth in Lending Act requires that pay- 
ments be posted on the date of receipt. Failure to comply with this 
law, which is already on the books, could result in significant pen- 
alties. 

Additionally, irregularities in postmarks would make compliance 
with H.R. 1963 very difficult. Postmarks a:re often illegible, and 
sometimes there is no postmark at all. It would be difficult or im- 
possible to capture an accurate postmark in a large percentage of 
cases with today's scanning systems. Even if such systems were 
technically feasible, one must question whether mandating an in- 
creased investment in this technology is appropriate in light of the 
trend away from paper processing toward electronic payments. 

The costs associated with this bill are enormous. The bill would 
mandate new storage requirements at a time when the industry is 
moving toward greater automatioA and reduced paper. When you 
add the additional employees and equipment cost, estimates climb 
to the tens of millions of dollars annually to comply with the pro- 
posed legislation. And all borrowers, not just the late payers, will 
end up paying the extra costs this bill will impose. 

Mr. Chairman, H.R. 1963 would render today's expensive proc- 
essing equipment virtually obsolete. Processing equipment would 
have to be invented and built to replace existing machines to proc- 
ess various sized envelopes and capture the postmark, at tremen- 
dous expense. Even without capital costs, the price of this legisla- 
tion would be prohibitive. A recent survey of IBAA leadership 
bankers revealed that the additional cost for a community bank to 
process payments as required by this bill could range as high as 



60 

$120,000 per year. And this estimate does not include the cost of 
replacement technology. 

In addition, creditors would have to adjust interest charges or 
late fees added to a consumer's account because of late payment. 
In most instances, these changes would have to be made manually. 
The bill appears to require that the balance be retroactively cred- 
ited and finance charges recalculated. This is not only costly but 
unfair, because the money remains in the payer's account, possibly 
earning interest, until the payment is actually processed by the 
creditor. 

Proponents of H.R. 1963 argue that the IRS already uses the 
postmark for the date of pa3rment, so I would like to address that 
comment briefly. Although the provisions of H.R. 1963 may seem 
similar to the IRS's policy of accepting returns postmarked by the 
April 15 deadline, the situations are not comparable. 

Since there is one annual deadline for filing tax returns, the IRS 
handles most returns within a time window of a few weeks. On the 
other hand, the billing cycles of private firms vary widely by the 
type of account and the individual customer. It would be impossible 
to establish a limited timeframe within which all payments can be 
processed according to postmark. 

Moreover, the IRS processes about 115 million tax returns per 
year, whereas the financial services industry — just the financial 
services industry — processes more than 1 billion payments per 
month. In addition, it should be noted that the IRS does not offer 
any flexibility in its payment schedule, as creditors typically do. 

In conclusion, Mr. Chairman and members of the committee, 
while we recognize that there is an appeal to H.R. 1963 because 
of its simplicity, there are unintended consequences and expenses, 
especially for consumers, that are masked by this simplicity. We 
believe this legislation is not needed, because existing industry 
practices already adequately shield consumers from the uncertainty 
of pa3anent deliveries, in the form of grace periods and flexibility 
when payments do arrive late. 

In conclusion, I would like to thank you, Mr. Chairman and 
members of the committee, for the opportunity to present the com- 
ments of the financial services industry on H.R. 1963. As I stated 
previously, I would be happy to answer any questions you might 
have. 

[The prepared statement of Mr. Stenehjem follows:] 



61 

Prepared Statement of Leland M. Stenehjem, Jr., President, First Inter- 
national Bank and Trust, Fargo, ND, on Behalf of the American Bankers 
Association, America's Community Bankers, American Financial Services 
Association, Consumer Bankers Association, Independent Bankers Assoclv- 
TiON OF America, MasterCard International Incorporated, and Visa U.S.A. 
Inc. 

Good morning, Mr. Chairman and Members of the Committee. I am Lee Stenehjem, Jr., 
President of the First International Bank & Trust, a $219 million community bank located in 
Fargo, North Dakota. I am also the President-elect of the Independent Bankers Association of 
America (IBAA). On behalf of the IBAA', the American Bankers Association (ABA), America's 
Community Bankers (ACB), the American Financial Services Association (AFSA), the Consumer 
Bankers Association (CBA), MasterCard International Incorporated, Visa U.S.A. Inc., and all of 
our members, I am pleased to present these comments on the Postmark Prompt Payment Act of 
1995 (H.R. 1963). 

Legislative Focus Misplaced 

H.R. 1963 would mandate that late arriving bills be considered paid on the date that the 
payment is postmarked by the U.S. Postal Service, rather than the day payment is artually 
received. H.R. 1963 reflects a frustration with mall delivery delays, in particular with the late 
delivery of payments where late payment fees are imposed. In essence, the bill attempts to shift 
the burden of creating an efficient mail system from the Postal Service to the marketplace. This is 
almost impossible task because the Post Office has a monopoly on First-Class mail and only 
Congress has the ability to make substantial changes in its operations. 

The financial service industry has diligently worked with the Postal Service to improve the 
postal system. ABA for example, has representatives on the Postal Service's Mailers Technical 
Advisory Committee and has been represented on many ad hoc groups formed by the Postal 
Service to address efficiency issues. Nevertheless, mail delivery delays continue to be a problem. 
For example, the GAO reports that First-Class on-time delivery ratings based on the Postal 
Service's standards, have ranged from 79 percent to 84 percent during 1991 and 1994 (See 
Attachment A). This means that during those years, between 16 and 21 percent of our customer's 
payments were delivered late by the Postal Service standards. 

We share the Subcommittee's firustration vnth mail delays. However, while we will 
continue to work with the Postal Service, any legislative response should focus on the Postal 
Service's basic process and deficiencies. 

H.R 1963, if adopted, would create a myriad of technical and logistical difficulties for the 
financial services industry. Proponents contend that this bill will help consumers. However, 
consumer safeguards are already in place to protect consumers against uncontrollable delays, 
which will be discussed later in the testimony. More importantly, costs to comply with the 
proposed legislation would be enormous and these costs would be ultimately be passed on to the 
consumer. Thus, enactment of H.R. 1963 would be expensive, anti-consumer, anti-productive, 
and create an unnecessary regulatory burden in the financial services industry. 



62 



Existing Grace Periods Address Mail Delays 

Most creditors already provide consumers with a generous grace period before late 
payment fees are assessed. For example, mortgage payments are typically due on the first of the 
month, but payment is considered timely so long as it is received by the 14th or the ISth. 
Obviously, 14 or IS days is sufficient to allow for consumer delays, legitimate problems in making 
the payment, and any problems with mail delivery. 

At my bank, we have a ten day grace period for commercial and consumer loans and a 25 
day grace period for credit card consumers. Even then, we don't actually assess a late charge 
until ten days later, making the effective grace period for credit cards, for example, 3S days. For 
many cardholders, this amounts to an interest free loan. If this bill were to be enacted, these 
policies would have to be reassessed and grace periods might be seriously curtailed. 

Most creditors try to be flexible to ensure that consumers' payments are deemed timely, 
notwithstanding the vagaries of the mail system, customer delays, and legitimate problems in 
making the payment. Thus, creditors will oflen waive the penalty or interest if the consumer 
provides an adequate explanation for the delay. 

Because creditors accommodate the occasional delays caused by the Postal Service by 
waiving late payment fees and making other appropriate adjustments, H.R. 1963 is largely not 
necessary for those instances. The bill will benefit those consumers whose payments arrive late 
because they wait until the last moment to send payment. 

However, the benefit to this group of late payers is at the expense of the majority who 
mail payments on a timely basis. The majority of consumers will share the cost of the new 
payment processing systems in the form of higher fees and possible reduced or eliminated grace 
periods. 

Supporters of the bill allege that some unscrupulous creditors deliberately delay crediting 
an account on the day of payment receipt in order to impose additional charges. However, under 
Section 164 of the Truth in Lending Act (Section 226. 10 of Regulation Z), credit card issuers 
must post payment on the date of receipt. If creditors violate the Truth in Lending Act, 
significant penalties apply. In addition, there has not been any documented evidence to indicate 
that the financial services industry is guilty as charged. 

Postmark Would Undermine Compliance 

Irregularities in postmarks would make compliance with H.R. 1963 even more doubtful. 
Postmarks are often illegible due to multiple postmarks, misapplication, and the wear and tear of 



63 



delivery. In some cases, there is simply no postmark. Accordingly, it would be difficult or 
impossible to capture an accurate postmark in a large percentage of the cases under today's 
system 

Metered mail presents additional obstacles. Although metered mail is exempt from the 
bill, some processing solutions envision capturing postmarks from ajl payments through imaging. 
However, metered mail postmarks are typically red—and red ink copies very badly if at all. 

Accordingly, the bank would not be able to know the postmark date or whether it was 
metered mail. Clearly, unless the Postal Service develops a machine-readable postmark, H.R. 
1963 will necessitate the reintroduction of expensive manual processing. Furthermore, there is 
the issue of payments mailed from outside the United States. Most foreign countries either do not 
postmark their mail, or do it in a different manner than the U.S. Postal Service. 

Bill Would Impose Processing Problems 

The costs associated with the bill are enormous. H.R. 1963 would impose significant 
costs on creditors and other entities and individuals collecting payments. The bill would promote 
inefficiency and mandate new storage requirements at a time when the industry is moving toward 
greater automation and reduced paper. When you add to the equation additional employees and 
equipment, the cost estimates are tens of millions of dollars annually to comply with the proposed 
legislation. All borrowers will end up paying the extra cost this bill would impose. 

Most creditors use some kind of automated system for part or all of the process, although 
my bank does partially processes payments manually Automated equipment performs many of 
the steps, ensuring speedy processing and crediting for bank customers as well as reduced 
processing costs. H.R. 1963 would compromise the efficiency of today's as well as the future's 
automated payment processing systems. 

The extra processing steps required by H.R. 1963 would be a continuing expense. At this 
time, Mr. Chairman, I would like to walk you through a step by step example of a common 
processing procedure. First the envelope is manually opened (larger financial institutions 
machines cut open the envelopes). The contents are then removed (larger financial institutions 
actually have machines that vacuum out the contents) and the envelope is discarded. The 
remittance statement is then fed into a high speed reader that captures the essential data—the 
customer's name, account number, amount due, amount paid, a due date, etc.— by reading the 
specially encoded remittance statement The only information that may not be captured 
automatically is the payment amount if it varies from the scheduled or minimum payment. In this 
case, the amount paid may have to be entered manually. 



64 



Under the proposed bill, payment collectors would have to capture the postmark by 
reading the postmark, or retaining the envelope or its image. The postmark would have to be 
captured for all payments because the "late payment process" is not performed until later in the 
sequence. With most systems, the envelope and remittance statement would have to remain 
together or somehow be rejoined. We are not aware of any machines at this time that can process 
envelopes or read postmarks in this way. 

In addition, creditors would have to adjust interest charges or late fees added to a 
consumers account because of late payment. In most instances these changes would have to be 
made manually. The bill appears to require that the balance be retroactively credited and finance 
charges recalculated. This is not only costly, but unfair: the creditor would be required to give 
credit to a customer— not only before the creditor receives the funds, but even before it receives 
the check. The bill would create a government mandate forcing creditors to give late-paying 
borrowers interest free loans. 

Le gislation Would Make Equipment Obsolete 

In the alternative, processors could hire people to open each payment, compare dates on 
the postmark and the invoice, then separate late payments and process them manually. Obviously 
this solution renders most automated equipment (e.g. envelope openers, etc.) obsolete. In 
addition, the creditors incur substantial costs to cover new employees. 

Mr. Chairman, the bill would rer^ today's expensive processing equipment virtually 
obsolete. Processing equipment would have to be invented and built to replace existing machines, 
or retrofit existing ones, if feasible, in order to process various sized envelopes and to capture the 
postmark. 

For example a recent survey of the IBAA leadership (approximately 200 community 
bankers) showed the cost estimates for processing payments as required by this bill ranging up to 
$120,000 per year. This estimate does not include the cost of the replacement technology. There 
is also an estimated 510 billion active payments mailed per year for consumer loans, consumer 
insurance, and utilities.' Based on $0.20 (this amount does not represent any actual or estimated 
increase in cost, but is only used for purposes of demonstration) the additional processing costs 
for these consumer payments alone is over $10 billion per year — and this represents just the tip of 
the iceberg. The number increases dramatically when you add up the billions of payments made 
by both individuals and companies each month such as rent payments, commercial loans, 
condominium fees, and health club payments. 



' Based on studies completed for the U.S. Postal Service estimating the distribution of 
annual household payments by method of delivery. 



65 



Legislation Would Have Negative Effects on Student Loans 

H.R. 1963 would also affect federally-supported student loans, making the servicing of 
such loans more complicated and expensive. Under the principal federally-supported student loan 
program, the Federal Education Loan Program, or FELP, over six million loans are made each 
year to students and their families. Well over two million loans go into repayment each year. 

FELP loans are heavily regulated by the Department of Education in terms of how interest is 
charged to the borrower and how lenders and other holders charge the Department for interest 
subsidies paid on behalf of borrowers H.R. 1963 would insert a new, largely unnecessary wrinkle 
in both of these areas, adding an expensive new verification process to servicing of student loans. 

The significant problem of deciphering postmarks and handling the inevitable borrower inquiries 
would drive up servicing costs at a time when Congress is attempting to hold back the cost of 
student loans to borrowers and taxpayers. Importantly, because the maximum borrower interest 
rate on student loans is specified by statute, lenders and holders would not have the option to pass 
increased costs on to the borrowers. The net effect will be to further tighten yields on student 
loans, possibly leading to additional lender to withdraw firom the program. 

The problem of smeared, unreadable postmarks and responding to borrower inquiries will also 
affect the Federal Direct Student Loan Program, under which the government funds student loans. 
These so-called Direct Loans are serviced by some of the same private-sector companies most 
active in the private-sector based FEL program. 

IRS Processing Differs Greatly 

Proponents of H.R. 1963 argue that the Internal Revenue Service (IRS) already relies on 
the postmark for date of payment. Although the provisions of H.R. 1963 may seem similar to the 
IRS's policy of accepting returns postmarked by the due date, the situations are not comparable. 
Since there is a single deadline for most tax returns, April 1 5, the IRS handles most returns 
within a time frame of a few weeks. Those returns that arrive afler April 15 can be processed by 
hand during within a few days. On the other hand, the billing cycles of private businesses vary 
widely by type of account and by individual customer. It would be impossible to establish a 
limited time window within which all payments can be processed according to postmark. 
Moreover, the IRS processes about 1 1 5 million returns per year. The financial services industry 
and similar entities process payments in excess of one billion transactions per month. 

Impact on Securities Firms 

The presumption that payments are received on the date they were postmarked would 
appear to create a number problems for firms engaged in the securities brokerage business. 



66 



Securities broker-dealers are subject to statutory and regulatory requirements establishing 
transaction time frames that are inconsistent with the presumption of receipt established under 
H.R. 1963. 

Pursuant to the Securities Exchange Act of 1934, the Board of Governors of the Federal 
Reserve System has established requirements for extensions of credit to customers through 
margin accounts Under Regulation T (12 C F R. Section 220 1 et seq ), a deficiency in a margin 
account must ordinarily be satisfied within 3 business days after the deficiency was created (eg., 
by a securities purchase order) by "receipt of fiinds or securities." If the deficiency is not satisfied 
within this period, the broker dealer is required to liquidate securities in the customer's account to 
cover the amount of the deficiency, and thereby to reduce the amount of credit that is extended to 
the customer. 

H.R. 1963, by deeming that a payment is received on its postmark date, not on the date 
that the fiands or securities are received, would establish an inconsistent requirement that is 
particularly worrisome in an environment when the value of the payment itself continually 
fluctuates. While the customer's payment on a securities transaction may not be received for 
several days after a transaction was executed, the Act would deem the payment to have been 
made on the date it was postmarked, creating uncertainty as to the value which must be 
credited to the customer's account. A change from receipt date to postmark would also affect the 
customer's responsibility for late payment fees which are currently imposed on the basis of 
the payment receipt date, not its posting date. 

Finally, the use of payment postmark dates would affect securities firms' ability to comply 
with the requirement that they obtain permission from the Federal Reserve Board to extend 
credit for an additional period of time if they have not received settlement on transactions within 7 
days. While payments that are in the mail may be deemed to have been received under H.R. 1963, 
the firm does not in fact have them or know that they have been mailed, and would therefore be 
required to seek permission to continue extending credit to the customer. 
The new accounting and record keeping requirements that would be engendered by this 
requirement would be costly. 

We are aware of no evidence that existing practices of securities firms with regard to 
payments sent through the mail are harmfial to consumers. These practices have been established 
in accordance with requirements established by, and monitored by, the Securities and Exchange 
Commission, The Federal Reserve Board, state securities regulators and industry self-regulatory 
organizations. Transactions subject to these requirements should not be subject to inconsistent 
standards established by the Postal Service. 



67 



Conclusion 

There is an appeal to H.R. 1963 because of its simplicity. However, the unintended 
consequences and expenses — and uhimate burden for consumers — is masked by this simplicity. 
We believe this legislation is not needed because existing industry practices already adequately 
shield consumers from those uncertainties in the form of grace periods and flexibility when 
payments do arrive late. 

On behalf of the IBAA, ABA, ACB, AFSA, CBA, Visa U.S A., and MasterCard 
International Incorporated, I would like to thank Chairman McHugh and the Committee for the 
opportunity to present our comments on H.R. 1 963 . 

I would be happy to answer any questions you might have. 



68 



1. These organizations are represented in the testimony are: 

Tbe Independent Bankers Association of America is the only national trade association that 
exclusively represents the nations community banks. The BAA is an organization of independent 
banks, locally owned and operated, dedicated to meeting the financial needs of their communities. 
Its membership includes approximately S.SOO financial institutions in all fitly states and the 
District of Columbia. 

The American Bankers Association is the only national trade and professional association 
serving the entire banking community from small community banks to large bank holding 
companies. ABA members represent about 90 percent of the commercial banking industry's total 
assets, and about 94 percent of the ABA members are community banks with assets less than 
SSOO million. 

America's Community Bankers is the national trade association for 2,000 savings and 
community financial institutions and related business firms The industry has more than $1 trillion 
in assets, 253,000 employees and 14,500 offices. ACB members have diverse business strategies 
based on consumer financial services, housing finance and community development. 

The American Financial Services Association is the trade association for a wide variety of 
market-funded providers of financial services to consumers and small business. AFSA members 
are important sources of credit to the American consumer, providing approximately 15 percent of 
all consumer credit. 

Consumer Bankers Association was founded in 1919 to represent retail banks nationwide. 
Today, it represents approximately 750 federally insured bank holding companies, banks, and 
thrifl institutions that hold nearly 80 percent of all consumer deposits and more than 70 percent of 
all consumer credit held by federally insured depository institutions. CBA's focus is on retail 
issues, including deposits, investment, lending products and services. Its membership includes 
bank holding companies, regional, super-regional, and money center banks, and community banks 
and thrifts. 

Visa U.S.A. Inc. is a membership association comprised of financial institutions in the United 
States which are licensed to use the VISA service marks in connection with payment systems, 
including credit cards. 

MasterCard International Incorporated is a membership organization comprised of financial 
institutions which are hcensed to use the MasterCard service marks in connection with payment 
systems, including credit cards. 



69 



t/n.D, V t-^ 



CkaptcrS 

Po«Ul Beadqnutcn Cu Straofthai lu 
Orermll PUnnlas «im| Honltarlng of Scrrlcc 
Impfovement InltlAthras 



than residential customers and if business customer satisfaction has 
improved since it was first measured in early 1994. 

EXFC data show that the national rating for on-time delivery has yet to 
exceed 90 percent, even though the Service's goal is to deUver all 
First-Class mail on time 95 percent of the time. As indicated in figure 3.2, 
EXFC ratings have ranged firom 79 to 84 percent nationally for the 14 
quarters ended September 1994, with a rating of 83 percent reported for 
postal quarter 4, 1994. 



Rgura 3^ Extamal Rrat-Clas* On-Time Oelh/ary Ratlngi Have Ranged From 79 to 84 Percent During 1991 Through 1994 
100 0»wall EXFC ratings 



341 ««1 14a Xa >« 4-a2 1-M 2-a) 3-« 4-S3 1-M »«4 344 



Source: EXFC System. US Poslal Service 



The national exfc rating was 87 percent for postal quarter 4, 1995, ending 
in May 1995. This was the highest national exfc rating ever reported by the 
Postal Service. 

We also reviewed csi and expc data to determine the number of 
metrt^Militan areas that had higher and lower ratings during postal quarter 



70 



Responses to questions 

r^arding H.R. 1963 firom 

John M. McHugh, Chair 

Subcommittee on the Postal Services 

from 

Mr. Josq>h Bracewell, 

Chairman and CEO 

Century National Bank 

1. Assuming a bill payer has timdy mailed his or her payment, how should a consumer 
protect himself from incorrectly assessed late fees and penalties? 

Bill payers today have more than adequate time to mail payments so that 
they arrive on tune. Consumers are Informed well In advance of payment due 
dates, and, in addition, are given extra time beyond the due date In the form of 
grace periods. Creditors provide grace periods as a customer courtesy and to 
allow time for mail delivery. The grace periods, usually between 10 and 30 days 
In length, are more than long enough to allow for average mall delivery times to 
ensure timely delivery to the creditor. Thus, consumers who mall In a "timely" 
fashion. I.e., in sufTklent time to allow for normal mail delivery times, generally 
will not incur a late payment fee. Nevertheless, even if a consumer fails to allow 
enough days for postal delivery, most creditors will forgive late payments If the 
consumer explains the reason for the late arrival. 

U a consumer believes that a late payment fee or any other fee has been 
imposed incorrectly, pursuant to the Truth in Lending Act, the consumer may 
dispute the charge and have the fee removed or refunded. 

A. Is the consumer notified in his bill r^arding the assessment of such fees or penalties? 
Does such notification contain any explanation as to their recourse to dispute these charges? 
Under what circumstances will a creditor waive the penalty or interest if the consumer 
provides an adequate explanation for the delay? 

Late payment penalties are Included in the periodic statements of open-end 
credit plans during any month a fee Is assessed. Most closed-end loans include a 
notice of the amount of a late payment penalty with the coupon. In addition, 
consumers must be advised of late payment penalties at the time they open the 
account. Tliese disclosures must be in writing and in a form that the consumer 
can keep. 

For open-end credit such as credit cards, a statement explaining the 
consumers right to dispute charges and other billing rights must be provided 



71 



annually, or in the alternative, on each periodic statement. Most credit card plans 
provide the notice on each periodic statement. 

Because of competitive pressures and customer relations considerations, 
creditors usually waive late payment fees as a matter of policy if the consumer 
provides an adequate explanation for the delay. Decisions may also be based on 
the length of the lateness and the frequency of the individual borrower's tardiness. 

2. Do the members of the associations you represent offer customers a grace period? Please 
provide for the Subcommittee the length of time for such grace periods and the circumstances 
under which they are offered, and can be modified. Have any of your members eliminated or 
reduced the length of time provided under those grace periods in the last year? 

Most creditors permit grace periods for both open and closed end credit. 
For open-end credit such as credit cards, the usual grace period is 25 to 30 days. 
Typical mortgage plans permit 15 days grace period. Other consumer loans allow 
10 days. Overall, creditors have not reduced grace periods in the last year. Due 
dates may be modified at the consumers' request to a date most suitable for them. 

A. Should H.R. 1963 exempt from its coverage those creditors which offer their customers 
grace periods? 

Exempting creditors offering grace periods from H.R. 1963 coverage is not 
a solution. First, customers will be confused about which bills are subject to the 
mail date rule and which are not. Second, this approach does not solve the 
problem the Subcommittee is seeking to correct: late payments due to mail delays. 
Even with a grace period, customers will still depend on the postal service to 
deliver the payment in a timely fashion, that is, before the date the creditor 
considers it to be late and subject to a late payment charge. Moreover, most late 
payments today are by individuals who mail at the last minute. Whether there is 
a grace period or not, they will continue to mail without allowing sufficient time 
for mail delivery. 

B. In an average month, what percentage of accounts incur late fees or penalties? How do 
your members structure the imposition of late fees or penalties? For example, are fees 
assessed as percentage of payment or balance due, or are such assessed fees a fixed dollar 
amount? 

The percentage of accounts that incur late fees or penalties varies depending on 
the institution, loan type, region, and economic conditions. Penalty fees are based on a 
percentage of the loan or a fixed amount, depending on the state, creditor, and loan 
type. The amount of any late payment fee or how it is calculated is disclosed to 
consumers at the time the account is opened. 



72 



3. Do creditors incur any additional costs in handling late payments? If so, could you please 
provide the Subcommittee the nature of those additional costs. Is the collection of assessed 
late fees or penalties a profit source for your members? What percentage of total revenues 
does the collection of late fees and penalties? 

Creditors do incur additional costs in handling late payments: personnel 
costs for manual handling and reviewing accounts and other costs. Late fees help 
to offset other costs associated with delinquent payments including the cost of 
collection efforts and losses from unpaid loans. Only about five percent of total 
bank revenues are derived from service fees, such as late penalty fees. Late 
penalty fees make up a very small portion of this five percent. 

4. Of the payments received late, what is the pattern of late payments in terms of number of 
days late? If a standardized grace period were imposed, how long should it be in order to 
avoid the imposition of late fees and penalties? 

We do not have industry figures for the average period payments are late. 
Grace periods should not be mandated as such a mandate will have no affect on 
late payments and late payment fees. Whether grace periods are voluntary or 
mandatory, payments mailed too close to the end of the grace period or delayed by 
the Postal Service will still arrive late. Late payments are typically only a problem 
for those who risk mailing late i.e., they mail too close to the end of the grace 
period. These borrowers will continue to mail late, whether the grace period Is 
legislatively mandated or voluntarily provided as it is today. The other cause of 
late payment is mail delivery delays. They will also continue to be a problem 
regardless of whether grace periods are mandatory or voluntary; payments will 
still arrive after the date payments must be received to avoid a late payment fee. 

5. Some have argued that H.R. 1963 would encourage bill payers to wait until the date the 
bill is due before posting it. Would this consumer behavior cost your membership? If so, 
how much and in what ways? 

We expect that there would be some customers who would wait until the 
due date to maU payments. Creditors would forfeit some interest in this case, but 
would probably offset it with shorter grace periods. 

6. Some creditors will receive payments in person at a retail site; however, the consumer's 
account is not credited until the bill is received at the processing site. Do your members 
engage in this practice? Why shouldn't consumer accounts be promptly credited when paid at 
the retail site? 



73 



Most financial institutions require payments to be mailed to a specified 
address, usually a processing center which may be inteiTial or an external 
outsourced destination. However, if payments are accepted at the branch or retail 
location, they are generally posted upon receipt at that location. Using processing 
centers is far more e^cient and drastically reduces payment processing costs, 
especially for small institutions that otherwise lack economies of scale. Requiring 
that creditors accept payments at any branch or retail location would in many 
cases create confusion, delays, and additional costs, to the detriment of consumers. 

7. To what extent do your members currently process their payments manually? 

Most institutions use automated systems for at least part of their payment 
processing. Some of the largest institutions are fully automated though many 
institutions are only partially automated. Some small institutions continue to use 
manual systems, though they are moving toward automation. 

8. How do you address discrepancies between the amount owed and the amount paid in the 
bill? 

Creditors post the amount paid. If the amount paid is less than the 
minimiim amount due, they notify the customer of the discrepancy and request the 
balance due. 



74 

Mr. McHuGH, Thank you very much, Mr. Bracewell, for your 
comments. 

Moving next to Mr. Mallory Duncan, vice president and general 
counsel for the National Retail Federation. Welcome. 

Mr. Duncan. Good morning, Mr. Chairman and members of the 
committee. The NRF appreciates the opportunity to appear before 
the subcommittee to present the retail industry's views on H.R. 
1963. I will summarize our written testimony. We also ask that the 
full text of our remarks be included in the record of this proceed- 
ing. 

Mr. McHuGH. Without objection, so ordered. 

Mr. Duncan. By way of background, the National Retail Federa- 
tion is the world's largest retail trade association, with membership 
that includes the leading department, specialty, discount, mass 
merchandise and independent stores, as well as 32 national and 50 
State associations. Many of our members issue store label or retail 
credit cards. Collectively, the companies we represent extend retail 
credit to tens of millions of consumers. 

H.R. 1963, however well-intentioned, would have a serious ad- 
verse effect on credit card issuers' ability to continue to extend 
credit in an efficient, cost-effective manner. This proposal will cre- 
ate difficulties and unfairness for businesses and for consumers. 

The genesis of this proposal is talk-show host Bruce Williams. In 
his testimony before the subcommittee in October, Mr. Williams 
implied some credit grantors might be intentionally delaying post- 
ing of payments to customers' accounts in order to collect addi- 
tional charges, but he mentioned no examples, nor did he indicate 
that retailers engage in this practice. But his proposed solution, 
embodied in H.R. 1963, would harm us, nonetheless. 

I would like to make four points: First of all, this legislation puts 
the cart before the horse. We are here today talking about a solu- 
tion to a problem for which no one has determined the cause. Now, 
Mr. Williams has often referred to the use of the April 15 postmark 
by the IRS. 

Mr. McHuGH. Excuse me, Mr. Duncan, may I interrupt you? 

Mr. Duncan. Certainly. 

Mr. McHuGH. I apologize. I've never done this. But are you sum- 
marizing the testimony that you submitted to the subcommittee? 

Mr. Duncan. Yes, I am. 

Mr. McHuGH. I don't find what you're saying anywhere in here, 
and I didn't find it last night when I read it. Yes, sir. 

Mr. Duncan. I think the very next comment was taken literally 
from that testimony, if I may continue. 

Mr. McHuGH. Well, the problem is, we don't have the testimony. 

Mr. Duncan. Rather than repeating the testimony verbatim, I'm 
trying to summarize it for you. If you'd like, I'll read my testimony 
directly. 

Mr. McHuGH. No, that's not necessary. As I said, I'm just trying 
to follow and understand where we are in the presentation. But 
please continue. 

Mr. Duncan. Mr. Williams, as I was saying, has often referred 
to the use of the April 15 postmark by the IRS to establish the 
timely filing of individuals' tax returns with the Federal Gk)vern- 
ment. That example seriously overextends the analogy. Virtually 



75 

all individual tax returns are due on the same date. Those received 
within a relatively short window after April 15 can be hand-sifted 
for timeliness without the IRS incurring an expensive ongoing obli- 
gation. 

The same is not true for retailers. Rather than a single or a few 
yearly dates, credit card accounts are on billing cycles with dif- 
ferent due dates for different consumers throughout every month. 
This spreads the workload burden more evenly and allows consum- 
ers' credit card payments to be processed more efficiently. Indeed, 
in some cases, as a service, customers are allowed to choose their 
payment date. 

These processes preclude the establishment of a limited time 
window within which all payments must be received. This bill 
would require credit grantors to be continually on the lookout for 
pa3mients that would be late but for an early postmark. 

Second, we are not holding up checks. Retailers want the checks 
they receive to clear as soon as possible. Many arrange for expe- 
dited delivery of their mail from the destination post office and 
make as many as five trips per day to pick up pajnuents. To speed 
the process and to reduce costs, retailers minimize the manual 
handling of payments. Automated equipment does virtually every- 
thing. 

However, under this bill, absent manual sorting of every letter, 
a retail card issuer would not know that a payment was late until 
after the retailer's equipment had opened the envelope, removed 
the contents, and sent the payment and statement through its 
automated processing and billing systems. By that time, the enve- 
lope would be long gone. 

Thus, the bill would require the creation and purchase of new 
systems that would read the postmarked envelope and link that in- 
formation with the payment data so that it could be used in the 
event the payment was delivered late. This would be an extraor- 
dinarily costly burden to impose on consumer credit, even if the 
equipment were immediately available. 

But as expensive as the creation and purchase of new equipment 
would be, manual processing would be even worse. Some of NRF's 
members process more than half a million customer payments 
every business day. The vast majority of those payments are time- 
ly. To slow those operations, in order to manually sort for postmark 
data on those consumers who pay their bills at the eleventh hour, 
would penalize the millions of consumers who pay their bills on 
time, by raising the costs and hindering the processing of every- 
one's account. 

Mr. Chairman, members of the subcommittee, if I may digress 
for just one moment, consider what manual processing would in- 
volve. You simply do not process 30,000 payments an hour by pick- 
ing each one up, opening it, and trying to extract the payment in- 
side, the check, comparing that with the date, the postmark date 
on the envelope, and make a judgment as to its timeliness, at least 
not without hiring hordes of people or creating unconscionable 
delays. 

Third, the bill is counterproductive. Ironically, it could actually 
encourage individuals to pay late by guaranteeing them the finan- 
cial float without risk for that delay. Congressional endorsement of 



76 

this delay is particularly troubling in view of the efforts many re- 
tailers make to provide a postal grace period between their pay- 
ment due date and the date on which the customers' next state- 
ments are prepared. 

Retailers bear the cost of carrying financing for goods they sell 
and, in many instances, already provide customers with an ex- 
tended grace period before their first payment is actually due. For 
the subcommittee to extend this period even further and to require 
retail credit grantors to invest millions of dollars in not-yet-devel- 
oped equipment, ostensibly as a benefit to a small percentage of 
consumers who pay late, is, as I said, counterproductive. 

The likely result of the subcommittee's action will be to dampen 
credit availability, to raise the cost of credit, to raise the cost of 
merchandise, and to shorten or eliminate grace periods. 

Fourth, regulating retailers is not the solution to mail delays. 
The actual target of H.R. 1963 may be the Nation's mail delivery 
system, but the U.S. Postal Service is not the agent of the retail 
card issuer. Retail credit grantors cannot force the Service to pro- 
vide faster delivery. 

Despite its claimed quasi-independent status, the U.S. Postal 
Service is ultimately beholden to the Federal Government. The 
Government appoints its Board of Governors, scrutinizes its costs, 
regulates its operations, and has oversight of its successes and fail- 
ures. If the Federal Government wants to speed up the mail, it 
should do so directly. Retail card issuers should not be held hostage 
as the putative means to an end they cannot control. 

In conclusion, there are numerous practical and complex techno- 
logical difficulties with this proposal. For example, the fact that 
large numbers of postmarks are unreadable, because they are faint, 
obliterated, or nonexistent, would make the bill literally unwork- 
able for all those transactions. 

Just one final observation: A tray of mail from the Postal Service 
contains 1,300 envelopes. It took us 33 minutes just to manually 
sort it by postmark. More than 1 percent of the postmarks were 
nonexistent. A moderate-sized retail credit processing operation 
regularly receives 40-plus trays of mail a day. Thus, it would take 
an individual 20-some hours of nonstop sorting just to read the 
postmarks in 1 day's mail, and there would still be half a tray of 
unreadable mail at the conclusion. A large retailer would have ten 
times as much. H.R. 1963 is not the right approach. 

We appreciate the opportunity to express the views of the Na- 
tional Retail Federation. I would be happy to answer any questions 
you may have. 

[The prepared statement of Mr. Duncan follows:] 



77 



> 



National Retail federation 



Testimony of 

Mallory B. Duncan 

Vice President, General Counsel 

National Retail Federation 

on 

H.R. 1963, Postmark Prompt Payment Act of 1995 

The Subcommittee on the Postal Service 

of the Committee on Government Reform and Oversight 

February 28, 1996 



The National Retail Federation appreciates the opportunity to appear before 
the Subcommittee to present the retail industay's views on H.R. 1963, the 
"Postmark Prompt Payment Act of 1995." 

By way of background the National Retail Federation is the world's largest 
retail trade association with membership that includes the leading dep£irtment, 
specialty, discount, mass merchandise and independent stores, as well as 32 
national and 50 state associations. NRF members represent an industry that 
encompasses over 1.4 million U.S. retail establishments, employs nearly 20 million 
people, 1 in 5 American workers, and registered 1995 sales of more them $2.2 
trillion. NRF's international members operatestores in more than 50 nations. 



ne Vlbrid's Largest Ketall Itade Association 

♦ 

Uberty Place, 325 7th Street NW. Suite 1000 

Wtohlneton. DC 20004 

202.783.7971 Van: 202.737.2849 



78 

Many of our members issue store label (or "retail") credit cards. Collectively, the 
companies we represent extend retail credit to tens of millions of consumers. 

H.R. 1963 would provide that the U.S. Postal Service postmark stamp date 
would be the presvimed date of receipt whenever a mailed payment actually was 
delivered jifter the time prescribed for payment. The proposal advanced in this bill, 
however well intentioned, would have a serious adverse effect on credit granting 
retailers' ability to continue to extend that credit in an efficient, cost effective 
manner. This proposal will create difficulties and unfairness for businesses and for 
consumers. 

The genesis for this proposal appears to be the use of the April 15 postmark 
to establish the timely filing of individuals' income tax returns with the federal 
government. H.R. 1963 seriously overextends that analogy. Virtually all 
individual tax returns are due on the same date. Those received within a relatively 
short, several day window after April 15 can be hand sifted for timeliness without 
the Internal Revenue Service incurring an expensive on-going obligation. 
Furthermore, the U.S. Postal Service (and its predecessor the Post Office) is, in all 
respects, the federal government's agent for the receipt of tax returns. Dehvery to 
one arm of the government is tantamount to delivery to the other, just as delivery of 
a cash payment at a utiUty company's service window is presiunptive of pa3Tnent to 
its back office financial operations. The speed with which the payment is actually 
dehvered is a matter under the principal's direction, whether it be the government 



79 

or the utility company. This is not true in the case of mailed retail credit card 
payments. 

Rather than a single date, credit card accoimts are on billing cycles with 
different due dates for different consumers throughout the month. This spreads the 
workload burden more evenly £md allows consumers' credit card payments to be 
processed more efficiently. Indeed, in some cases customers are allowed to choose 
their pa5Tnent due date. However, this precludes the establishment of a Umited 
time window within which all pa5mients must be received. H.R. 1963 would require 
credit grantors to be continually on the lookout for payments that would be late, but 
for an early postmark. 

The slowing in the processing of consumers' payments that this legislation 
could entail is directly contrary to retailers' efforts to speed up their receipt of 
customers' pasonents. Retailers want the checks they receive to clear as soon as 
possible. Many arrange for expedited delivery of their mail from the destination 
post office and make as many as five trips per day to pick up payments. Federal 
law requires that those credit card payments be credited on the day received. 
Automation facilitates this process. 

To reduce the cost of credit, with rare exceptions, the memuad handling of 
customer pa5Tnents is minimized. Automated equipment does virtually everything. 
However, under H.R. 1963, absent memual sorting of every letter, a retail card 
issuer would not know that a payment was "late" until after its equipment had 



80 

opened the envelope, removed its contents, and sent the payment and statement 
through its automated processing system. The envelope would have long before 
been disposed. Thus H.R. 1963 would require industry to create, and card issuers 
to buy, new systems that would read the postmarked envelope and link that 
information with the payment data so that it could be used in the event the 
payment were determined to be late. This would be an extraordinarily costly 
burden to impose on consumer credit. 

Expensive as the creation and purchase of new equipment would be, manual 
processing would be an even worse alternative. Some of NRF's members process 
more than one half million customer payments every business day. The vast 
majority of those payments are timely. To slow those operations in order to 
manually sort for postmark data on those consumers who pay their bills at the 
eleventh hour would penalize the millions of consumers who pay their bills on time 
by raising the cost and hindering the processing of everyone's accoimts. 

Ironically, despite the extra costs it would impose upon the system, and thus 
on timely payers, H.R. 1963 effectively would reward those consumers who pay late 
by guaranteeing them the financial "float" without risk for their delay. This could 
actually encourage individuals to pay late. Congressional endorsement of this 
delay is particularly troubhng in view of the efforts many retailers make to provide 
a postal grace period between their payment due date and the date on which the 
customers' next statements are prepared. For example, if a customer's statement is 



81 



prepared on the first of each month, the customer might be given a "due date" of a 
few days before the end of the prior month. That allows additional time for any 
delays in postal delivery and for the processing of the pajmient prior to the 
customer's next statement date. 

However, if the pa3Tnent is not received by the first of the month, H.R. 1963 
would leave the retail card issuer with a dilemma. How could it accurately assess 
and convey the status of the customer's accoimt? Customers who timely pay their 
bill in full each month are not assessed a finance charge. A charge is assessed for 
pa5Tnents received after the due date and any additional grace period the card 
issuer provides. By encouraging customers to pay at the last moment, H.R. 1963 
would further complicate payment processing by requiring issuers to retroactively 
credit late payments as if they had been received on time.' 

Retailers bear the cost of canying financing for the goods they sell and, in 
many instjinces, those who offer credit have already provided customers vnth an 
extended grace period before their first payment is due. For the Subcommittee to 
extend this period even fiarther and to require retail credit grantors to invest 
millions of dollars in not-yet-developed equipment ostensibly to benefit the small 



' In addition, suppose a customer has a $1,000 line of credit of which $200 has been used. The retail 
card issuer would like the customer to have the maximum purchasing abibty commensurate with 
his or her ability to pay. Should the credit grantor issue a billing statement that assumes the 
retailer will receive the customer's payment? And how much should it assume the customer plans 
to pay? How much credit should it tell the customer he or she has available? Would the customer's 
next finance charge-free grace period be shortened or wpuld her billing cycle have to be changed 
each time she was 'late." At what point could the creditor begin collection activities or report a 
nonpajrment to a consumer reporting agency? 



82 

percentage of consumers who pay late, is counterproductive. The Hkely results of 
the Subcommittee's action will be to dampen credit availability, to raise the cost of 
credit, to raise the cost of merchcindise, to shorten grace periods and/or to encourage 
the replacement of retail credit cards with third party cards, debit cards and checks. 

Members of the Subcommittee should not overlook two significant 
advantages of the current system - customers are given a long period in which to 
arrange for timely mailing of their bills and the delivery of those payments is an 
"event certain" for processing purposes. 

Of course the actuEil target of H.R. 1963 may be the nation's mail delivery 
system. But the U.S. Postad Service is not the agent of the retail card issuer. Retail 
credit grantors cannot force the Service to provide faster delivery. Despite its claim 
to quasi-independent status, the U.S. Postal Service is ultimately beholden to the 
federal government. The government appoints its Board of Governors, scrutinizes 
its costs, regulates its operations and has oversight of its successes and failures. If 
the federal government wishes to encourage faster delivery of the mail, it should do 
so directly. Retailer card issuers should not be held hostage as the putative means 
to an end they cannot control. 

Clearly, there are numerous practical and complex technological difficulties 
with this proposal, many that we have not addressed. The fact that large numbers 
of postmarks are unreadable, because they are faint, because they are obliterated 



83 



by the stamp, or because they £ire completely non-existent, and thus would make 
the bill unworkable for millions of consumer transactions is just one example. 

We appreciate the opportunity to express the views of the National Retail 
Federation. I would be happy to answer any questions you might have. Thamk you. 



84 



Responses to questions in writing regarding H.R. 1963 

by John M. McHugh, Chairman 

Subcommittee on the Postal Service from 

Mallory Duncan, Vice President and General Counsel 

National Retail Federation 



1. Assuming a bill payer has timely mailed his or her payment, how 

SHOULD A consumer PROTECT HIMSELF OR HERSELF FROM INCORRECTLY 
assessed LATE FEES AND PENALTIES? 

Answer : If a consumer has mailed his or her pa5anent so that it is timely 
received by the retail credit grantor and a late fee for that payment is 
nevertheless incorrectly assessed, then a billing error has occurred. That 
same statement on which the consumer is billed for the erroneous late fee 
will also contain the cardholder's bilhng rights summary. This summary 
explains the cardholder's recourse, imder the Fair Credit Billing Act, to 
dispute erroneous fees. The cardholder should write to the address provided 
with an explanation as to why the fee is unwarranted. In many cases the 
dispute may also be addressed by telephoning the card issuer's customer 
service center. 

la. is the customer notified in his bill regarding the assessment of 
Such fees or penalties? Does such notification contain any 
explanation as to their recourse to dispute these charges? under 
what circumstances will a creditor waive the penalty or interest 
if the consumer provides an adequate explanation for the delay? 

Answer : As was mentioned above, the assessment appears on the monthly 
statement along with an explanation as to recovirse. If the late fee was not 
assessed in error, but rather was assessed as a consequence of delayed 
mailing of the customer's payment, then the determination as to whether fees 
will be waived depends upon the explanation of the delay and other factors 
relating to the customer's circumstances. For example, if there has not been 
a history of late payments on the account, many retail credit grantors will 
remove the fees immediately upon request. Some credit grantors will 
routinely halt late fee assessments when unusual weather-related delays 
(hurricanes, blizzards, floods and so forth) are known to have adversely 
affected the ability of customers to obtain timely mailings. In general, 
retailers are very responsive to their charge card customers' requests. 



85 



RESPONSES TO WRITTEN QUESTIONS REGARDING H.R. 1963 

BY Mallory Duncan, National Retail Federation 



DO THE MEMBERS OF THE ASSOCIATIONS YOU REPRESENT OFFER CUSTOMERS 
A GRACE PERIOD? PLEASE PROVIDE FOR THE SUBCOMMITTEE THE LENGTH 
OF TIME FOR SUCH GRACE PERIODS AND THE CIRCUMSTANCES UNDER WHICH 
THEY ARE OFFERED, AND CAN BE MODIFIED. HAVE ANY OF YOUR MEMBERS 
ELIMINATED OR REDUCED THE LENGTH OF TIME PROVIDED UNDER THOSE 
GRACE PERIODS IN THE LAST YEAR? 

Answer : Retail credit grantors operate differently than some other credit 
grantors. The phrase "grace period" can refer to a number of different 
intervals. For example, a customer with no outstanding balance on his or her 
charge card may purchase merchandise in early July for which no billing 
statement is received until August. If the customer pays his or her bill in full 
by the late August due date, the customer will owe no finance charges on the 
purchase even though the customer has been extended credit amd may have 
had the use of the merchandise for more than a month. This finance charge 
fi-ee interval between billing and the due date is ofl;en referred to as a "grace 
period." Mfmy retail credit grantors also have what is in effect an additional 
postal grace period between the due date and the date on which the account 
is actually next billed. This "grace period," typically between two and four 
days, accommodates mail delays sometimes encountered by customers who 
have sent their payments a reasonable period in advance of the due date. 
Some retail credit grantors backdate payments by a day (the overstuff date) 
creating what is in effect another grace period. Finally, there may be an 
additionad period between the statement date (i.e. the end of the postal grace 
period) and the date that a late charge is assessed. This late fee grace period, 
typically ten days - although it may be as few as one or as many as sixty 
days depending upon competition, company pohcy and state law ~ effectively 
provides yet another cushion for customers who do not mail their pa5Tnents 
on time. Under federal credit laws, changes in the terms of a customer's 
account must be disclosed in advance. We have no industry-wride statistics, 
but we understsmd that some of our members have reduced at least one of 
these grace periods within the past year while others have not. 

SHOULD H.R. 1963 EXEMPT FROM ITS COVERAGE THOSE CREDITORS WHICH 
OFFER THEIR CUSTOMERS GRACE PERIODS? 

Answer : For the reasons set forth in our testimony at the February 28 
heauing, we do not believe that H.R. 1963 is either responsive to the actual 
problem or workable. Amending the bill to provide a exemption for certain 
grace periods will not change the underlying problems of the legislation 



86 



Responses to written questions regarding H.R. 1963 
BY Mallory Duncan, National Retail Federation 



2B. In AN AVERAGE MONTH, WHAT PERCENTAGE OF ACCOUNTS INCUR LATE FEES OR 
PENALTIES? How DO YOUR MEMBERS STRUCTURE THE IMPOSITION OF LATE FEES 
OR PENALTIES. FOR EXAMPLE, ARE FEES ASSESSED AS A PERCENTAGE OF 
PAYMENT OR BALANCE DUE, OR ARE SUCH ASSESSED FEES A FIXED DOLLAR 
AMOUNT? 

Answer : We do not have industry-wide figxires, however anecdotal evidence 
suggests that the percentage is in the low single digit percentage range. 
TVpically, the structure and permissible amount of late fees varies by state 
law. A common late fee is $10 or 5% of the pajmaent due. 

3. Do CREDITORS INCUR ANY ADDITIONAL COSTS IN HANDLING LATE PAYMENTS? IF 
SO, COULD YOU PLEASE PROVIDE THE SUBCOMMITTEE THE NATURE OF THOSE 
ADDITIONAL COSTS. IS THE COLLECTION OF ASSESSED LATE FEES OR PENALTIES 
A PROFIT SOURCE FOR YOUR MEMBERS? WHAT PERCENTAGE OF TOTAL 
REVENUES DOES THE COLLECTION OF LATE FEES AND PENALTIES REPRESENT? 

Answer : Retail credit grantors incur additional costs in collecting late 
payments. The costs are those associated with collection activities conducted 
by mail and by telephone. Additional expenditures for postage, payroll, 
employee benefits, supphes, telephone toll cheirges as well as outside 
collection agencies and other more serious efforts are all part of the cost of 
collecting delinquent pa5mients. Late fees also are imposed for the salutary 
effect of encouraging individuals to pay on time. We are aware of no 
industry- v/ide figures indicating the effect of late fees on companies' 
profitability or the fees' percentage of revenues. It is proprietary 
information. Discussions with individuals involved in the industry revejd 
that in some cases, the fees do not cover the costs of collection while in other 
instances they provide a small positive contribution to total revenues. 

4. Of the PAYMENTS RECEIVED LATE, WHAT IS THE PATTERN OF LATE PAYMENTS IN 
TERMS OF NUMBER OF DAYS LATE? IF A STANDARDIZED GRACE PERIOD WAS 
IMPOSED, HOW LONG SHOULD IT BE IN ORDER TO AVOID THE IMPOSITION OF LATE 
FEES AND PENALTIES? 

Answer; This information is not available. To the best of our knowledge, 
those retailers who track delinquency data do so by monthly billing cycle 
rather than on a daily basis. For the reasons set forth in our testimony and 
the response to question 2A, a standardized grace period should not be 
imposed. 



87 



Responses to written questions regarding H^. 1963 
BY Mallory Duncan, National Retail Federation 



Some have argued that H.R. 1963 would encourage bill payers to wait 
until the date the bill is due before positing it. would the consumer 
behavior cost your membership? if so, how much and in what ways? 

Answer; We believe that one of the adverse effects of H.R. 1963 would be to 
cause greater numbers of consumers to pay their bills at the last possible 
moment, just as the IRS' April 15 tax fihng deadline causes so many millions 
of individuals to do the same. Retail credit grjintors would be required to 
treat as timely the hundreds of millions of payments that actually would be 
received late. The collective lost finance charge revenue is incalculable. In 
addition, there would be the costs of manuedly processing those pa3Tnents 
until such time that machine readable postmarks and postmark reading 
equipment were developed. Once developed, the cost of purchasing, 
installing and training individuals to use that expensive new equipment 
would become an additional cost. 

SOME CREDITORS WILL RECEIVE PAYMENTS IN PERSON AT A RETAIL SITE; 
HOWEVER, THE CONSUMER'S ACCOUNT IS NOT CREDITED UNTIL THE BILL IS 
RECEIVED AT THE PROCESSING SITE. DO YOUR MEMBERS ENGAGE IN THIS 
PRACTICE? WHY SHOULDN'T CONSUMER ACCOUNTS BE PROMPTLY CREDITED 
WHEN PAID AT THE RETAIL SITE? 

Answer; Not all retail charge card accounts are issued directly by the 
retedler. For example, in a number of instances a bank issues the card, in the 
retailer's name, to customers in accordance with mutually acceptable 
creditworthiness guidelines. The bank will not enter a deposit on an 
instnnnent it has not received. Payment on those accounts must be made 
directly to the party who extends the credit: the issuing bank at the address 
on the remittance envelope. Therefore, in a number of such cases payment 
cannot be made at the retail facihty. However, as a convenience for 
customers, others of such retailers will accept customer pa5anents at the store 
and forward them to the bank where they are credited to the customer's 
account on the date received by the bank. At the other end of the spectrum is 
the retailer with sophisticated computerized operations that directly issues 
its own charge card and posts pas^nents to customers' accovmts within 
moments after receipt at the store. This variation in sophistication and 
means of extending credit explains why not aU accoimts can be processed in 
the same manner. 



88 



Responses to written questions regarding H.R. 1963 

BY MALLORY DtlNCAN, NATIONAL RETAIL FEDERATION 



7 . TO WHAT EXTENT DO YOUR MEMBERS CURRE>fTLY PROCESS THEIR PAYMENTS 
MANUALLY? 

Answer: It is difficult to answer this question in a meaningful fashion. The 
pasonent processing function consists of a complicated series of steps, some or 
all of which are automated. However, during the course of automated 
handling some nonstandard or problematic items will be rejected by the 
eqviipment, resulting in at least partial manual handling. For example, if the 
equipment determines that the customer has stapled his or her pa5Tiient 
check to the statement, the contents of the envelope automatically will be 
routed to a human operator for mjinual separation. On the other hand, if the 
automated equipment is unable to "read" the customer's handwriting, an 
electronic image of that writing will be routed to a human operator for 
decoding even though the statement and the check never leave the 
automated processing stream. It is unclear whether the Committee would 
consider the latter to be manual processing. Among larger retail credit 
grantors approximately 3% of pa5Tnents receive what might be considered 
predominately manual handling. 

8. How DO YOU ADDRESS DISCREPANCIES BETWEEN THE AMOUNT OWED AND THE 
AMOUNT PAID IN THE BILL? 

Ans\yer; In general, retail charge card customers may remit any amount 
with their statement. So long as they make their required minimvim monthly 
payment, no late charges will be assessed. Customers who pay the total 
balance or more wiU not be assessed a finance charge for merchandise billed 
to their next statement for which they make a timely full payment, and they 
will carry a temporary credit balance for the amount of any overpayment. 
Customers who pay an amount between these extremes will reduce the 
balance on which finemce charges are calculated and possibly reduce their 
subsequent required minimum monthly payment. 



89 

Mr. McHuGH. Thank you, Mr. Duncan. 

Next is Mr. Paul Reid, who is president of the Mortgage Bankers 
Association. 

Mr. Reid, good morning. Thank you for being with us. 

Mr. Reid. Mr. Chairman and members of the subcommittee, 
thank you very much for the opportunity to testify this morning. 

For the record, I am Paul Reid, president and CEO of American 
Home Funding, a full service mortgage banking firm 
headquartered in Richmond, VA, and my company is a wholly 
owned subsidiary of Rochester Community Savings Bank of Roch- 
ester, New York. I am also currently serving as president of the 
Mortgage Bankers Association of America. I might add that MBA's 
membership currently services 4 out of every 10 first mortgage 
loans in this country. 

We appreciate the opportunity to testify on H.R. 1963. MBA rec- 
ognizes the chairman's efforts to protect consumers from late pay- 
ment charges that are assessed due to unforeseen and uncontrol- 
lable circumstances. However, the Mortgage Bankers Association 
has serious reservations concerning the impact of the proposal on 
mortgage lending and servicing, and the costs it would impose on 
lenders, other credit providers, and finally on consumers. 

M.B.A. would like to express deep concerns about this legislation, 
for the following reasons: First, the cost of compliance with H.R. 
1963 would be substantial, and these costs would ultimately be 
borne, we believe, by consumers. Second, adequate consumer pro- 
tections already exist in the mortgage process. Third, a generous 
grace period already exists for most mortgages by virtue of specific 
language in the contract between lender and borrower. 

Let me be specific. Each month, an estimated 47 million mort- 
gage payments are processed by the mortgage servicing industry. 
This equates to some 564 million pa5niients per year. If the post- 
mark date is to be used, mortgage payments received after the ex- 
piration of the prescribed due date would be processed differently. 

Although loan processing technology is highly automated, it is 
not designed to read postmarks. Either special equipment would 
have to be purchased to read postmarks, or payments received 
after the prescribed date would have to be hand processed. Neither 
option is an operationally or financially viable alternative in a 
heavily competitive and economic environment. 

Lenders are able to reduce the cost of servicing loans by maxi- 
mizing technology and reducing burdensome paper retention re- 
quirements. This bill would impose significant additional expenses 
on mortgage servicers. In fact, we tried to estimate the overall cost 
of compliance, and we've come up with a number of $1.5 billion an- 
nually. 

Again, the subcommittee must bear in mind that these increased 
compliance costs will ultimately, I believe, be passed along to bor- 
rowers, either in the form of higher interest rates or fees. With 
such a potential, the disadvantziges of the bill seem to far outweigh 
the perceived benefits. 

Concern has also been raised regarding the crediting of mortgage 
payments in a timely manner. Mortgage servicers have incor- 
porated reliable consumer protections in their procedures for pay- 
ment receipts. Grenerally, a lockbox system handles the posting of 



90 

payments. Under this system, the date of receipt is completely veri- 
fiable and is subject to audit. 

Consumers are also protected under investor requirements. Such 
requirements mandate that payments be processed in a timely 
fashion. Further, Fannie Mae and Freddie Mac, as part of their 
seller/servicer guidelines, require that payments be posted on the 
same day as received. Such protections ensure that consumer pay- 
ments are credited when received. 

Finally, let me address the issue of contractual grace periods for 
mortgage loans. The contractual language of standardized mort- 
gage documents provides that mortgage pajrments are due on the 
first day of the month. However, lenders understand that payments 
are sometimes delayed in the mail and that many delays are jus- 
tifiable. In order to compensate for such problems, a grace period 
of as long as 2 weeks is allowed under the language of most stand- 
ard mortgage documents. Late charges are therefore only assessed 
when the grace period lapses. 

Quite frankly, I've seen in practice that mortgage servicers have 
consistently exhibited flexibility in the assessment of late charges 
in instances where borrowers have experienced meaningful and un- 
controllable circumstances, such as the recent blizzard in the 
Northeast, the furlough of Federal employees, and the hurricane 
that hit southern Florida several years ago. 

In addition, H.R. 1963 may preempt State law. Nearly one-third 
of the States require mortgage lenders to provide a specific grace 
period prior to assessing a late charge. At a time when Congress 
is delegating more authority to the States, it would appear that 
this legislation perhaps is headed completely in the opposite direc- 
tion. 

In sum, it is difficult to discern what benefits borrowers would 
receive under implementation of H.R. 1963. There has been no 
demonstration of systematic processing delays in handling mort- 
gage payments that would warrant the significant governmental 
encroachment into private contracts that this bill represents. This 
legislation would directly impose significant costs on the mortgage 
servicing industry and a significantly higher paperwork burden on 
the servicing of loans. Personally, I am convinced that the addi- 
tional costs would have to be passed on to borrowers. 

M.B.A. believes mortgage borrowers are already protected by the 
contractual grace periods incorporated into standardized mortgage 
documents as well as by accurate and reliable payment receipt pro- 
cedures. For the foregoing reasons, the Mortgage Bankers Associa- 
tion believes that H.R. 1963 is unduly burdensome and unneces- 
sary. 

M.B.A. would like to thank you, Mr. Chairman, and the sub- 
committee, for the opportunity to testify. I will be available to an- 
swer any questions you may have. 

[The prepared statement of Mr. Reid follows:] 



91 

Prepared Statement of Paul S. Reid, President, Mortgage Bankers 

Aasnr'iATiOM 



Mr. Chairman and Members of the Subcommittee, I am Paul Reid, President and CEO 
of American Home Funding. Inc.. a wholly-owned subsidiary of Rochester Community Savings 
Bank, headquartered in Richmond. Virginia. I- am currently serving also as President of the 
Mortgage Bankers Association of .\merica (MBA).' With me are Michael J. Ferrell, Senior Staff 
Vice President and Legislative Counsel, and Karen B. Kapen, Associate Director and Counsel. 

MBA appreciates the opportunity to testify on HR 1963, the "Postmark Prompt Payment 
Act of 1995." MBA recogmzes the Chairman's efforts to protect consumers from late payment 
charges that are assessed due to unforeseen and uncontrollable circumstances. However, MBA 
has serious reservations concerning the impact of the proposal on mortgage lending and servicing 
and the costs it would impose on both lenders, other credit providers, and consumers. 



OVERVIEW 



On June 29, 1995. Representative McHugh (R-NY), Chairman of the House Postal Service 
Subcommittee of the Goverrunent Reform and Oversight Committee, introduced HR 1963, which 
would provide that payment of any bill, invoice, or statement of account due is deemed received 
as of the date of the postmark if the payment was: 1 ) deposited in the mail; 2) in an envelope; 
3) with adequate postage; 4) properly addressed; 5) postmarked by the postal service; 6) 
postmarked on or before the prescribed due date; and 7) received by the payee after the 
prescribed due date. The legislation is intended to protect consumers from late payment charges 
that are assessed as a result of delays in the mail process. Such delays are viewed as 
circumstances beyond the control of consumers and, thus, finance charges applied as a result of 
such events are seen as puniuve. 

HR 1963, which amends the Postal Service Code, would affect most types of payments 
that are sent by mail. As such, lenders and other credit providers are united in strong opposition 
to the legislation. If enacted, HR 1963 would require the mortgage and financial services 
industries to outlay significant sums of money to comply with the new law. New equipment, 
processing techniques, and storage requirements would have the effect of dramatically increasing 
the cost of credit to consumers. In all likelihood, borrowers and debtors would see an increase 
in interest rates and fees. There is no doubt that HR 1963 would be unduly burdensome to 
lenders and credit providers and deleterious to consumers. As a result, MBA would like to 
express deep concerns about this legislation for the following reasons: 



'MBA is the national association representing exclusively the real estate finance industry. Headquartered in 
Washington, D.C.. the association works to ensure the continued strength of the nation's residential and commercial 
real estate markets: to expand homeownership prospects through increased affordability; and to extend access to 
affordable housing to all Americans. MBA promotes fair and ethical lending practices and fosters excellence and 
technical know-how among real estate finance professionals through a wide range of educational programs and 
technical publications. Its membership of approximately 2,477 companies includes all elements of real estate finance: 
mortgage companies, mongage brokers, commercial banks, thrifts, life insurance companies and others in the 
mortgage lending field. 



92 



• The cost of compliance with HR 1963 would be substantial, and these costs would 
ultimately be borne by consumers. 

• Adequate consumer protections already exist in the mortgage process. 

• A generous grace period already exists for most mortgages, by virtue of specific 
language in the contract between lender and borrower. 



IMPACT ON MORTGAGE LENDERS 



The Incre.\se in the Cost of Compliance Would be Borne by Consumers 

Currently, lenders are able to reduce the costs of servicing loans by maximizing 
technology and reducing burdensome paper retention requirements.^ The "paperless" mortgage, 
in which most documents are stored electronically, promises to reduce costs for mongage 
servicers even further. In the last three years, direct expenses on a per loan basis have declined 
from SI 23 in 1992, to $112 in 1993, and further down to S95 in 1994.' The economies of scale 
show up even more dramatically among large volume mortgage servicers, who employ the most 
sophisticated forms of technology. Servicers handling 100,000 loans or more had average per 
loan ser\icing expenses of $118, $94, and $83 in the same three years of 1992-94. 

In order to comply with the requirements of HR 1963, mortgage servicers would incur 
significant expenses. In fact, the total cost of compliance would be approximately SI. 5 bilhon.^ 
The legislation would increase costs by requiring servicers either to make substantial financial 
outlays to purchase new equipment or by requiring manual processing and massive paper 
retention. Such prospects hardly seem appropriate as the mortgage lending industry approaches 
the 21st century. 

Each month, an estimated 47 million payments are processed by the mortgage servicing 
industry. This equates to some 564 miUion payments per year. If the postmark date is to be 
used, rather than the actual date of receipt of funds, mortgage payments received after the 



^ An example of the new wave of technology sweeping the mortgage servicing industry is American Home 
Funding's "Quick Collect" program. This program allows mortgage payments to be made at any Western Union 
office. When payment is made. Western Union credits its account and sends a check electronically to American 
Home Funding. In addition, many lenders have instituted automatic payment programs in which borrowers' accounts 
are debited each month on a specified day. These types of programs demonstrate the increased use of technology 
in the industry. 

■* Source: "1994 Cost Study: Income and Cost for Origination and Servicing of J- to 4-Unit Residential 
Loans." Operabons Report No. 17, prepared by the Economics Department of the MBA. 

* Total costs include: the cost of acquisition and installation of postmark reading hardware and software; 
the cost of storage facilities and procedures for documentation of postmarks; the loss of interest earned on funds 
deposited later the cost of funds advanced to investors on loans which have been securitized; the loss of late fees: 
and the cost of envelopes sent with coupon books to standardize responses. 



93 



expiration of the prescribed due date would have to be processed differently. Although loan 
processing technology is highly automated, it is not designed to read postmarks. Either special 
equipment would have to be purchased to read postmarks, or payments received after the 
prescribed date would have to be hand processed. Neither option is an operationally or 
financially viable alternative to servicers who are trying to reduce costs. 

The postmark requirement would also create additional problems for servicers. The 
prevailing industry practice is to provide borrowers with a booklet of payment coupons once a 
year, rather than to bill borrowers on a monthly basis. Envelopes are not usually provided with 
the payment coupons. If HR 1963 is adopted, senicers would have to provide borrowers with 
standardized envelopes, in order to automate payment processing, and hope that the borrowers 
retain and use those envelopes for the full year. Not only is this an additional expense, but 
servicers will be forced to hand-process payments received in non-conforming envelopes. 
Considenng the number of payments that are received daily by servicers and their agents, hand 
processing would be unduly burdensome and time consuming. 

Additionally, HR 1963 creates significant logistical problems that would contribute to 
increased costs. Under the bill, servicers would have to store envelopes to prove the date of 
postmark for any loan payment where a late fee was charged. Given the low visual quality of 
most postmarks, servicers would encounter difficulty photocopying or electronically storing such 
data. If there is no return address, the mortgage servicer will have to affix identifying 
information on the envelope. They would also have to develop systems for indexing by loan 
number and retrieving envelopes when requested to do so by auditors or consumers. 

Again, the Subcommittee must bear in mind that these increased compliance costs will 
ultimately be passed along to borrowers in the form of higher interest rates or fees. While the 
borrowers who are tardy in making payments may benefit from this proposal, those borrowers 
who are conscientious and make their payments when due will suffer because they will also have 
to shoulder the burden of lenders' higher compliance costs. Thus, the disadvantages of HR 1963 
far outweigh the perceived benefits. 

Protections Currently Exist to Ensure that Payments are Promptly Credited 

Some concern has been raised regarding the crediting of mortgage payments in a timely 
manner. However, mortgage servicers have incorporated reliable consumer protections in their 
procedures for payment receipts. Such precautions should allay concerns that the Subcommittee 
may have regarding the prompt posting of payments. 

Generally, a lock box system handles the posting of payments. In order to ensure 
payments are posted in a timely manner, lock box systems operate 24 hours per day. Payments 
are sent directly to a lender's post office box. This box is specifically designated for mortgage 
payments. The payments are picked up several times during the course of the day and night by 
a lock box courier who delivers them to the lock box facility. Once the payments are received 
at the facility, the payments are sorted, the checks are deposited, and the payments are posted. 
The information is then electronically transmitted to the mortgage servicer. This highly 
automated system enables servicers to process the payments within 24 hours of being received. 
Under this regime, the date of receipt is verifiable and subject to audit. It is worth noting that 
servicers are interested in receiving their funds as quickly as possible. It is highly doubtful that 
they would purposefully delay posting of payments in order to assess late fees, as some have 



94 



stated. It does not make economic sense for them to do so. Further, consumers are protected 
under investor requirements. Such requirements mandate that payments be processed in a timely 
fashion. Also, the Federal National Mortgage Association (Fannie Mae) and the Federal Home 
Loan Mortgage Corporation i Freddie Mac) as part of their seller/servicer guidelines require that 
payments be posted on the same day as received. Such protections have proven to ensure that 
consumer payments are credited when received. 

Generous Grace Periods Already Exist for Mortgages. 

The contractual language of standardized industry mortgage documents provides that 
mortgage payments are due on or before the first day of the month.' However, lenders 
understand that payments are sometimes delayed in the mail and that many delays are justifiable.* 
In order to compensate for such problems, a grace period of as much as two weeks is allowed 
under the language of most standard mortgage documents. In the majority of cases, late charges 
are only assessed when the grace period lapses.' 

The grace period granted to borrowers is very generous. As such, MBA believes that HR 
1963 is redundant and fails to grant borrowers greater protection than the contractual grace period 
included in most mortgages. Indeed, HR 1963 could be construed in a manner that actually 
shortens the grace period from the date of postmark to the actual date of receipt by the payee. 
Consequently, a majority of consumers would end up being penalized. 

In addition, HR 1963 would preempt state law. Nearly one-third of the states require 
mortgage lenders to provide a specific grace period prior to assessing a late charge.* If a state 
statute stipulates the length of the grace period, only the state legislature is able to change such 
a provision. In these states, mortgage lenders have absolutely no ability to reduce the grace 
period below the statutory minimum. Borrowers, in such states, are protected not only by 
contract law but by state law as well. At a time when Congress is delegating more authority to 
the states, it would appear that this legislation is headed in the opposite direction. 

Depending upon the interpretation of key provisions of HR 1963, additional problems 
could be posed for borrowers and lenders. By effectively changing the definition of the "date 
of receipt" to the "date of postmark" in the mortgage contract, the legislation could have two 
possible adverse effects depending upon what date is considered the "prescribed date." 



^ The standard first mongage note states that" I will make my monthly payments on the 1st day of each 

month beginning on ...I will make my monthly payments at or at a different place if required by the note 

holder.. If the not holder has not received the full amount of any monthly payment by the end of 15 calendar days 
after the date it is due. I will pay a late charge to the note holder." 

' An example of a Justifiable delay is the recent blizzard that hit Washington, DC and the eastern seaboard 
in January. Many lenders, such as American Home Funding, Inc., delayed assessing late fees due to the disruption 
in mail service, as well as the understanding that many borrowers were unable to leave their homes either to make 
their payments or to mail them. 

' The one exception to this rule is simple interest loans. However, such mongages are not prevalent in the 
industry. 

° Sec Appendix A for a list and summary of state laws requiring grace periods prior to assessment of late 
charges for residenual mortgage loans. 



95 



According to HR 1963, payments are only covered if they are "required to be made on or before 
a prescribed date" and are "after such date. delivered...;o the payee," and if "the postmark date 
falls on or before the prescribed dale for making the pa> ment." Thus, under the language of the 
bill, there are two possible "prescribed dates": 1) the contractual due date, or 2) the last day of 
the grace period. 

If the prescribed date is interpreted to mean the contractual due date, borrowers would be 
adversely affected. HR 1963 would only apply to those borrowers who deposit their mortgage 
payments into the mail on or before the first of the month. Currently, only 25 percent of 
borrowers pay their mortgage on or before the 1st of ihe month. This leaves 75 p»ercent--the 
majority of borrowers-who pay after the 1st of the month. If this is the case, HR 1963 loses its 
appeal as a consumer-beneficial bill because few borrow ers would qualify for the bill's protected 
status. Thus, the intent of the legislation would be defeated. 

If the prescribed date is interpreted to mean the last day of the grace period, lenders and 
those who service mortgages would be adversely affected. As long as borrowers have their 
mortgages postmarked by the 15th day of the month, HR 1963 would apply. This, of course, 
covers most borrowers. Only 6 percent of borrowers actually have late payments.' However, 
such an interpretation would further lengthen the generous grace period already accorded to 
borrowers. This is patently unfair to lenders and mortgage servicers. 

Under this interpretation, the law could have the unintentional consequence of encouraging 
changes in a borrower's payment pattern that could result in substantial financial losses for the 
mortgage service industry. For example, it is quite conceivable that borrowers will no longer 
take into account the lag in the mail service and will wait until the last possible moment to send 
in their payments, knowing that the postmark will now determine whether or not their payment 
is late. If borrowers took advantage of the provisions of HR 1963 in such a manner, lenders 
would experience an additional delay in receiving payments of at least three days.'" Under the 
standard security holder agreements for any mortgages that are held in mortgage-backed 
securities, lenders must forward the payments to the investors, generally by the 16th day of each 
month, regardless of whether such payments have been received from borrowers. If the grace 
period were lengthened, lenders would not be receiving payments in a timely manner but would, 
nonetheless, remain obligated to outlay funds that they have not received. Ultimately, lenders 
would ha\e to pass the increased cost of making payments on behalf of delinquent borrowers 
along to all borrowers. This would occur in the form of higher interest rates. 



SUMMARY 



It is difficult to discern what, if any, benefits borrowers would receive under 
implementation of HR 1963. There has been no demonstration of systemic processing delays in 
handling mortgage payments that would warrant the significant governmental encroachment into 



Late payments are defined as those received by the pa>ee on the 16th, 17th, and 18th of the month in 
which they are due. 9 percent of borrowers are delinquent. Of thai 9 percent, 4 percent are delinquent by 30 days 
or more. 

' Three days is the U.S. Postal Service deliver, goal for mail to another city. 

6 



96 



private contracts that would result upon enactment of HR 1963. This legislation would directly 
impose sigmtlcant costs on the mortgage servicing industry and a significantly higher paperwork 
burden on the servicing of loans. This, in turn, would result in higher mortgage costs for 
borrowers. Mortgage borrowers are sufficiently protected by the contractual grace periods 
incorporated into standardized mortgage documents as well as by accurate and reliable payment 
receipt procedures. 

MB.-\ would like to thank the Subcomminee for this opportunity to testify on HR 1963. 
We would be pleased to answer any questions you may have or to provide further information, 
as necessan , for the record. 



97 



Appendix A 
Summary of State Laws Regarding Late Payment Charges 

Off 

Residential Mortgage Loans 



Alabama 
Alabama Code § S-19-J(al: When a payment is in default 10 days or more, the creditor may charge and collect 
a late charge. Only one late charge may be collected on any scheduled payment, regardless of the period during 
which it remains in d;faull. 

California 
California Civil Code §§ 2954.4, 2954.5: A payment (on a loan secured by a mortgage) is considered late when 
not received at least ten days after it is due. Provisions of this section apply to loans made by all lenders. Before 
a default, delinquenc\ or late charge may be assessed and before a borrower becomes obligated to pay a late charge, 
the borrower must either: 1 ) be notified in writing and given at least ten days from the mailing of such notice in 
which to cure the delinquency, or 2) be informed, by billing notice, of the dale after which a late charge will be 
assessed. 

Colorado 
Rev. StaL §5-3-105: 5-3-203: With respect to a refinancing, a late charge may be assessed if the installment is not 
paid within 10 days oi its scheduled due date. The late charge must be assessed within 30 days of the scheduled 
date. 

District of Columbl^ 
Code Ann. §28-3310ib): No delinquent or late charge may be contracted for or received unless the delinquency has 
continued for at least 10 calendar days. 

Idaho 
Code §28-42-301(2): The parties to a regulated consumer loan secured by a security interest in real property that 
is the residence of the debtor may contract for a delinquency charge on any installment not paid in full within IS 
days after its scheduled due date. 

Kentucky 
KY Rev. Stat §294.110(4): Delinquency charges may be made for each installment more than 10 days in arrears. 

Maryland 
Comm. Law Code .Ann. §12-105: If the loan contract provides for them, the following fees and charges may be 
collected: a delinquent or late charge if the delinquency has continued for at least 15 calendar days. 

Massachusetts 
Gen. Laws Ch. 183 §59: A mortgagee, assignee or holder of a mortgage note secured by a first lien is authorized 
to charge a penalty or late charge for any payment made IS days after the payment due date. 

Mississippi 
Miss Code Ann. §75-17-27: A late payment charge, if contracted for in writing, is permissible when a delinquency 
is more that IS days past due. 

New York 

Real Prop. Law §254-b: Lenders are permitted to collect a late charge of not more than two percent on any 
installment which is not paid within IS days of its due date. 

North Carolina 
NC Gen. Sta. §24-I0.1(b): Lenders may charge a party to a mortgage a late payment charge as agreed upon by 
the parties in the loan contract as long as the payment is at least IS days past due. 

Oregon 
Or. Rev. StaL §§86.160-185: Lenders may impose a late charge when a scheduled payment is not received within 



98 



1 5 days aiier the due date of the installment. If the 1 5 day period ends on a Saturday, Sunday, or legal holiday, the 
15 day per.od is extended to the next business day 

Virginia 
Code Ann. §6.1-330.80: Any lender may impose a late charge for failure to make timely payment of any installment 
due. Timely payment is defined as one made by the date fixed for payment or within a period of seven days 
thereafter. 

West Virginia 
W VA Code §46A-3-113: Parties ma\ contract for a delinquency charge on any installment not paid in full within 
10 days o\ the scheduled due date. 

Wisconsin 
Stat. .\nn. §138.052(6): Parties may agree to a late payment charge on any installment not paid on or before the 
15 dav after it is due. 



99 

Response to Written Questions Submitted by Hon. John M. McHugh to Paul 

S. Reid 

1. It is unnecessary for borrowers to take additional steps to protect themselves from 
incorrectly assessed late charges. This is due to the fact that borrowers are already 
adequately protected by the contractual language of standardized mortgage documents. 
These documents state that mortgage payments are due on the 1st day of each month. 
A standard note states that the borrower will make "monthly payments on the 1st day of 
each month." However, lenders understand that payments are sometimes delayed in the 
mail and that many delays are justifiable. In order to compensate for such problems, a 
grace period of as much as two weeks is allowed under the contractual language of most 
mortgage documents. The note further states that: "If the note holder has not received 
the full amount of any monthly payment by the end of the 15 calendar days after the date 
it is due, I will pay a late charge to the note holder." This is an exceedingly generous 
grace period. Such a grace period gives borrowers ample opportunity to pay their 
obligations timely and avoid late charges. 

Due to the explicitness of the contractual language, borrowers are sufficiently protected 
from delays in mail service and should never be in doubt as to when the late charge will 
be assessed, where the payment is due, and how much will be assessed. As a result, 
borrowers do not need additional safeguards to protect against incorrectly assessed late 
charges. 

A. A borrower is notified on the payment coupon regarding the assessment of a late 
charge. Typically, the late charge amount and the date it will be assessed are 
included on the borrower's monthly payment coupon. In the case of American 
Home Funding (AHF), letters are distributed notifying the borrower: 1) that the 
payment is late; 2) that a late charge will be assessed; and 3) stating the total 
amount due. The monthly coupon does not contain any explanation as to the 
borrower's recourse to dispute a late charge. However, lenders often waive late 
charges upon request of the borrower. Of course, each lender will have its own 
criteria for determining when a late charge may be waived. At AHF, the 
borrower's payment history and any outstanding circumstances are seriously 
considered when making a waiver determination. In many instances, if the 
borrower has a good payment history and makes a late payment, the late charge 
is waived for the first occurrence. 

2. Mortgage bankers typically offer borrowers a 15-day grace period following the due date 
to make payment. The grace period is specified in either the mortgage note or deed of 
trust. For conventional loans (non-government) and Veteran's Administration (VA) loans, 
the grace period is specified in the mortgage note. For Federal Housing Administration 
(FHA) loans, it can be specified in either document. In Virginia, there are some housing 
finance agency loans which have grace periods of 10 days. 



Page 1 of 4 Pages 



100 



As for modification of grace periods, it can be somewhat difficult. Grace periods that are 
specified in the mortgage documents can only be changed by consent of all interested 
parties. Further, loan modification is limited by a variety of factors, including investor 
requirements, such as those of the secondary market participants, Faimie Mae and Freddie 
Mac, and state law. In some states the ability to modify a loan is limited only if the 
loans are held in portfolio by the lender. Regardless, changing a specified grace period 
is exceedingly difficult and rarely done. To modify an existing grace period, all parties 
would have to agree and/or permission would have to be obtained from the affected 
agencies and the investors. In fact, I know of no instance in which a grace period was 
eliminated or reduced. It has not been done at AHF. 

A. HR 1963 should exempt creditors who offer their customers grace periods. 
However, in its current form, it is difficult to discern what benefits borrowers 
would receive under implementation of HR 1963. The bill represents an 
unnecessary government encroachment into private contracts, would impose 
significant costs on the mortgage servicing industry, and would result in higher 
interest rates for borrowers. Mortgage borrowers are sufficiently protected by 
contractual grace periods included in standardized mortgage documents, as well 
as by reliable payment receipt procedures. MBA is opposed to HR 1963 in its 
current form, and only a total exemption of creditors who offer grace periods is 
an acceptable solution. 

B. In an average month at AHF, 9 % percent of accounts incur late charges. The 
late charge is calculated from a specific percent of principal and interest (P&I) or 
of principal, interest, taxes, and insurance (PITI). Thus, the late charge is a 
percent of the payment and not a fixed dollar amount. The structure of Uie late 
charge will also depend upon state law and investor requirements. 

Lenders incur significant costs in handling late payments. It is estimated that lenders 
incur several million dollars per month in excess expenses as a result of handling late 
payments. This is due to a variety of factors. First, late payments have to be processed 
manually. The lock box system cannot be efficiently used with late payments. Mortgage 
servicers shoulder additional personnel expenses as a result of manual processing. 
Second, if the mortgages are in mortgage-backed securities, lenders are required to pass 
through payments to investors whether the servicer receives them or not. In such a case, 
lenders must advance their own corporate funds to cover these investor obligations. Such 
funds could be collecting interest if they stayed on deposit. 

Although the collection of assessed late charges is a source of profits for our members, 
the numerous expenses incurred in the processing of late fees offset, to some extent, the 
increased revenue. Therefore, the profits received from such collections are not pure 
profits. They are eroded by significant processing outlays. 



Page 2 of 4 Pages 



101 



Mortgage payments are due on the first day of the month and are late on the second day 
of the month. Due to generous grace periods afforded to borrowers, the definition of late 
payments has been defined as those payments received by the lender on or after the 16th 
of the month in which they are due. 9 V* percent of payments received by AHF are late, 
and 4 to 5 percent of these late payments are received at the end of the month or later. 
The lateness of payments varies between conventional mortgages and government 
mortgages (FHA and VA). 2 to 3 percent of conventional mortgages are received at the 
end of the month, whereas 7 to 8 percent of government mortgages are received at that 
late date. On average, AHF receives the majority of its payments on the 8th day of the 
month. 

If a standardized grace period is to be imposed, it should be 15 days long-the current 
industry standard. 

Depending upon interpretation, HR 1963 may encourage borrowers to wait until the due 
date before posting their payments. If the "prescribed due date" is interpreted to mean 
the last day of the grace period, lenders and servicers would be adversely affected. Such 
changes in borrower's payment patterns could result in substantial financial losses for the 
mortgage servicing industry. If borrowers wait until the last moment to send in their 
payments, lenders would experience an additional delay in receiving payments, possibly 
up to three days. Under the standard security holder agreements for mortgages that are 
in mortgage-backed securities, lenders must forward the payments to investors, usually 
by the 15th or the 20th day of each month, regardless of whether such payments have 
been received from borrowers. If the grace period were lengthened, lenders would not 
be receiving payments in a timely manner, but would remain obligated to outlay funds 
that they have not received. Eventually, lenders would have to pass along the increased 
cost of making payments on behalf of delinquent borrowers to all borrowers. This would 
probably result in the form of higher interest rates or fees. 

It is stated that some lenders receive payments at retail sites, but fail to credit borrowers* 
accounts until payments are received at the processing sites. It is unknown whether this 
practice is widespread among mortgage bankers. However, such a practice is more likely 
to occur in companies with national and regional branches, as well as in bank- and thrift- 
owned mortgage subsidiaries. In almost all cases, the standard first mortgage note 
specifies the location at which a borrower should make his/her payments. The note 
states that the borrower will make "monthly payments at (a stated location) or at a 
different place if required by the note holder." This is due to the fact that servicing is 
performed at central locations and many retail mortgage banking sites are technologically 
unequipped to accept payments. Borrowers are under an obligation to make their 
payments in a timely manner at a certain location. If they fail to do so, the lender may 
be unable to post a payment when it is received at the retail site. Therefore, borrowers 
should not assume that payment at just any retail site will result in instantaneous crediting 
of accounts. 



Page 3 of 4 Pages 



102 



Because each individual mortgage company is different, it is difficult to determine the 
extent of MBA members who process their payments manually. At AHF, however, 
approximately 14 percent of our payments per month must be processed manually. Such 
manual processing is the result of late payments, "exception" payments, such as payments 
that include extra principal, and payments made with incomplete checks. 

Every company has standards in place to address discrepancies between the amount owed 
and the amount paid to the lender. Investors, however, establish these tolerance limits. 
Therefore, investors determine what level of a discrepancy (less than or more than $X 
amount) will be acceptable and what level will trigger a certain response by the lender. 
In the case of additional monthly payments without specific instructions, AHF sends 
letters informing borrowers how their money was allotted. This is a fairly typical 
response. 



Page 4 of 4 Pages 



103 

Mr. McHUGH. Thank you very much, Mr. Reid. I appreciate that. 

I was negligent in my duties in not taking the opportunity to ac- 
knowledge the presence of another member of this subcommittee, 
the gentleman from Maryland, Mr. Ehrlich. 

Robert, welcome. I would yield to you, if you have any opening 
comments you may wish to make. 

Hearing none, I appreciate, again, his being here. 

The last presenter for the first panel this morning is Mr. Thomas 
Hughes, who is president and CEO of the Navy Federal Credit 
Union, who is speaking, as well, on behalf of the National Associa- 
tion of Federal Credit Unions. I should note for the record that my 
next-door neighbor in the Cannon House Office Building, and a 
resident of the region represented by Mr. Hughes, Congressman 
Davis, has spoken highly of you, sir, and I always believe what the 
gentleman from Virginia tells me. 

I would also note that he has entered a statement for the record 
which will be contained in its entirety, without objection, and kind 
comments of introduction, too. So I wanted you to know that the 
gentleman was very much aware of your presence here this morn- 
ing and sends his regards. 

[The prepared statement of Hon. Thomas M. Davis follows:] 

Prepared Statement of Hon. Thomas M. Davis, a Representative in Congress 
From the State of Virginia 

Mr. Chairman, I would like to thank you for granting me the opportunity to wel- 
come Vice Admiral Thomas Hughes, the President and CEO of the Navy Federal 
Credit Union (NFCU) based in Vienna, Virginia, to Capitol Hill this morning. I have 
personally had the opportunity to visit the NFCU facility in the Eleventh District 
of Virginia and I am nonored that Adm. Hughes is able to testify today. 

Adm. Hughes became President and CEO of the NFCU on August 1, 1987 after 
completing more than 43 years of distinguished active duty service in the United 
States Navy. Today, NFCU is the nation's largest credit union with 1.5 million 
members worldwide and assets of $8.4 billion. As a member of the Credit Union Na- 
tional Association's (CUNA) "Renewal Project" Steering Committee, Adm. Hughes is 
working to "reinvent" the credit union movement. He has also served as a member 
of CUNA's Regulatory and Insurance Structure Commission, Reserves Study Com- 
mission, the Regulatory FOCUS Task Force, and the Filene Research Institute's Re- 
search Council. Adm. Hughes also serves on the Board of Directors of the National 
Association of Federal Credit Unions (NAFCU). 

As the President of the largest credit union in the United States, and based on 
his past experience, Adm. Hughes is expertly qualified to inform the Subcommittee 
of the effects that H.R. 1963, if enacted, would have on credit unions in particular 
and other businesses dependent on the postal remittance of bills and financial state- 
ments. Mr. Chairman, I thank you again for the opportunity to welcome Adm. 
Hughes and thank you for holding these important hearings today. 

Mr. Hughes. Thank you very much, Mr. Chairman. He has ex- 
pressed to me a mutual admiration for you and the position that 
you hold, and the way you conduct your business. So thank you for 
the comment. 

Grood morning to both the chairman and the members of the sub- 
committee. I am Tom Hughes, a member of the board of directors 
of the National Association of Federal Credit Unions, and I am 
president and CEO of the Navy Federal Credit Union. I appreciate 
this opportunity to appear before you today and to express our po- 
sition regarding H.R. 1963, the Postmark Prompt Payment Act. 

The National Association of Federal Credit Unions, or NAFCU, 
as we refer to it, is the only trade association exclusively dedicated 
to and representing the interests of our Nation's federally char- 



104 

tered credit unions. Navy Federal Credit Union is the Nation's 
largest credit union, with more than 1.5 million members and as- 
sets of over $8.7 billion. Navy Federal's membership is comprised 
primarily of Navy and Marine Corps military and civilian person- 
nel and their families. 

I have a short opening statement and a longer written one which 
I request be inserted into the record. 

Mr. McHuGH. Without objection, so ordered. 

Mr. Hughes. Thank you very much, sir. 

H.R. 1963 would mandate that all pa3nTients for bills and invoices 
mailed with postage stamps would be considered paid on the date 
the envelopes containing the payments are postmarks. This bill in- 
tends to address two perceived problems: one being the alleged 
poor on-time performance of the United States Postal Service; and 
the second being the unscrupulous practices of some businesses in 
holding payments past the due date in order to collect late charges. 

While I recognize and appreciate the consumer advocacy intent 
of this proposed legislation, I am deeply concerned that it rep- 
resents a knee-jerk reaction to several relatively small issues. 

In response to the first issue, if there is a problem, it makes far 
more sense for Congress to demand that the Postal Service improve 
its performance and reliability, and impose penalties or sanctions 
on them if they fail to do so, rather than cause credit unions to suf- 
fer significant losses and administrative costs for a problem they 
did not cause, over which they have no control, and that they can- 
not resolve. 

As for the second issue, while we have all heard anecdotal tales 
of various problems with late payments, to my knowledge there are 
no statistics or quantitative analyses to support the radical fix con- 
tained in this legislation. 

In preparation for this hearing, NAFCU contacted the offices of 
the National Credit Union Administration, NCUA, which is a gov- 
ernment regulator, to determine if this is a problem with credit 
unions overall. NCUA's findings were absolutely astounding. Out of 
7,500 federally chartered credit unions, with more than 41 million 
members, the NCUA received less than 20 complaints concerning 
payment processing delays during the past year. This is not a bad 
track record for an industry that processes hundreds of millions of 
pa)mients a year. 

When you add to this such regulatory safeguards as Truth in 
Lending, which mandates that all open-end consumer credit trans- 
actions must be posted by credit unions on the date of receipt, the 
need for legislation seems highly questionable. 

Supporters of H.R. 1963 would require that businesses abide by 
the same processing standard as the Internal Revenue Service. Yet 
while the IRS has essentially one annual due date, the 15th of 
April, for most income taxes, credit unions and other businesses 
have hundreds of due dates throughout the year, greatly complicat- 
ing the process of capturing and recording the postmarks. 

Due to the geographic dispersion of Navy Federal's membership, 
the postal system represents an important means of conducting 
business. During the 1995 calendar year, over 7 million incoming 
pieces of mail were processed by Navy Federal Credit Union, of 



105 

which over 5.7 million were consumer, mortgage and equity loan, 
and credit card pajonents. 

This volume of mail requires an automated process, both equip- 
ment and systems-wise, to ensure accurate and timely receipt proc- 
essing and posting of members' accounts. Enactment of this legisla- 
tion would render these equipment and systems virtually useless. 
Pajmnent processing would revert to manual sorting and data 
entry, or possibly new technology. 

There are additional costs that are too lengthy to enumerate, but 
it is safe to say that accommodating the changes required by the 
proposed legislation would cost Navy Federal, singly, well over $1.2 
million a year, primarily for additional personnel to replace our 
current automated pa5rment processing system with a manual ef- 
fort. Clearly, a step backwards. In addition to the dollar cost, we 
can also expect significantly slower payment processing times and 
more errors in manually posting accounts. 

While it may be tempting to dismiss evidence about a single 
credit union, NAFCU has conducted a survey of its membership to 
estimate the cost of implementing H.R. 1963. Credit unions with 
assets of less than $2 million would annually spend an additional 
$810 each to meet the new processing standards mandated by H.R. 
1963. 

For credit unions with assets of $10 million to $50 million, the 
additional cost would average $18,000 per credit union. While larg- 
er credit unions, over $100 million in assets, would annually spend 
an additional $198,000 to comply with these standards. These seem 
to be awfully high prices to pay for an industry which generates 
less than 20 payment processing delay complaints, nationwide. 

Every credit union is a member-owned, not-for-profit cooperative 
financial institution. Members are the heart of the credit union. 
They own the organization. They pool their savings and they lend 
them to one another without question. The cost of accommodating 
the proposed Postmark Prompt Payment legislation would result in 
lower ^vidends on savings and higher loan rates for these credit 
union members, the very consumers the proposal is intended to 
protect. 

In summary, Mr. Chairman, I strongly encourage you to recog- 
nize the potential costs of enactment of this legislation, costs ulti- 
mately to be paid by the consumer. Clearly, this is a case in which 
the impact of the proposed solution is far worse than the perceived 
problem. On behalf of the members of the Federal credit unions, in 
general, and Navy Federal, in particular, I request that you recon- 
sider this proposed legislation. 

Congressman McHugh, I thank you and the subcommittee for the 
opportunity to appear today, and I would be happy to answer any 
questions. 

[The prepared statement of Mr. Hughes follows:] 



106 

Prepared Statement of Thomas J. Hughes, President and Chief Executive 
Officer, Navy Federal Credit Union, on Behalf of the National Assoclv- 
TioN OF Federal Credit Unions 

Chairman McHugh and members of the subcommittee, 1 am Tom Hughes, 
member of the board of the National Association of Federal Credit Unions and 
President/CEO of Navy Federal Credit Union. I thank you for the opportunity to 
appear before your subcommittee to express our position regarding H.R. 1963, the 
"Postmark Prompt Payment Act." 

The National Association of Federal Credit Unions is the only national 
organization exclusively representing the interests of our nation's federally 
chartered credit unions. NAFCU is comprised of more than 850 credit unions -- 
member-owned, nonprofit, financial cooperatives throughout the nation -- that 
collectively hold approximately 66 percent of total federal credit union assets and 
represent the interests of nearly 21 million individual credit union members. Navy 
Federal is the nation's largest credit union, with more than 1.5 million members and 
assets of over $8.7 billion. Navy Federal's membership is comprised primarily of 
Navy and Marine Corps military and civilian personnel, and their families. Credit 
unions are known for their personalized service and, as cooperative institutions, 
exist solely to serve their member-owners (i.e. consumers). As consumer-oriented 
institutions, credit unions share the opinion of the author of this legislation. 
Congressman McHugh, that timely and conscientious bill payers should be 
protected from unwarranted late fees. However, after a thorough examination of 
H.R. 1963, it seems clear to our membership that this legislation would actually 



107 



lessen consumer benefits by greatly increasing credit costs and the existing 
regulatory burden credit unions already face. 

H.R. 1963 would mandate that all bills and invoices mailed with postage 
stamps would be considered to have been paid on the date these letters are 
postmarked, rather than when these payments are actually received. This bill 
intends to address two perceived problems: the first is the alleged poor on-time 
performance of the United States Postal Service (USPS); and, the second being the 
unscrupulous practice of some businesses in holding payments past the due date in 
order to collect late charges. Addressing these issues is a laudable goal, but we 
are deeply concerned that this legislation may represent an over reaction to several 
relatively small problems. 

The legislation attempts to combat the unethical practice of some businesses 
that reportedly delay posting of payments actually received in order to impose late 
fees. Although supporters of H.R. 1963 claim that this is a widespread problem, we 
have not heard or seen any documentary evidence to suggest that this practice is 
common. Indeed, in preparation for this hearing, NAFCU contacted the offices of 
the National Credit Union Administration (NCUA), which regulates all federally- 
chartered credit unions, to determine whether or not this is a problem within the 
credit union community, and if so to what extent. NCUA's findings were astounding. 
Out of nearly 7,500 federally-chartered credit unions with a total membership of 



108 

over 41 million that NCUA oversees, the six regional NCUA offices responsible for 
fielding consumer complaints received less than 20 complaints, nationwide, during 
the past year concerning payment processing delays. Although, admittedly, this 
number should be zero in a perfect world, less than 20 complaints annually is not a 
bad track record for an industry that processes hundreds of millions of payments a 
year. When you add to this such regulatory safeguards as the Truth in Lending Act, 
which mandates that all open-end consumer credit transactions must be posted by 
credit unions on the date of receipt (12 USC Section 226.10), the need for this 
legislation seems -- at least as far as its applicability to credit unions is concerned -- 
highly questionable. 

Not only would the "Postmark Prompt Payment Act" fail to correct the cause 
of the overwhelming majority of late payments, but its many supporters oftentimes 
rely on a faulty analogy to justify its passage. H.R. 1963, supporters say, would 
merely require that businesses abide by the same processing standards as the 
largest bill collector of them all -- the Internal Revenue Service (IRS). Since the IRS 
accepts a dated postmark on an envelope as prima facie evidence of timely 
payment, if the envelope is postmarked on or before the date a payment is due, the 
private sector should be able to comply with these new standards easily, the 
argument concludes. Such an argument is highly flawed. While the IRS has one 
annual due date -- April 15 -- for most income taxes, credit unions and other 
businesses have hundreds of due dates throughout the year, greatly complicating 



109 



the process of capturing and recording postmarks. Moreover, while the IRS 
processes approximately 135 million returns a year, according to its Statistics of 
Income Bulletin, with a substantial majority of these payments collected on one day 
(April 15), credit unions and other businesses process billions of payments per 
month. Finally, because people make "down-payments" on their tax bills throughout 
the year through withholding, their total bill is not due on April 15. Credit unions, 
however, do not have the security of these automatic "down-payments" and would 
suffer severe cash flow problems If the processing system was significantly delayed. 
These facts alone cry out for a reevaluation of this legislation. 

Another fact about the IRS' collection system that deserves notice, and has 
been touched on by other groups speaking before the subcommittee, is the fact that 
the USPS is the government's (IRS') agent for the collection of tax returns. Receipt 
of payment by the USPS is equivalent to receipt of payment by the IRS. This 
relationship, of course, does not exist between the USPS and credit unions. Unless 
the USPS finds a way to instantaneously deliver mail to credit unions and other 
private sector institutions, a timely payment to a post office is in no way, shape, or 
form a timely payment to such an institution. To demand otherwise, as H.R. 1963 
seems to do, is neither fair nor justified. 

While these facts reveal a few of the problems posed by this legislation, 
there are several additional compliance problems that would dramatically raise 



110 

operating costs for credit unions if H.R. 1963 were enacted into law. Like other 
financial institutions, many credit unions rely heavily on highly sophisticated 
automated equipment and systems. Enactment of H.R. 1963 will significantly 
reduce the effectiveness of these systems, perhaps rendering these expensive 
systems obsolete. Absent new systems that could effectively and affordably read 
postmarks, all credit unions -- like all other creditors -- would be forced to revert to 
manual sorting and data entry. While this would raise equipment and labor costs 
for all credit unions, such costs would skyrocket for those credit unions that conduct 
a heavy volume of member service by mail. Navy Federal Credit Union, for 
example, serves over 1.5 million members in duty stations around the world, as 
mentioned earlier. Based in nearby Merrifield, Virginia, Navy Federal is the 
financial institution for transient members of the United States Navy and United 
States Marine Corps, with over eighty branches around the globe and members on 
every continent. Due to the geographic dispersal of Navy Federal's membership, 
the postal system represents an important means of conducting business. During 
the 1995 calendar year, 7,182,192 incoming pieces of mail were processed by Navy 
Federal, of which 5,714, 584 were consumer, mortgage and equity loan and credit 
card payments. This volume of mail requires an automated process, both 
equipment and systems, to ensure accurate and timely receipt processing and 
posting of members' accounts. Enactment of this legislation would render current 
equipment and systems virtually useless. Payment processing would revert to 
manual sorting and data entry. 



Ill 

Additional costs would also be incurred since the envelopes bearing the 
postmark would have to be retained to resolve potential disputes. Each envelope 
would have to be annotated with member information in order to provide some 
capability for archival storage and retrieval. Moreover, how Navy Federal would 
handle the roughly 20 percent of the envelopes on which the postmark cannot be 
read has yet to be determined. Accommodating the changes required by this 
proposed legislation would cost Navy Federal well over $1.2 million a year, primarily 
for additional personnel to replace their current automated payment processing 
system with a manual effort -- clearly a step backwards. In addition to the dollar 
cost, they can also expect significantly slower payment processing times and more 
errors in manually posted accounts. 

While it may be tempting to dismiss evidence about one particular credit 
union, NAFCU has conducted a survey of its entire membership to estimate the 
costs associated with adoption and implementation of H.R. 1963. These costs 
include additional labor costs and costs associated with manually adjusting interest 
charges, but do not account for the costs incurred by the purchase of new 
equipment or modification of existing equipment. Based on the data we obtained 
from our members, NAFCU found that H.R. 1963, if enacted, would increase annual 
credit union operating expenses by an average of 2.3 percent across the entire 
asset spectrum. While this figure may not initially seem to be particularly high. 



112 

when this figure is translated into true cost figures -- real dollars and cents -- the 
costs are very significant for credit unions and their members. Extremely small 
credit unions with assets of less than $2 million would be required to spend an 
additional $810 annually to meet the new processing standards mandated by H.R. 
1963. For credit unions with assets in the $10-50 million range, additional costs 
would average $18,200 per credit union; while larger credit unions (those with 
assets over $100 million) would spend an additional $198,000 annually to comply 
with these standards. These seem to be excessively high prices for our nation's 
member-owned cooperative credit unions to pay - particularly since they are the 
source of less than 20 complaints nationwide annually about processing delays. 

Although new automated equipment could reduce some of these costs, the 
fact remains that payment envelopes would still need to be retained in some manner 
to resolve potential disputes and account numbers would still have to be "tied" to 
these envelopes, adding numerous steps to the payment processing function and 
unnecessarily increasing the need for additional staff. 

The mechanics of how to implement H.R. 1963 are also plagued with 
difficulties, some insurmountable. For example, how would a credit union handle 
those envelopes whose postmarks are missing or illegible? This Is not an academic 
issue; it is a real problem. One NAFCU-member credit union based in Ohio 
randomly selected 20 percent of their credit card payment envelopes out of one 



113 

day's mail in order to examine their postmari<s. Out of this total, nearly 15 percent 
of the envelopes had no postmark at all or had an illegible postmark. What policy 
would apply in these instances? 

Under the protocol that would be imposed if the "Postmark Prompt Payment 
Act" became law, increased costs would continue to mount even after a credit union 
had received and recorded a payment. Interest charges would have to be 
retroactively recalculated and credited. Inherent delays in the mail system would 
allow customers paying on or just before the due date to receive interest-free loans 
-- imposing an additional cost or financial burden on those who pay on time and 
thus discouraging anyone from paying their bills on time. Consider the problems 
that could arise if a credit union member makes out a check for a loan payment and 
places it in the mail at their local post office on, for example, Thursday -- the day the 
payment is due. The local post office places a Thursday postmark on the envelope. 
The payment is received at the credit union the following Monday. The credit union 
processes the payment immediately (backdating the payment to the previous 
Thursday) and then sends the check through the clearinghouse system for 
collection. If the check is "non-local" the earliest the credit union would receive 
settlement would be Wednesday - a full week beyond the original due date. Not 
having access to those payment funds for one full week could, potentially, cause 
severe cash flow problems, especially for small credit unions. 



114 

The legal liability implications of H.R. 1963 are no less troublesome. Would 
a credit union have any recourse against the USPS if a loss occurs due to delays 
caused by the USPS? This might happen if a payment is "lost" in the mail and is not 
received until weeks, months or even years after it is mailed. In this scenario, the 
credit union may have already reported the account as past due to a credit bureau 
or exercised its right of setoff and transferred funds on deposit in the member's 
share draft account to cover the past due payment. In both of these cases, the 
member's payment would not be able to be considered "late," and because the 
credit union treated the account as if it were delinquent, there could be serious legal 
repercussions. 

As is hopefully made clear by NAFCU's testimony, credit unions would have 
to surmount a myriad of technical and operational problems to meet the 
requirements of this bill. Indeed, if there was ever a need for a detailed cost/benefit 
analysis of a particular piece of legislation, H.R. 1963 is that legislation. But what 
about the other side of the equation? What are the consumer benefits to be derived 
from passage of H.R. 1963? Do these outweigh the enormous costs this legislation 
would impose on credit unions and their member-owners? 

Although NAFCU does not speak for the customers of other types of financial 
institutions and businesses, the nation's 70 million credit union members would 
clearly be seriously affected by this legislation. Because of the cooperative nature 



115 



of credit unions, all additional processing costs, along with the costs of retroactively 
crediting interest charges and the costs to store the postmarks electronically would 
necessarily have to be passed on to credit union member-owners in the form of 
lower dividend rates on savings and higher interest rates on loans. Furthermore, 
this legislation would likely lead to a drastic reduction, if not total elimination, of the 
generous grace periods that credit unions generally extend to their members today. 
These grace periods have for years more than compensated for slow mail delivery, 
as well as the possibility that members at one time or another will simply forget to 
mail their payments on time -- effectively protecting both conscientious timely bill- 
payers and untimely bill-payers. For all these reasons, H.R. 1963 will likely have 
the unintended consequence of eliminating benefits currently enjoyed by 
consumers, instead of enhancing them. 

In summation, the National Association of Federal Credit Unions strongly 
opposes H.R. 1963. We believe that this legislation will impose enormous 
unwarranted costs on credit unions and other creditors. We also believe that this 
bill will actually harm consumers in the form of lower dividend rates on savings, 
higher interest rates on loans and shortened grace periods. Moreover, at a time 
when technological innovation is being encouraged in the private sector and many 
members of Congress have their own World Wide Web sites - a term that would 
have been mere gibberish ten years ago ~ this legislation would send payment 
processing back to the Stone Age. 



10 



116 

On behalf of tfie members of NAFCU, we appreciate this opportunity to 
submit testimony and contribute to the debate on H.R. 1963. We are confident you 
will consider our comments carefully. Finally, should any members of the 
subcommittee have questions regarding the issues we have addressed or any other 
matter affecting their credit union constituents, we hope you will contact us. 



117 

Mr. McHUGH. Thank you very much. I would receive demerits 
from my other position on the House National Security Committee 
if I did not note that, in addition to his other duties, Thomas 
Hughes is a retired vice admiral, U.S. Navy. We thank you for your 
contributions and sacrifices in that regard, as well, Admiral. Wel- 
come. 

Mr. Hughes. Thank you very much. 

Mr. McHUGH. Let me just say, one of the reasons, when I got 
lost on Mr. Duncan's testimony, through no fault of his, through 
mine, is that I tried to read, over the last 2 days, all of your testi- 
mony very carefully, because I think it is important. We have tried 
to glean from your presentations as much information as possible 
to help us to understand the more complete impact of this bill. And 
you have all done that in a very real way. 

Because of v/hat we have learned, we are going to have to, at a 
minimum, take a second look at many parts of this bill as it affects 
business-to-business contracts and transactions — that was never 
our intention — as it affects some of the securities industry's trans- 
actions that was mentioned in more than one of your testimonies, 
as it affects some of the insurance industry transactions, and so 
forth. So we are trying to take this very seriously, and I want to 
restate that for the record and again express our appreciation for 
your efforts. 

I think, when we talk about impacts, we have to be very honest. 
Let me preface my next comment by saying I take a great deal of 
pride in being a capitalist. Maybe some of you good folks are ques- 
tioning that right now, but I want to assure you that I am. My 
press secretary is a little upset with me this morning because I 
didn't make it to the presentation of the Spirit of Enterprise Award 
by the U.S. Chamber of Commerce that I'm very proud to have won 
for my votes last year in support of the businesses of this country. 
And I certainly want to receive more in the future. 

So when I ask the next question, I do not mean it, in any way, 
in a pejorative sense. It is very important to know how much this 
is going to cost people. And you all have spent a great deal of time 
suggesting that the implementation, whether you have to hire peo- 
ple, if indeed the technology is available, what that will cost, and 
those are important aspects. 

But I noted, for example, Mr. Sewruk, you spoke about lost inter- 
est. Do we understand, industry-wide, what we're talking about 
here in lost interest? Mr. Sewruk, you mentioned several credit 
unions across the Nation, the Fairwinds Federal Credit Union, that 
would lose $73,000 per year based on a calculation that they made. 
I want to make sure I understand what you're telling the sub- 
committee. 

Are you saying that that $73,000 in lost interest is the approxi- 
mate amount, in their judgment, that is being paid by customers 
with loans who, under the text of the bill, are making those pay- 
ments or putting those payments in the mail stream in a timely 
fashion, yet are received beyond the due date? 

Mr. Sewruk.- Again, I'm not familiar with the specifics of their 
calculations, but based on some numbers that we estimated, by ex- 
ample, if the due date, as an example, was the 1st, and the pay- 
ment was received on the 4th or the 5th — and I have some other 



118 

information — a $1,000 loan at 8 percent has a daily rate factor of 
approximately 22 cents. So if you calculate that over a number of 
days period and you multiply that times tens of thousands of dol- 
lars worth of loans or million dollars worth of loans, then obviously 
the accumulation of those numbers, I presume, that's where they 
came up with theirs. 

Our numbers, while they may not be as significant, we have ap- 
proximately $15 million worth of loans outstanding. And one of the 
other individuals mentioned, this, in fact, does encourage individ- 
uals to make late payments. If I'm a smart consumer, I'm going to 
open up an account in California and pay by a check drawn on an 
Alaska bank, and wait for the due date posted on that date and get 
10 days float. 

So if I get the payment, we, as the institution, get the payment 
on the 5th, not only do we have to credit back to the 1st, so we've 
lost the interest on those 5 days, but we've also lost the incremen- 
tal interest on the higher principal balance. So it may be fractional, 
but if you multiply that times a billion dollars worth of loans, and 
so forth, obviously they accumulate. 

One of the other questions — and this is just an aside — how do 
you address payments on delinquent loans? If I have a loan that's 
4 months delinquent, and I receive a pa)nTient on any date, do I 
have to go back 4 months and make that loan current? Now, that 
certainly would distort the credit report that's going to be put out 
to the credit industry. So that's not reflecting accurate information 
in either regard. 

Mr. McHuGH. Well, correct me if I'm wrong, I'm assuming you 
didn't personally do all of this calculation. 

Mr. Sewruk. Not there. 

Mr. McHuGH. As I read these figures, I know where they are 
coming from. Because the assumptions you have made — and why 
I asked about $73,000 — the assumptions they have made on the 
total impact is to take every outstanding loan in existence for the 
American credit unions and calculate that they would be late. 

I mean, automatically, every loan pajrment is going to be made 
in an untimely fashion, by a certain number of days, therefore the 
impact is $150-some million. I think that puts a new meaning on 
the phrase "worst-case scenario," but I guess we have to start 
somewhere. 

What is the percentage of your late payments now? 

Mr. Sewruk. Again, we don't calculate. We don't assess any late 
payment fees. We don't track late payments. You know, individ- 
uals, they make a payment after the due date, we don't have any 
specific clause or operations that penalizes or identifies those indi- 
viduals. So I really don't have those numbers available. 

But based on individual — just doing some manual surveys over 
the past few weeks, if we have 2 out of 100 individuals that send 
payments after the prescribed due date, that really is probably a 
norm. 

Mr. McHuGH. So you don't assess any of this? 

Mr. Sewruk. No. 

Mr. McHuGH. And that's the Nest Egg Credit Union in Fulton, 
NY, for those out there who may wish to join. 

Mr. Sewruk. Yes, sir. 



119 

Mr. McHuGH. Let me turn to the Admiral, because he was 
speaking more from the industry perspective. Are you aware, Ad- 
miral Hughes, what the average of your total accounts is that ar- 
rive in a delinquent fashion? Is it 20 percent, 10 percent? 

Mr. Hughes. Our overall delinquency, which is much beyond — 
we don't list one as delinquent until 30 days after it's not received. 
In other words, it's not related to the late pa3nTient process. But our 
delinquency, overall, is about .76 percent for credit cards and for 
regular consumer loans, and very close to it — the mortgage loans, 
are on the order of about .35 percent. 

Mr. McHuGH. So less than a percentage point. 

Mr. Hughes. Pardon me? 

Mr. McHuGH. Less than a full percentage point on both of those. 

Mr. Hughes. Yes, sir, less than a percent. 

Mr. McHugh. Mr. Reid, how about for national mortgagors, is 
there a national average? 

Mr. Reid. Mr. Chairman, in the written testimony. 

Mr. McHugh. Six percent? 

Mr. Reid. Six percent of the people pay on the 16th, 17th, or 
18th. There's an additional 3 percent that truly are seriously delin- 
quent, where they are not making it within the 30-day period. In 
my own company, it runs a little over the 9 percent level. 

But I might also add, if I might, Mr. Chairman, that the pay- 
ments are due on the 1st, but with this 15-day grace period — in my 
company, we process over 100,000 loans per month, and the aver- 
age date that it's received is the 8th. 

Mr. McHugh. That leads us to another question. One of you 
mentioned in your testimony — I believe it was Mr. Duncan — I'm 
not trying to append it to anybody; I thought it was a very apt ob- 
servation. 

I think the behavior of most consumers today — and I will speak 
for myself on my mortgage, because that's something I look at 
every month, and it's always the same. I rip the coupon out, and 
it says the payment is due on or before the 1st, and clearly, then, 
late payment is due after — I believe it's the 18th, in my case. I cer- 
tainly tend to treat the 18th more as the due date than the 1st. 
I mean, I worry more about getting toward the 18th than I worry 
about getting toward the 1st, in normal circumstances. 

The testimony pointed out that there may, in fact, be a negative 
effect on consumers because the law would probably say that you 
have to have this postmarked prior to the 1st rather than prior to 
the 18th, because the due date is the 1st. That being the case, at 
the risk of sounding flippant, I would say, "What are you worried 
about? Wouldn't that accelerate your collections?" 

Go ahead. Admiral Hughes. 

Mr. Hughes. But it's not fair to the consumer. 

Mr. McHugh. Well, I'm worried about you. Let's forget about the 
consumer for a second. How would you feel about it, your organiza- 
tion? 

Mr. Hughes. Our business is members and having a good rela- 
tionship and satisfying their requirements, not ripping them off. 
And, you know, we want to give them as much leeway as we can. 
As a matter of fact, we don't charge — we have a late charge for a 



120 

mortgage on the 16th of the month, and, for a first hit, we ignore 
the charge. 

Mr, McHuGH. OK. Well, obviously, credit unions are claiming to 
be a little different. 

Mr. Hughes. We're driven by a different mechanism. 

Mr. McHuGH. OK. So let me move down to Mr. Reid. 

Mr. Reid. Well, I think then I would worry about the consumer, 
believe it or not. 

Mr. McHuGH. Well, I don't mean to say you won't, but what I'm 
suggesting is, let's focus — because your testimony said, you know, 
"It's going to cost us money. It's going to encourage late pa5rments." 

Mr. Reid. Yes. 

Mr. McHuGH. And I really — for all the merits that may or may 
not exist in this bill — don't think it will encourage late payments; 
I think it will encourage more timely pa3niients. And that's really 
the point of my question. 

Mr. Reid. Right. Depending on how it became interpreted, Mr. 
Chairman, you could make a case that this thing could force the 
pa5mient date back, in a practical sense, so we would get the money 
sooner, and that would assist us. But an awful lot of payments 
now, today, in our business, are done through ACH, where you 
draft the borrower's checking account, and it's correlated to when 
they get their paycheck. I think that's why the 8th is the average 
date that I was suggesting, and we offer people the 5th, 7th, or 
10th day of the month to draft. 

Mr. McHuGH. For the record please define "ACH." 

Mr. Reid. OK. It's automated clearing of the checks, in which you 
can actually draft the borrowers' checking accounts directly from 
their banks, so they never have to write a check, or put it in the 
mail, or anything like that. 

Mr. McHuGH. That's like electronic transfer. 

Mr. Reid. Exactly. 

Mr. McHuGH. Something that probably your industry would like 
to see implemented. 

Mr. Reid. Absolutely. It drives down cost measurably. 

Mr. McHuGH. Go ahead, Mr. Duncan. 

Mr. Duncan. Mr. Chairman, we handle collections somewhat dif- 
ferently with retail credit cards. As I mentioned in the testimony, 
there can be a number of different due dates during the course of 
the month, depending upon the cycle of the customer's account. 

What we find, in general, is that customers tend to pay in four 
bumps, as it were. They will tend to pay when they first receive 
their bill; a number of people pay on the 1st or the 15th of the 
month, roughly, because that's when they receive paychecks; and 
the remainder pay just shortly before the due date. 

In terms of the number that occur after that due date, I don't 
have specific industry-wide figures, but anecdotal information from 
our members indicates it's just a few percentage points that come 
after that date. 

Mr. McHuGH. Yes, sir, Mr. Bracewell. 

Mr. Bracewell. I would like to just mention, on the issue of the 
cost that you were talking about before, that while the horror sto- 
ries in this area may relate to payments not being received by the 
due date, our understanding of the bill is that it requires every 



121 

payment, even a timely payment or an early pa3rment, to be 
backdated to the date it was postmarked. So the lost money comes 
from having, basically, to credit the loan on a backdated basis, even 
if there's a timely payment. 

Mr. McHUGH. You're making an important point. I would ask 
you to restate it so that I know. Run that by me again. 

Mr. Bracewell. ok. Let's say you have a $10,000 loan and you 
have a $1,000 payment due. We accrue interest on that $10,000 
loan until we receive the $1,000 payment. Then it becomes a 
$9,000 loan, and the very next day we accrue interest on $9,000. 
If we had to backdate your $1,000 payment by 3 days, then we 
would lose 3 days' interest on a $1,000 payment. It doesn't matter 
whether the payment was late, early, or whatever; basically, we 
have given up the interest. 

So I think this calculation that you were taking issue with and 
saying that that might reflect the cost associated with people not 
paying by the due date doesn't just apply to lateness and timeli- 
ness; it applies to backdating payments of all sorts back to the date 
when they were postmarked. So it applies to every payment, late, 
on time, or whatever. 

Mr. McHuGH. You're making it all payments where we're just 
dealing with interest, not late charges. 

Mr. Bracewell. That's correct. I think the big money is in inter- 
est, not late charges. 

Mr. McHuGH. OK. Well, then, let's go where the big money is, 
interest. You're making a good point. And I'm not sure I agree with 
you on the intent of the bill. However, I appreciate the fact that 
you've said it raises a flag. 

Let me expand on Mr. Duncan's mention of Bruce Williams. Mr. 
Williams got onto that theme in his presentation and said, "You 
know, if I make my pajonent 5 days early, I receive no extra credit, 
even though the institution, whether it's retail or a bank or whom- 
ever, has that money for an additional 5 days and receives that 
float." How would you respond to that? 

Mr. Bracewell. I think there are two ways that financial insti- 
tutions calculate interest. The way I described to you is a daily in- 
terest accrual; that is, we credit your payment the day that we re- 
ceive the money, and you start to pay a lower amount of interest 
the very next day. 

Another type of payment schedule is an amortization schedule, 
which is more t3T)ical in the home mortgage business, where you 
would run out a payment schedule over a 30-year life of a loan, and 
it would tell you, if you made the payment exactly on the first day 
of every month, how much would be interest and how much would 
be principal. And then the financial institution basically takes a 
plus or minus, gives a grace period, for example, and treats the 
pajmnent as though it were made on the due date. 

So there are two different ways that interest is calculated. But 
I think, if it's calculated on a daily accrual basis, which I would 
venture — I don't have any figures on that — I would venture to say 
the vast majority of debts in this country are calculated on a daily 
accrual basis. Home mortgages would be the exception to that. But 
I think, in the commercial arena, and so forth, that's the most com- 
mon way. 



122 

Mr. McHuGH. OK. Mr. Duncan, you wanted to comment. 

Mr. Duncan. Yes, Mr. Chairman. In the case of retail charge 
cards, revolving credit, frankly, if the customer pays their bill in 
full — say they receive the bill on the 1st of the month, payment is 
due on the 25th, for merchandise they purchased the prior month — 
if they pay their bill in full by the end of the month, they pay no 
finance charge. So, in a sense, it's an interest-free loan to the 
consumer, which could be up to 30 days in length. 

If, in fact, however, they decide to revolve the payment, then, at 
the date the payment is received, finance charges are only assessed 
for that number of days. So if they pay earlier, they pay less fi- 
nance charges. 

Mr. McHuGH. Mr. Reid. 

Mr. Reid. Thank you, Mr. Chairman. I wanted to add that, you 
know, it is due on the 1st; however, if someone really is that inter- 
ested in the float, there are other alternatives. Western Union, 
with its technology, as we put in our written statement, has come 
up with a way. You can go to any Western Union office and instan- 
taneously wire funds to the lender. So if you really want to get the 
full float on that money you've got for your mortgage payment, you 
can do that. 

I mean, I see many people — now, they live in Richmond, so they 
can get to our office, but they literally drive the payment over. 
That's another way that it's done. I think there are alternatives 
that can be used. But, once again, it is due on the 1st. 

Mr. McHuGH. You can get a bank account in Alaska; is that 
what you said? 

Mr. Sewruk. Checking account. 

Mr. McHuGH. Checking account, 

I'm going to ask my colleagues for their patience, even more than 
they have already expressed, and I want to yield to them, but let 
me ask one more question. As I look over this field and begin to 
understand the complexity of it, one of the things that strikes me, 
among several, is the lack of uniformity, in terms of grace periods. 

Now, I'm very happy to have been a part of a lot of what the 
104th Congress has done with respect to devolution of power and 
giving back to the States that which should be theirs, but I'm be- 
ginning to wonder, where we have a circumstance — as we heard in 
testimony today, a third of the States have mandated, through 
their various financial laws, grace periods, meaning two-thirds 
have not. 

When I think of the reality that, more likely than not, your mort- 
gage is going to be sold to someone in the secondary market, as re- 
cently happened to me — I mean, it's a way of business — and while 
you may have chosen a local bank, as I did, to begin with, chances 
are you're not going to end up there, and you're going to have to 
make bills payable to somewhere in another part of the country. 

Maybe it's time to consider, through this Congress, a standard- 
ized, uniform — to be totally redundant about it — grace period, rath- 
er than having, one was mentioned, a 35-day grace period, another 
7, another 10. Maybe we ought to just pick 2 weeks and go from 
there. How would you react and respond to that? 

Mr. Sewruk wants to jump right in. Go ahead. 



123 

Mr. Sewruk. If I might use an example, sir. You indicated that 
your mortgage pajrment is due, generally, on the 18th. 

Mr. McHuGH. No, it's due on the 1st; I pay it on the 18th. 

Mr. Sewruk. There you go. I guess that's enough said. So now 
the vast majority would now use that 2-week due date grace period 
as the new due date. I think if you introduce a grace period across 
the board, then you just change the due date to the grace period 
date. 

Mr. McHuGH. Well, with all due respect, you can't have it both 
ways. You can't come before the panel and say, "Don't touch us be- 
cause we're giving grace periods," and then, when we talk about 
grace periods, say, "But you can't give grace periods." I mean, 
that's what you just told me. 

Mr. Sewruk. No, sir. What I'm saying is, you indicate that your 
payment is due on the 1st, but the grace period, if you will, date 
is the 18th. So, traditionally, you use that as the target date, and 
you try to have your payment in before the 18th. 

Mr. McHuGH. Well, if I don't want to pay late payments. I know, 
given what the State of New York has done — I'm not maligning my 
mortgage payment. 

Mr. Sewruk. You don't consider your due date the 1st. 

Mr. McHUGH. Legally, I'm supposed to know this stuff. I con- 
sider my due date the 1st. But being very honest, obviously, I look 
toward that grace period as something that, if it's necessary, I can 
utilize. 

Mr. Sewruk. And I'm suggesting that, if you, in fact, implement 
a grace period across the board similar to that, a 14-day grace pe- 
riod, then consumers will, traditionally, try and have all their pay- 
ments in before the 14th as opposed to the 1st due date. 

Mr. McHuGH. OK. Yes, sir, Mr. Bracewell. 

Mr. Bracewell. I would just like to add, in the interest of con- 
sumers, I think, as a capitalist proponent, the ability for financial 
institutions and other credit providers to compete with one another 
in various ways is certainly something that ought to be fostered 
rather than restricted. 

We all hear ads for retailers that offer, "If you buy this, you have 
no interest charge for 6 months, 7 months." Using your example of 
a mortgage loan, if you were going to refinance your loan, all other 
things being equal, you might prefer a grace period that went to 
the 18th instead of one that went to the 15th, for example. I mean, 
it's a mechanism whereby financial service providers can compete. 

Mr. McHuGH. So being a good politician, I would interpret your 
comments to say that we shouldn't limit people if they want to ex- 
tend the grace period beyond the minimum. 

Mr. Bracewell. I didn't understand that. 

Mr. McHuGH. I'm saying, you could allow competition; you could 
allow commercial or retail establishments to compete by offering 
grace periods beyond a msindated minimum. I mean, competition 
could occur; you're just ensuring a certain window of uniformity. 
You would like to compete in that window, below that, I under- 
stand. 

Mr. Bracewell. Well, not necessarily. 

Mr. McHuGH. Do you provide a grace period? 

Mr. Bracewell. Yes, we do. 



124 

Mr. McHUGH. Are you required, under Texas State law, to do 
that? 

Mr. Bracewell. Actually, the bank I'm most familiar with, 
where I work on a day-to-day basis, is one here in Washington, DC, 
which requires a 10-day grace period. 

Mr. McHuGH. 10-day. OK. Thank you. 

Did you want to comment, Mr. Duncan? 

Mr. Duncan. Just briefly, to say that there are grace periods and 
there are grace periods. There's the period, of course, before your 
bill is due. There's the additional days, generally not disclosed, that 
most retailers allow a customer in case there happens to be a mail 
delay. And then, in some cases, other retailers allow a few addi- 
tional days. They call it sort of an "overstuff period." 

The problem is, retailers compete with these grace periods the 
way they compete with anything else, the way they compete with 
return policies. Obviously, there's only so much in the pie when 
you're charging for merchandise, and you can shift that money 
around to attract a particular customer. You take Nordstrom and 
compare it, say, with — ^well, pick Wood/s here recently in the Dis- 
trict. 

Mr. McHuGH. Good example. 

Mr. Duncan. They provide different levels of customer service, 
different costs. And one of them may choose to have a more gener- 
ous refund policy but perhaps at the expense of a couple of days 
in that grace period. It really shouldn't be Congress's function to 
change those parameters. 

Mr. McHuGH. Wood/s went out of business; right? 

Mr. Duncan. That's right. That's why I chose that example. 

Mr. McHuGH. OK. I thought wisely so, too. 

Did you want to comment, Mr. Reid? 

Mr. Reid. Well, ours is somewhat standardized, "ours" being 
mortgage bankers. The majority of our loans, as you know, Mr. 
Chairman, are put into mortgage-backed securities through the 
GSE's — Fannie Mae, Freddie Mac — and 15 days is what they go 
with. 

But I think, for the record, I would also note that when we put 
these loans in securities, we have to pass through, "we," the 
servicer, have got to pass through the timely payment of principal 
and interest, whether we receive the payment or not. So an ex- 
tended grace period for us would cause even greater cash-flows and 
extensions of money out there until we got the money in from the 
consumer. 

Mr. McHuGH. What is your industry standard, 10 days? 

Mr. Reid. 15 days. 

Mr. McHuGH. 15 days. 

Mr. Reid. Right. 

Mr. McHuGH. Yes, Admiral. 

Mr. Hughes. Without really addressing the immediate point that 
you make of "should we standardize," I think that there's another 
thing that we ought to be looking at, and that is your problem, and 
what can you do for the system. I've looked at that pretty hard, 
and, first of all, I don't think there's a large problem, which I have 
stated in my statement. There's a problem of cost versus benefit. 



125 

It's going to cost more to solve this small problem than the benefit 
that's received, in my opinion. 

What we're driving toward very hard is to get out of the mail 
business as much as we can and not run into this. People still will 
have the choice of using the mail, but we're trying to go more and 
more into electronic banking, and technology is pushing us that 
way. 

I had 4 million calls last month on what we call "Touch Tone 
Teller," where people at home can just hit the thing and say, 
"Transfer X dollars to pay my bill," or they can have a standard 
agreement with us to automatically, on the 1st, 15th, whatever day 
they want, transfer and clear my account and Visa with my savings 
account. Also, along that line, we encourage direct deposit of people 
and allow them to make the distribution of their funds, so that 
they will pay standard bills that come every month. 

I think that is more of a benefit to the consumer, overall, to give 
him as much of that option as possible. Adding more money to the 
present system in order just to meet the mail thing I think is bet- 
ter spent in putting in other ways, and that's to avoid the problem 
that you're addressing. 

Mr. McHuGH. Indeed, some financial institutions are now paying 
you to, such as Citibank, establish that. It's interesting. 

I appreciate your patience. In the order in which you have ap- 
peared, I believe the gentleman from New York was first. 

Mrs. Meek. Plus, I have seniority over him. 

Mr. McHUGH. Well, I could never tell from here. 

Mr. Owens. 

Mr. Owens. I will be brief, and you can go on to the real ques- 
tions. I would like to note that this has been quite an eye-opener, 
because your views are very different from the previous panels'. It's 
an enormously popular idea that we're dealing with here. People 
who have few transactions and very little money find it just as pop- 
ular as those who have a lot of transactions and are dealing with 
a lot of payments. 

Just a few questions, most of which have been covered by the 
chairman in one way or another, but I think this one hasn't. With 
all of your figures, you must have some estimates on the number 
of people who pay in advance of deadlines. What percentage of peo- 
ple pay in advance? Say it's due on the 1st, but you have a grace 
period up to the 5th, so how many people pay in advance of the 
5th, the deadline where the penalty starts rolling? In some cases, 
it's the 5th; in some cases, it's the 14th. Do you have some figures 
on that? 

Mr. Hughes. About 2 percent of our people where we charge a 
fee, and that's only on a small set of loans. About 2 percent. 

Mr. Owens. Only about 2 percent pay in advance. 

Mr. Hughes. Two percent hit the mark where they owe a fee. In 
other words, 98 percent pay within the demanded time. 

Mr. Owens. So there would be no advantage in offering some 
kind of incentive for people to pay in advance or pay on time, as 
part of this whole problem of trying to get at the problem that a 
lot of us feel is very real, in terms of being penalized for payments 
that do arrive late. 



126 

I've got a certain department store that I won't name, that, of 
course, moved their pajonent office outside of New York City, as 
most of them have. So I buy the merchandise in New York City, 
but I'm sending the payment somewhere else. And I've been trying 
to avoid that which I think is an exorbitant $15 late payment pen- 
alty. No matter how much the payment is, it's 15 bucks. 

I'm trying to catch them, but they seem to have the upper hand. 
Every time I rush to make the payment ahead of time, there's a 
snow in New York, or out in South Dakota where their office is lo- 
cated there's a snow. So they aren't blamed for late delivery of the 
mail. The myth that the mail goes through rain or shine is just not 
true. Of course, they didn't even bother to deliver mail for a couple 
days in New York when the big storm hit. They admitted they 
weren't going to deliver it. 

So, you know, I just wondered if there's some way to offset the 
disadvantage so many feel with advantage. You know, I'm not anti- 
capitalist; make as much money as you can. But you've got an ad- 
vantage on the float. You're always floating in your direction. Why 
can't you float in the direction of the consumer? Is that a possibility 
of helping the situation, offer bonuses to early payers and incen- 
tives? 

Technology is such that it would be no problem for you to have 
a sliding scale, those who get there earliest get a certain bonus, 
right down the line, you reach midpoint and the penalty sets in. 
It's to their disadvantage, those who come after the 14th or the 
15th, but those who come ahead sort of have some slight advan- 
tage. Is that possible, with the technology that you have, and what 
do you think of it? 

Mr. Duncan. Representative Owens, speaking for the retailers — 
and I'm glad you didn't name that particular one — as I suggested 
earlier, if payments are received in full, there is no finance charge 
if it's received by the due date. 

Mr. Owens. I'm not talking about a finance charge; I'm talking 
a late pa5anent charge. 

Mr. Duncan. A late payment charge typically is assessed if a 
payment is received several days after the due date. 

Mr. Owens. "Several" being an ambiguous term. 

Mr. Duncan. "Several" being 10 days, perhaps, a fairly standard 
number. 

Mr. Owens. In this case, it's five. 

Mr. Duncan. It's a fairly standard number. However, most of the 
retailers that I have spoken with say that, if a customer calls and 
believes there was a snow delay or a problem such as that in the 
local area, they will, in fact, waive those fees at the request of the 
consumer. 

Mr. Owens. I'll put that on my schedule to make those calls. 

Another question is, with technology being what it is today, is it 
possible that the post office could help resolve some of the problems 
that you all indicate, how difficult it is to determine when the date 
of pa3rment was? Is it possible that some bar code keyed into the 
dates that the post office stamps on every letter, which is more dis- 
tinct than the present postmark, which I think is antiquated and 
obsolete, the whole procedure, could easily allow you, on the other 
end, to have some machines that could identify what date is on it? 



127 

Is that possible that we might call upon the post office to solve 
that problem for you? 

Mr. Hughes. I think that most of us are on what we call "cycle 
billing." You can't peak and do all the billing as of a given date, 
but you would rather spread it out. 

Mr. Owens. But you at least know what date it was postmarked 
without having to examine it closely. The bar code on it clearly 
tells you what date the postmark indicates. 

Mr. Hughes. I thought you meant when the payment was due. 
I apologize. 

Mr. Bracewell. May I? 

Mr. Owens. Yes. 

Mr. Bracewell. I would just say two things about that. As to 
whether the investment in that kind of technology is wise and ap- 
propriate, first of all, for the Postal Service, it would seem like, to 
the extent that Congress is trying to address this problem with the 
Postal Service, the investment should be made in making more 
timely mail delivery, which is where most of this problem seems to 
come from. 

And on the financial services side, the investment really needs 
to be made in the direction of the trends that are going on in the 
industry right now, which is away from paper processing and in 
the direction of electronic. 

So while that investment could be technologically feasible, one 
would question whether it's properly placed, in terms of the govern- 
ment interest. 

Mr. Owens. Well, the two interests coincide. The example you 
gave is not a good one to make your point. Timely delivery is a 
problem with the post office, I assure you. If they had better ways 
to indicate exactly when it's postmarked, we would have a better 
reading of when the timely delivery takes place, also. So one thing 
does not cancel out another. It's a fairly easy adjustment, it seems 
to me, with today's technology. 

Mr. Sewruk. If I might. 

Mr. Owens. Yes. 

Mr. Sewruk. If I just might add, when the postmark, whether 
it's a postmark or bar code, is imprinted, is not necessarily even 
close to the date that we receive it, No. 1. 

Mr. Owens. The issue here is postmark. The issue here is that 
consumers want to indicate when they put it in the mail and have 
it postmarked. That's the issue. 

Mr. Sewruk. Then someone, again, at our end, would have to 
track it. Now, if it's a manual review of the postmark versus an 
automated reader-sorter on the bar code, we're paying for it one 
way or the other. We're either pajdng for electronic equipment to 
do that reading and sorting for us, and then still manual interven- 
tion. 

Mr. Owens. Electronic equipment probably would be negligible. 
Over a long period of time, there would be very little cost, would 
you not admit? 

Mr. Sewruk. Well, unless you're multiplying to multiple loca- 
tions versus usage. 

Mr. Owens. Thank you very much. 

Mr. Duncan. Representative. 



128 

Mr. Owens. I'm sorry. Mr. Duncan. 

Mr. Duncan. There are also a couple of technological problems. 
I suspect the next panel may be able to answer this better. But you 
couldn't just have the postmark on the envelope. If we're going to 
be able to process it by automated equipment, it would actually 
have to be on the statement. 

That means, likely, you'd have to have a cut-out window on the 
front of the envelope that it would be sprayed onto, so that when 
we pull the statement out — ^because the envelope is long since de- 
stroyed — so when we pull the statement out, the machine, the new 
technology we would have to buy, would have to be able to read 
that sprayed-on bar code. 

Now, there's a problem there, because if you increase the number 
of windows on the envelope, then you make it more likely that the 
envelopes will get jammed up as they go through the Postal Serv- 
ice's own processing machine. Corners of envelopes become stuck in 
those windows. So while it's an interesting suggestion, you may, in 
fact, slow the mail even further by trying to put these extra win- 
dows into the envelopes. 

Mr. Owens. Thank you. 

Mr. McHuGH. I thank the gentleman. 

As a note, we will hear from people who are involved on the tech- 
nology side, and perhaps they will be in a position to comment 
upon some of the efforts that the Postal Service is making in the 
regard the gentleman from New York was talking about. 

The gentlelady from Florida, Mrs. Meek. 

Mrs. Meek. Thank you, Mr. Chairman. 

I've listened intently to much of the testimony here. I'm a little 
ambivalent on this bill. I think it's deliberately helpful to the 
consumer, and usually I am on the consumer's side. But I have 
some problems, because, in listening to the industry, it appears 
that this is going to be a nightmare for the industry. As much as 
we would like to do these noble things, many times it's almost pro- 
hibited by the hard time in trying to implement it. So I'm looking 
very closely at it, and that's what I see. 

I also feel that we really need to look at the overregulation of 
many of our industries. One of the things I've learned from the 
Congress, particularly since the Republicans have come in — and I 
appreciate their approach to it, because the Democrats had regu- 
lated you out of the world — but when the Republicans came in — 
I hate to be partisan — they did cut out some of those regulations 
and try to make things a little bit easier. 

So that's one part of my ambivalence, that. No. 1, the reforms 
here in Washington, many of them are very good. There are many 
that I don't agree with. But the one about overregulation of indus- 
try is one that I do agree with, because I feel that it would be cost- 
prohibitive in much of this. 

I was just wondering if there have been any impact studies to de- 
termine the overall cost of this bill. I'm sure it will happen when 
the Chairman submits it and it goes through the people in other 
committees. But, hopefully, it is one that doesn't have such an 
overwhelming fiscal impact that industry could not survive from it. 
But, in my opinion, it's very diverse in its application, and natu- 
rally there will be a big critical path when this is carried through, 



129 

because there will be many mistakes made and even more com- 
ments, more critical comments. 

I'm just wondering if there will be any real savings for consum- 
ers. I missed the panel on the consumers, the proponents of the 
bill. I was not here. So I realize that I've listened very intently to 
this panel, and I read the comments from the other one. But I have 
that ambivalence. 

The second thing is, you told us that you stand to lose finan- 
cially, but you did not say, really — ^you talked about fees and inter- 
est payments, but you didn't really give us a composite as to what 
would be the total cost to the industry. And I know that may be 
hard to do, but that would be helpful to me. 

My second question is, my staff has talked to some of the people 
on the technology panel this afternoon, and we learned — and I 
think I heard Mr. Hughes, is it, talk about that — they say that 
there's a date which normally coincides with the postmark date, 
that goes through the post office, and it already appears on a ma- 
chine, which is in a readable form on many of the remittance enve- 
lopes that the industry uses, and that the question of technical fea- 
sibility for implementation of this proposed bill is not at all dif- 
ficult, as many of you have suggested. 

How would you respond to that? I think Mr. Duncan mentioned 
it with the Retail Federation. How would you respond to the fact 
that there's already a bar code on the mail when it comes from the 
post ofiice, and it will not create the big problem that many of you 
have described? Would you please put a spin on that for me? 

Mr. Duncan. I'm not familiar with the specifics of the comments 
that you received from the next panel; however, there is a bar code 
on the envelope. The bar code is an address code, generally, and 
it directs the mail to the credit grantor. There is not, to my knowl- 
edge, a bar code on the envelope that indicates the date of mailing 
or the postmark. 

Mrs. Meek. That's what the person said to whom we talked. He 
said that bar code normally coincides with the postmark date, 
which already appears in a machine readable form on many remit- 
tance envelopes. Now, I don't know the source of that bar code, 
whether it comes from the industry or whether it's put on by the 
post office, that I don't know. I'm just asking for your clarification 
of that point, unless staff has it. It comes from the post office, yes. 

Mr. Sewruk. If I might, Mrs. Meek. 

Mrs. Meek. Yes. 

Mr. Sewruk. I have a number of samples, and there are a num- 
ber of envelopes that have no bar code whatsoever. 

Mrs. Meek. Those are those that were not sent by the industry. 

Mr. Sewruk. Well, they were sent through the post office, 
through the Postal Service. They have a postmark but certainly 
have no bar codes, as evidenced by the others. 

Mrs. Meek. Yes. And I'm sure that misconception is due to the 
fact that when the industry — many of them that I owe, and I owe 
everybody — on it is a bar code. When they send me the return en- 
velope, there's a bar code on that envelope. But that's from orga- 
nized industries, you know, that send it. The mortgage company 
sends it, and the banks send it, as well. And the Retail Federation, 
that's really going to be a nightmare for them. 



130 

But all I can say is, these are questions that I want to have a 
good feel about. We certainly don't want to put a burden on any- 
body, but we don't want the consumers to be constantly harassed 
by these late interest fees. So that's why I wanted to explain the 
fact that I am ambivalent on it. 

I do hope you can answer the question about the late fees and 
all of that, according to your industry, in terms of the bottom line. 
Then I can certainly be in a better position to help the chairman 
and the rest of the committee on this bill. Thank you. 

Thank you, Mr. Chairman. 

Mr. McHuGH. I thank the gentlelady for her comments. 

The gentleman from Maryland, Mr. Ehrlich. 

Mr. Ehrlich. Thank you, Mr. Chairman. 

First of all, I want to thank the panel for their testimony. Also, 
I want to thank the gentlelady. As a freshman Republican, I appre- 
ciate your comments very much. 

Mrs. Meek. I just deal with the truth, that's all. 

Mr. Ehrlich. I appreciate that very much. 

Mrs. Meek. I think that will always stand up, 

Mr. Ehrlich. I appreciate it very, very much. 

Thanks for being here today. We appreciate your testimony. I 
have listened very intently to the chairman, as well. I guess I de- 
rive from what I've heard today a couple conclusions. One is, does 
a problem exist? Not really. Second, to the extent any problem does 
exist, it's the fault of the post office. And these are just what I'm 
hearing. 

If you humor us for just 1 second and begin from the premise 
that there is a problem, maybe anecdotal evidence to be sure, but 
there is a problem out there. Tom, you were talking about innova- 
tive ways to use new technology to combat this problem, to the ex- 
tent it does exist. You mentioned getting out of the mail business — 
a number of you mentioned getting out of the mail business alto- 
gether, use of the phone, direct deposit. 

What other innovations do you know of or are ready to come on 
line, that you are interested in, and want to make us aware of that 
are out there. And, to some extent, even provide a remedy for the 
anecdotal problems that have been brought to our attention, with 
respect to your industries? 

Mr. Hughes. The whole scheme of electronic payments, you 
know, is extending. The wire business was spoken to. I've spoken 
to direct deposit and making a menu of disbursing of the payments 
directly within the organization by some agreed-to arrangement. 
The electronic phones we talked about. 

But I think the general direction of the finance industry is in the 
direction of home banking. And a lot of the people, the tech- 
nologists, some of which you will hear today probably — ^but there 
is a lot of sabre rattling going on. It's a very expensive process, and 
pushing you too early into that is bad. We need to take our time 
and put a lot of resources into determining which way we should 
go on all of this home banking. 

Not that it's not technologically feasible, it's a matter you can go 
the wrong way. The same thing with — ^you know, I've gone to image 
and spent a lot of money. I haven't gotten full benefit for the cost; 
it's probably one of the bigger mistakes I've made in my career. I 



131 

went into it too early, and I'm paying for it a little bit right now. 
So you have to be careful of those things, but I think support for 
going into directions that avoid things like paper and the mailing 
system, et cetera, is really the way to go. 

I think, on the other issue, other than just late fees and every- 
thing, the claim of people cheating on the system, I think you 
ought to make that into a criminal act, you know. It's in the legis- 
lation right now, in Reg Z, I guess, coming from the legislation, but 
you ought to make that a criminal act and put force on it for willful 
violations. Make the examiners look into it, and, if they come 
across it, make it a criminal act and slap people with it. I think 
you're going about it in a very indirect way in the process you're 
following right now. 

Mr. Ehrlich. Mr. Reid. 

Mr. Reid. Mr. Congressman, even if you had the technology 
today that allowed you to say, **Well, it was in fact put in the mail 
on the 15th," we still would probably not get that money until the 
17th or 18th. As I was stating previously in my testimony, if you 
have your loans in mortgage-backed securities, you've got to pass 
that through to Wall Street. 

Right now, my company, for instance, we pass $3 million to $5 
million a month through that we don't actually have the receipts 
from the customers yet. Now, by the end of the month, most of that 
money is in, but that's a big loss of float. So we're talking about 
days here on millions of dollars. 

Mr. Ehrlich. I understand. Anyone else on the panel like to ad- 
dress that? 

Mr. Sewruk. Just maybe an extension of what Mr. Hughes stat- 
ed earUer. Where the industry, I think, is trying to move toward 
electronic bill payments, this bill, to some extent, stifles that and 
encourages consumers to stay with paper checks. It encourages 
them to take advantage of that opportunity. So now I should prob- 
ably discontinue pa3rroll deduction. I should discontinue direct de- 
posit through my employer and send the checks. And I think that's 
counterproductive. 

One other item, I think, that hasn't arisen here is the question 
of disputes. And I think that, ultimately — ^well, I'm not sure who's 
going to have the ultimate final say in the matter of disputes, a 
consumer arguing when the postmark — and payment, and so 
forth — ^but, invariably, all it does is create ill will. I mean, no one 
will be the winner. We'll always be the bad guy, and it's just going 
to create problems for us. For us, a member relationship is critical 
to our survival. 

Mr. Bracewell. I just wanted to say one comment based on your 
paraphrasing of our position, that there's no problem, or, if there 
is a problem, it's because of the Postal Service. I would just like 
to say that I think, if we look back in history, there is a due date 
on a loan. As the chairman said, his due date is the 1st; his grace 
period is the 18th. 

The grace period came about as a private industry response to 
this very problem we're dealing with right now. The payment is 
due on the 1st. And I don't think we hear very many horror stories 
about people who put their payment in the mail in time to arrive 
on the 1st and it not arriving by the time of the grace period. I 



132 

think the phenomenon we've got is people beUeving that the grace 
period somehow moves the payment date back, when it was really 
put there in the first place to allow for these very problems we're 
dealing with. 

So the Postal Service may exacerbate the problem, in the sense 
that people have an expectation that it only takes 2 days for the 
mail to get there, and they've got a 10-day grace period, so they 
can use 8 days, for example, for their own use of their money. But 
I think it's important to put some historical perspective on that. 

Mr. Ehrlich. I think you raise a good point there. 

Thank you, Mr. Chairman. 

Mr. McHuGH. Before I 3deld to the gentleman from Texas, I 
think you make a good point. I go back to what Mr. Sewruk just 
suggested, that this bill would encourage people to pay late. Did I 
hear you right? 

Mr. Sewruk. Yes. 

Mr. McHuGH. Yes. I don't agree with that. I go back to the fact 
that if I were seated where you — and I'm not trying to suggest 
what tack you should take — are, and it was contained in one bit 
of testimony, I think the most troubling part, from the consumer's 
side of this, is that, under the terms of the bill, you would have 
to have that in the mail stream by the due date, by the 1st, not 
by the end of the grace period. 

Now, what I heard here this morning is, by your own testimony, 
and I think it's logical, most people play off that due date. So I 
think this bill would, if anything, require people to pay more timely 
than less timely. 

Mr. Sewruk. If I might. 

Mr. McHuGH. Sure. 

Mr. Sewruk. In clarification of "late," and by "late" I use it as 
payment due date based on initial contract, loan contract, we don't 
have grace periods. 

Mr. McHuGH. Because you don't have late payments. 

Mr. Sewruk. Thank you. Because we're a credit union. If you 
made your payment on this particular date for this number of 
months, then your interest would be X, and you paid the date of — 
and so forth. So when I say the "late" payment, I'm just using 
"late" payment as it refers to the due date of the loan. 

Mr. McHuGH. OK. And I accept that as correct. 

Mr. Sewruk. But, now, if I might. 

Mr. McHuGH. But a big "but." 

Mr. Sewruk. If I might. If the payment is due on the 1st and 
the payment is received on the 5th, I have to credit back the indi- 
vidual to the 1st. So we, as the institution, have lost the interest 
for those 5 days. The loan now, going forward to maturity, will re- 
ceive the interest that was projected, but, in fact, the consumer 
has, in fact, received the benefit of not pajdng all that interest that 
they had the use of those funds. 

Mr. McHuGH. Well, we had a discussion earlier today about the 
application of the bill against the retroactive assessment of inter- 
est, and that's a point that has to be addressed. The thing I'm try- 
ing to clarify is, in the jargon of most people in this room who look 
at this industry, this bill would encourage more timely not less 
timely payments. 



133 

Mr. Sewruk. I guess I would have to disagree, sir. 

Mr. McHuGH. We will agree to disagree. 

Mr. Duncan. Mr. Chairman. 

Mr. McHuGH. Yes, sir, Mr, Duncan. 

Mr. Duncan. You raise an interesting point; however, I feel it 
important to distinguish revolving credit from the example that 
you raised. In the case of revolving credit, there is a set due date, 
and we hope customers will pay a week before, or whatever, so that 
the payment is there on time. In that case, it actually would en- 
courage consumers to pay late. Witness the lines we see in front 
of the Postal Service for the IRS on the 15th and the 14th, as peo- 
ple try to get their bills in at the last possible second. 

Mr. McHuGH. However, if your due date on your credit card is — 
pick a date. 

Mr. Duncan. The 25th of the month. 

Mr. McHuGH. The 25th. Your late payment assessment, as most 
credit card companies levy, comes 10, 15 days beyond that 25th. 

Mr. Duncan. In many cases, that's right. 

Mr. McHuGH. But under this bill, if that payment were post- 
marked on or before the 25th, the late pa3Tnent would be assessed 
immediately. I still think, even in that case, people are going to 
start looking at the 25th as the real due date, as is, in fact, the 
intent of the law as it exists under the contract, rather than, as 
most of us do, myself included, kind of look at that end of the grace 
period. 

Mr. Duncan. But if they know they will be considered timely as 
long as it's postmarked by the 25th, the 25th is when it's due at 
the creditor, people will be putting it in the mail on the 24th or 
the 25th, and relying on the postmark to say, "I'm on time." 

Mr. Sewruk. And you'll be having grace periods on postmarks 
before long. 

Mr. McHuGH. But my point is, what most people do now is look 
at the 25th and think, "That has nothing to do with me. What has 
something to do with me is the end of the grace period," whatever 
that may be. 

Mr. Duncan. Not for retail credit, because your statement typi- 
cally is pulled a few days after that due date. After all, you re- 
ceived your bill on, say, the 3rd or 4th of the month. 

Mr. McHUGH. Hopefully. Which is something we haven't dis- 
cussed yet. You're concerned about getting yours in a timely fash- 
ion and not being held responsible for the Postal Service. The cus- 
tomer who is waiting for your bill is subject to the same vagaries, 
and they are getting hit twice. 

Mr. Bracewell. Your bill should be due when you mail it out. 

Mr. McHuGH. Go ahead. 

Mr. Duncan. But, tjrpically, the customer receives the bill early 
in the month, and the payment is due within 2 weeks, say, there- 
after, 2 weeks or more, maybe the 25th of the month. That's the 
due date, and we would expect the customer to put the bill in the 
mail in a timely fashion so we would receive it by the 25th. After 
all, we will be pulling their statement again a few days later. 

Mr. McHuGH. Well, you expect that, but does it happen? 



134 

Mr. Duncan. Yes, in fact, as I think everyone here on the panel 
has mentioned, the overwhelming majority of payments are re- 
ceived by that due date. 

Mr. McHuGH. Now, what I heard the overwhelming majority say 
is that they are not received past the grace period. 

Mr. Duncan. Well — and I'll speak for us. 

Mr. McHuGH. Well, big difference. 

Mr. Duncan. I'll speak for us. 

Mr. McHuGH. OK. 

Mr. Duncan. In our case, the overwhelming majority of pay- 
ments are received by the due date, in a revolving credit situation. 

Mr. McHuGH. Am I misspeaking your earlier stated position, Mr. 
Bracewell or Mr. Reid, when you comment as to your delinquent 
accounts, those are past the grace period; is that true? 

Mr. Reid. Mr. Chairman, you're correct. Ours are due and pay- 
able on the 1st. The grace period is to the 15th. The average mort- 
gage payment is received on the 8th. 

Mr. McHuGH. OK. But an important point as to the differences 
in these accounts. 

Thank you for your patience, Mr. Green. The gentleman from 
Texas. 

Mr. Green. Thank you, Mr. Chairman. Before I lose my time, I 
will yield a minute to my colleague from Florida. 

You heard in my opening remarks the frustration that, if you 
have a due date of the 25th, and so often — maybe at credit unions 
you have a grace period — ^but the consumer is subjected to when- 
ever they receive it, like the chairman said — and you want it on the 
25th, and all the bill says is that, you know, it's shown as due. 

One of the suggestions I have thought about is — and I'll throw 
this out before I 5deld to my colleague — each of you said you have 
some type of liberal grace period, 14, 15 days, as much as 25 days. 

What if this bill were amended where you could literally write 
yourself out of the bill and that, say, if you have that kind of grace 
period, that, you know — ^because my experience with mine was that 
if it showed up a day late, then you were assessed a $20 charge 
on a $12 bill. And to make sure your credit was not, you know, im- 
pacted, you sent them 40-some dollars, 30-something dollars, $32 
or something. And that's the frustration. 

But if there was a grace period, you wouldn't have to worry 
about saving the envelopes, or anything else, you know, after that. 
If you have a 15-day grace period, then you could literally, by your 
business practices, write yourself out of the postmark bill. 

And I don't know if the problem is with credit unions, or with 
a lot of businesses, at least the ones who are testifying here today, 
because each of you say you have a grace period. But if you don't, 
and it comes in a day late, for whatever the reason, the post office, 
the postmark, whatever, then that may be a way that we could still 
address the problem, have some kind of standardization, and yet 
still have good business practices where each of you could utilize 
that. 

With that, Mr. Chairman, I will yield whatever time I have left 
to my colleague from Florida. 

Mrs. Meek. You're giving me all of your time? 

Mr. Green. Whatever I have left. 



135 

Mrs. Meek. Thank you. I thank the gentleman. 

I did not get an answer to my question about the late fees and 
interest costs. I wanted to know what was the bottom line to your 
industry, in terms of how much money are you taking in, how 
much revenue are you getting from your late fees, and how much 
are you getting from your interest fees? 

And that may be a question that maybe is unanswerable at this 
time, but that's something I would like to know, in that each of you 
has testified — and you're in the marketplace; I realize you're sup- 
posed to make money. I just want to see what the bottom line is 
to your particular industry, in terms of the late fees and all of that. 

Then I'm sure the committee could make some kind ascertain- 
ment as to, "Well, the industry, it isn't really hurting them that 
much. They won't even lose that much." Each of you has a very via- 
ble argument, but you did not tell that. And I think you should tell 
us, on your own, what you're going to do. Because our good chair- 
man brought this bill to this committee, what are you going to do 
in the industry to try to improve the industry, even before the bill 
passes? Because it's going to pass. 

[Laughter.] 

Mrs. Meek. I'm sorry. 

Mr. McHUGH. Well, from your lips to God's ears! 

Mrs. Meek. The first thing I learned when I got into politics, you 
never vote against the chairman. OK. So you need to face the real 
world here today. 

Mr. McHuGH. We really appreciate the gentlelad^s comments 
this morning, on all levels, but we're trying to work this out, too. 
As I mentioned, we try not to do anything that's disastrous to the 
flow of commerce in this country, and I think the gentlelady asks 
a very important question. 

What I'm assuming she would like, and if she's not asking for 
this, let me put in my two cents' worth regarding the possibility of 
having a breakdown of the various projected costs of the implemen- 
tation of the legislation. It probably is impossible to do it on the 
technology, because, as we're about to hear, that's evolving, but you 
can put a man hours cost to it. 

Mr. Duncan, I think you made some very pertinent points about 
the practicality of that, but as a way to calculate costs of the imple- 
mentation, the lost revenues that you would suggest would ulti- 
mately be transmitted as a increased cost to your consumer, or to 
the person taking out the mortgage, or the loan, whatever it may 
be. 

I wouldn't imagine you're in a position to share the information 
with us right now, but it would be very useful to the committee to 
get a better handle on exactly the total implications of this, from 
the industry's side. 

Mrs. Meek. Thank you, Mr. Chairman. 

Mr. McHUGH. Thank you. 

The good admiral made an interesting suggestion as to putting 
criminal sanctions in Reg Z. How would the rest of you respond to 
that? Any volunteers? 

Mr. Duncan. I suppose there's a great deal of reluctance to 
criminalize the statute for the reason I mentioned at the very be- 
ginning of my extemporaneous comments, and that is, we don't 



136 

really know what the cause of the problem is at this point. We 
don't know whether it's a problem in the Postal Service. We don't 
know whether there might, in fact, be some bad actors out there. 
And it's probably not a good idea to criminalize something when 
there's not necessarily a problem there. 

Mr. McHuGH. Do you agree or disagree, Mr. Bracewell? 

Mr. Bracewell. I would agree. I think that the financial institu- 
tions, at least that are represented here, are examined periodically, 
and we're examined for compliance with consumer regulations, and 
it's a very thorough exam. There are certainly statutory and com- 
mon law remedies for holding payments that have been received by 
the institution and not posting them on a timely basis. And finan- 
cial institutions live and die by their reputation for fairness and 
soundness, and so forth. 

So whether it would actually add anything to the degree of the 
magnitude of fear, if you will, of criminalizing some behavior, I 
would question seriously. 

Mr. McHuGH. Let me followup with you, Mr. Bracewell, because 
I seem to recall you mentioned there are significant penalties. You 
cited Reg Z as an example of how the industry is already under 
certain procedural requirements, legal requirements, as to posting 
of an account on the day it's received. And I believe it was either 
you or Mr. Reid who noted that this is an auditable function. 

How does that work? For those of us who don't involve ourselves 
in the financial industry, it seems at least possible that when a 
payment is received it could be lost in the shuffle, and that there's 
no intent, malicious intent here, no intent to bilk the consumer, but 
it's sitting over here and isn't really received. 

How does the lockbox system, if it does indeed, ensure that those 
accounts are posted and are in a form that is auditable? 

Mr. Bracewell. Our bank doesn't use a lockbox. Maybe Mr. 
Duncan or Mr. Reid could respond. 

Mr. McHUGH. Well, then, before I get to Mr. Reid, how do you 
doit? 

Mr. Bracewell. We do it the old-fashioned way. We go to the 
post office, use one of these letter openers, like Mr. Duncan dem- 
onstrated, and msinually post it into a computer terminal. Is there 
a potential that it could be lost or delayed or get under someone's 
desk blotter, I suppose so. That could happen. But I think, when 
we're talking about criminalizing behavior, we're talking about 
something more orchestrated than that. 

Mr. McHuGH. I understand. But I'm saying that there is, in your 
procedure, and I would assume in some of the smaller institutions, 
a way by which things happen. For whatever reason, it doesn't get 
posted. I'm not accusing you of anything. I'm not asking you to 
admit it. 

Mr. Bracewell. Right. I understand. 

Mr. McHuGH. But, it's not a fail-safe system. 

Mr. Bracewell. Right. We date-stamp our mail when it's deliv- 
ered. All these are manual processes, so every one lends itself to 
what happens if that person is sick that day, or what happens if 
they forget to turn the date stamp, et cetera, so it's not a fail-safe 
mechanism by any means. And I think, for most community banks, 



137 

of which there are thousands that are smaller than ours, there's al- 
ways the possibility of human error. 

Mr. McHuGH. How are you audited, then? You don't keep the en- 
velope that has been date-stamped; true? Or do you date-stamp 
whatever the remittance is? 

Mr. Bracewell. I don't believe we save the envelopes indefi- 
nitely. Whether we save them for a period of time, I really — I'll 
have to get back to you on that. I can't tell you exactly. 

Mr. McHuGH. OK. I would appreciate it. 

Mr. Reid, you were going to tell us on the lockbox, 

Mr. Reid. Yes, Mr. Chairman. The industry is becoming more 
and more automated and using technology, and it's outstanding. 
It's really helping us. I've mentioned a couple of ways that you can 
make your payment today, from driving up to a window to using 
Western Union. But the bulk of collections today in mortgage bank- 
ing are received through the lockbox. 

And how does that work? Well, it's a central location where those 
coupon books, like yours, go to that central lockbox. If we receive 
pa3anents, say, starting at midnight, every hour that box is exam- 
ined to see what has come in. By 5 in the morning, that is all to- 
tally automated into my company in Richmond, VA. By 5 in the 
afternoon of the next day, we've got all that logged in. It's highly 
automated. It cuts out a great deal of any error that can occur. 

Now, you still do have some people that want to make their pay- 
ment in the regular old envelope, and they put it in there and put 
their loan number at the bottom. But that's becoming less and less 
the situation. So technology is continuing to help us cut out the 
margin of error that would exist. 

Mr. McHuGH. You gentlemen have been enormously generous 
with your time, and I appreciate it. We do have another panel, and 
we have to move along. But let me just ask you a few questions 
that relate to some of the things that were placed on the record in 
the prior hearing, and I think, out of fairness, you should have an 
opportunity to respond. 

It was noted that if I were to go to a branch office of the National 
Bank of Federal Savings to make — and they are headquartered in 
Alaska — and I make my mortgage payment, that is not considered 
received and credited until the branch conveys that, in whatever 
fashion, to the back office or to the central office. Is that true? I'm 
getting a no over here, 

Mr. Bracewell. 

Mr. Bracewell. It wouldn't be true in our bank, or I would 
think any bank. If it's payable at our bank and it's at our bank, 
it's paid that day, provided it's there by 2 o'clock. 

Mr. McHuGH. Mr. Reid. 

Mr. Reid. Mr. Chairman, it depends on the particular bank. 
Some banks have the automation there that allows them to credit 
it right there; others, smaller, don't have the technology. It's the 
same as if you brought it to the post office. It's still got to be trans- 
ported to wherever the central location is. But when the borrower 
would have closed his loan, he would have been told where the pay- 
ments need to be brought. 

Mr. McHuGH, Is that transaction covered under Reg Z? 

Mr. Reid. I would have to get an interpretation on that. 



138 

Mr. McHuGH. OK. Well, let's assume that it's not, and let's as- 
sume — and I would suspect that you're in the business of being a 
community bank, and you've got to kind of make up for certain lack 
of economies of scale by better service, and you're right there — but 
in some of the larger institutions, let us assume that it is not cred- 
ited until it's actually received and it isn't covered under Reg Z, 
would you have a problem if we extended those requirements to 
that kind of payment? So if someone made a payment at a branch, 
they could at least expect that that's being credited when that pay- 
ment is taken by the clerk at that branch. 

There are some people in the back of the room shaking their 
heads no. I don't know who they are, but they should have gotten 
on the list. 

Mr. Reid. Well, Mr. Chairman, I would have difficulty with that, 
because we don't have the money. We have advances we have to 
make against mortgage-backed securities. It's something that 
would cause a great difficulty for a member that didn't have the 
technology in place, because they don't have the money. 

Mr. McHuGH. OK. Well, I appreciate your response. 

With that, let me again thank you. I would ask, with your indul- 
gence, that the subcommittee would keep the record open for the 
next 7 days for the submission of any additional testimony. Also, 
for those who are shaking their heads in various ways, if you want 
to submit testimony, we would welcome it. And I assure you, as 
we've tried to do with the testimony presented here formally, we 
will consider it all very carefully. 

Also, gentlemen, I would ask your indulgence, if the subcommit- 
tee would develop some written questions, as follow-up, that we 
could submit to you, and, at your reasonable convenience — we 
won't charge you a late fee if you don't get right back to us — ^but 
if you could kind of fill in for those, because we do have a number 
of other questions that I think are going to be helpful and impor- 
tant to us as we continue this process. 

So, with that, let me again, on behalf of the subcommittee, thank 
you. You have been very helpful. And we hope — and I mean this 
in all sincerity — to continue to work with you so that we can dis- 
pose of this matter in a way is right and proper and beneficial to, 
if not all, at least most. So thank you. 

Mr. Hughes. Mr. Chairman. 

Mr. McHuGH. Yes, Admiral. 

Mr. Hughes. If I may, I would like to reiterate an invitation to 
any of the members of the subcommittee. We're right here in town, 
and in an hour's time, easily, I could take them through a process- 
ing which I just refreshed myself with yesterday in preparation for 
coming here. But it may give a better feeling for the problem we 
have and the way you are looking at it. 

Mr. McHuGH. Give free samples of money? Oh, we can't take 
that anymore. Oh, well. Thank you. Admiral, we appreciate that. 

I know there are some people who are leaving, and such, and we 
hate to see you go, but we do have another panel. And if we could 
have those who are going to stay with us please find their seats, 
I would call forth the members of the second panel, and while we're 
getting settled, I would introduce them. If we might have a little 
order, please. 



139 

We have with us this afternoon for the second panel, Mr. Al Ste- 
vens, who is president of the Opex Corporation, and he will be ac- 
companied by Mr. Mark Stevens, who is vice president of market- 
ing, and Mr. Bob Dewitt, who is vice president of engineering; Mr. 
Ben Bruce, who is director of imaging systems, ElectroCom Auto- 
mation, L.P.; and Mr. Tod Mongan, senior vice president and gen- 
eral counsel of BancTec, Inc., who will be accompanied by Mr. 
Nolan Klier, director of product marketing. 

Gentlemen, thank you, first of all, for your patience in waiting 
for this rather lengthy first panel to be concluded. As you saw, the 
testimony was of great interest to the subcommittee members. We 
thank you for sticking with us. Also, let me thank you and welcome 
you here today. 

As you can, I'm sure, deduce from what has gone before, this is 
a legislative proposal that has generated a lot of interest and not 
a little controversy. As I'm certain you also heard, one of the major 
questions as to its successful implementation is simply the techno- 
logical capabilities and the ability of firms like those that you rep- 
resent to either provide or to somehow develop that technology over 
a period of time. So we appreciate your agreeing to join us here 
today and to share your very unique and expert perspectives with 
us. 

So with that, I would call on Mr. Ben Bruce of ElectroCom. Oh, 
that's right, I forgot. We have to swear you in, gentlemen. If you 
would rise, please. 

[Witnesses sworn.] 

Mr. McHuGH. Thank you. Be seated. The record will show that 
all of the presenters responded to the oath in the affirmative. 

So, again, Mr. Ben Bruce of ElectroCom. Thank you for being 
with us, sir. The attention of the subcommittee and its able staff 
is yours. 

STATEMENT OF BEN F. BRUCE, DIRECTOR OF IMAGING SYS- 
TEMS, ELECTROCOM AUTOMATION, L.P.; ALBERT F. STE- 
VENS, PRESIDENT, OPEX CORPORATION, ACCOMPANIED BY 
MARK A. STEVENS, VICE PRESIDENT OF MARKETING, AND 
ROBERT DEWITT, VICE PRESIDENT OF ENGINEERING; AND 
TOD MONGAN, SENIOR VICE PRESIDENT AND GENERAL 
COUNSEL, BANCTEC, INC., ACCOMPANIED BY NOLAN KLIER, 
DIRECTOR OF PRODUCT MARKETING 

Mr. Bruce. Mr. Chairman, members of the subcommittee, my 
name is Ben F. Bruce. I am the director of imaging systems for 
ElectroCom Automation, L.P., of Arlington, TX. ElectroCom is a 
major supplier of automation equipment to the U.S. Postal Service, 
having manufactured and delivered over 6,000 automated optical 
character reading and sorting systems over the past 20 years. My 
background is software and hardware engineering and program 
management, and I have been involved with postal automation sys- 
tems for a number of years. 

We have provided a written statement separate from this testi- 
mony. We would appreciate it if that was entered into the record. 

Mr. McHuGH. Without objection, so ordered. 

Mr. Bruce. As we understand it, the intent of the proposed 
prompt payment act now before the subcommittee is to require that 



140 

payments made by mail on bills, invoices, or accounts due be con- 
sidered paid as of their postmark date. EGA neither favors nor op- 
poses this legislation, but we have examined the feasibility of the 
proposed legislation from a technical and implementation perspec- 
tive. 

The principal technical issue we see with this bill is an informa- 
tion question — that is, how can the postmark date be captured and 
associated with the remittance transaction. The charts we have 
prepared show the face and reverse sides of a t5T5ical remittance 
envelope as it is received by a pajonent processor. Information 
presently found on most remittance envelopes can include a post- 
mark and up to three bar codes. A fourth bar code, called a "Planet 
Code," will be available in the near future. 

The postmark is applied primarily to canceled stamps and is 
present only on stamped mail, which includes most remittances. 
The Facing Identification Mark, or FIM code, provides general in- 
formation used by the USPS to process the mail piece. The Postnet 
Code is a bar code representation of the destination ZIP Code and 
is present on most remittance mail. 

The foregoing marks appear on the face of the envelope. The ID 
Tag is generated for internal processing purposes by the USPS and 
is printed on the reverse side of the envelope using a fluorescent 
ink. The Planet Code is a code which, in the near future, can be 
applied by postal customers in support of new services to be pro- 
vided by the U.S. Postal Services. 

Of these various pieces of information, the postmark was not de- 
signed to be machine-readable, and in most cases it is not, espe- 
cially at normal automation speeds. It should be noted, however, 
that the ID Tag contains a date code which normally coincides with 
the postmark date and already appears in machine-readable form 
on many remittance envelopes. 

Thus, the issue of technical feasibility for implementation of the 
proposed bill it not, in our opinion, in question. Rather, the ques- 
tion is the feasibility of developing a practical scheme which meets 
the intent of the bill without imposing undue cost or burdens on 
payer, payment processor, or the postal system. 

ElectroCom has come up with three potential schemes for imple- 
mentation, representing significantly different concepts. We are 
confident that, given more time, additional schemes could be devel- 
oped which are just as technically feasible but might differ in flexi- 
bility, cost, and who bears the burden of implementation. 

Although ElectroCom does not wish to propose or favor a specific 
scheme, we submit these concepts as a way of illustrating at least 
some of the potential means available for implementation. For the 
sake of time, I'm going to summarize our suggested implementation 
schemes. For a more extensive explanation, please refer to the 
written testimony we've provided, or I will be happy to answer any 
questions you might have. 

Under the first scheme. Scheme A, this would have the payment 
processor preprint identifying data on the remittance return enve- 
lope. When the remittance is received, the envelope would be auto- 
matically scanned for the preprinted data and for the existing ID 
Tag. This data would then be associated and correlated and made 
available to subsequent existing computer processing of the remit- 



141 

tance. The scheme requires the payment processor to create a new 
process, employing equipment capable of reading the preprinted 
data and the fluorescent ID Tag. 

Under Scheme B, the USPS would modify its fleet of automatic 
facer/canceler systems, through which many but not all remittance 
envelopes must pass. The modifications would enable these systems 
to imprint the Julian postmark date, using proven ink jet printer 
technology in both bar code and Arabic numeral formats, in a pre- 
cisely prescribed location on the mail piece. 

The payment processor could implement the legislation by either 
manually referring to the IJP-printed Julian date in Arabic numer- 
als, or, optionally, can design the return envelope and enclosed re- 
mittance document such that the Julian date is printed through an 
open area, a window without glassine, directly onto the remittance 
document. In this case, the envelope can be discarded after its con- 
tents are removed and the remittance document processed directly. 

Under Scheme C, this would utilize and expand upon a service 
called "CONFIRM," which is currently under consideration by the 
U.S. Postal Service. In this scheme, the USPS would specify a for- 
mat, such as the Planet Code, for the payment processor to print 
a transaction tag number on the remittance envelope. In its auto- 
mated processing stream, the USPS would scan the code, associate 
the tag number with the postmark date of the envelope, taken from 
the ID Tag, and this data would then be forwarded to each partici- 
pating payment processor as a paid service. 

It should be noted that any scheme which is proposed will be im- 
perfect. For example, there will always be some bar codes which 
are unreadable, or it may not be feasible for the USPS to process 
some mail pieces in an operation in which a code or date might be 
applied or customer data captured. Only an assurance that some 
percentage of the remittances will be correctly processed is likely 
to be possible. 

Again, ElectroCom does not propose any particular scheme for 
implementation, nor does it offer any opinion on the merits of this 
proposed legislation. We do recommend additional investigation 
and consultation with the affected parties in order to determine the 
detailed impact and cost of any implementation scheme under con- 
sideration. In our informed opinion, however, the legislation is 
technically feasible and can probably be implemented in a variety 
of ways with significant flexibility available to remittance proc- 
essors. 

This concludes our testimony, I would be happy to answer any 
questions. 

[The prepared statement of Mr. Bruce follows:] 



142 

Prepared Statement of Ben F. Bruce, Director of Imaging Systems, 
ElectroCom Automation, L.P. 



My name is Ben F. Bnice, Program Director of Imaging Systems for ElectroCom Automation, LJ>., a 
subsidiary of AEG ElectroCom International (AEI). AEI is a U.S. Corporation vAuch is wholly owned by 
E)aimlei Benz, AG of Germany. ElectroCom Automation, L.P. (ECA) is a major supplier of automation 
equipment to die U.S. Postal Service, having manufactured and installed over 6,000 automated optical 
character reading and sorting systems over the past 20 years. My background is software/hardware 
engineering and program management and I have been involved with postal automation systems for a 
number of years. 

The intent of die proposed Prompt Payment Act now before the Subconunittee on the Postal Service of the 
House Committee on Govenmient Reform and Oversight as we understand it is to require that payments 
made by mail on bills, invoices, ot accounts due be considered paid as of their postmark date. ECA has 
accqjted an invitation to testify on the technical feasibility of implementing this bill. 

ECA neither &vors nor opposes this legislation. We have examined the feasibility of the proposed 
legislation firom a technical and implementation perspective. 

The ixincipal technical issue we see with this bill is an information question: that is, how can the postmark 



FIMCode 




ElectroCom Automation 
Box 95080 
Arlington, TX 76005 




lll>llil.lnlllillli..llllill.illi.lll.illl<il.l.il 



059 



«8XBJDCK***S DIG 22030 
STEPHANIE MASON 
3915 CHAIN BRIDGE RD 
FAIRFAX VA 22030-3999 



ln.l.ll..l|.imillll>l»i>ll>llllilllul>lluill.illlMllll 




Planet^ Code 

Postnet Code 

Figure 1 - Typical Remittance Envelope, Face 



Page I Testimony of ElectroCom Automation. LP. on Prompt Payment BUI - 



143 



date be captured and associated with the ranittance transaction. To address this issue, we have prepared 
some illustrative examples which we hope will indicate a range of possibilities. We begin with a discussion 
of the information currently imprinted on an envek^. 

Figures 1 and 2 show the face and reverse sides of a typical remittance envelope as it is received by a 




1 1 I II I iiiiiii I I II I mil II II III fl iDiiii 



r 



ED Tag 

Figure 2 - Typical Remittance Envelope, Reverse Side 



payment processor. Information presently found on most remittance envelopes as received by the addressee 
can include a postmark (^plied via a rotating die) and up to three bar codes. A fourth bar code, called a 
Planet Code will be available to support a new sCTvicc in the near future. The postmark is applied 
primarily to cancel stamps and is present only on stamped mail - which includes most remittances. The 
Facing Identification Mark (FIM) code is optionally preprinted on the envelc^ by the payment processor 
and provides general information used by the USPS to process the mailpiece. The Postnet Code is a bar 



Planet Code is a Trademark of the U.S. Postal Service. 



Page 2 Testimony c/ElearoCom Automatitm, LP. on Pnmp* Payment BUI 



144 



code representation of the destination ZIP code and can be either preprinted or applied via an ink jet printer 
(UP) by the USPS. It is present oa most remittance mail. The foregoing maiks appear on the ^ce of the 
envelope. The ID Tag is goierated for internal processing purposes by the USPS and is printed on the 
reverse side of the envelope using a fluorescent ink. It is utilized in automated mail processing and is not 
currently intended as an official time/date indicator.^ The Planet Code is a code which in the near fiiture 
can be applied by postal customers in sui^rt of new services to be provided by the U.S. Postal Service 
(USPS). Figure 3 indicates the data contained in each of these imprints. 



Postmark (if stamped) 

D«e (Month nd Day) 

City or Mctni|xriitm Aiu of Oligin 

FIM Code (Four code values currently in use, additional values possible): 
Pce-Ba Coded Bx) Reqmics Posagc 
Pie4(r Coded ood No Postage Required 
No Bs Code and Requiics Foffagc 
No Bar Code aid No Foitage Requiied 

Postnet Code (ZIP Code of destination to city, block fasx, or delivery point) 

S^ligitZIP or 9.digitZIP or 11 -digit DelivnyPolin Code 

ID Tag: 

Uaaams(la<r3n^ 
UacUm Number (J-3999) 

DayofMonlh(l-31) 

Thm flu 30 mm. inlmaU. 0^7) 
Serial f/umier (J-2SO00) 

Plana Code: 

This code TtlB b* pn-prbittd by nailers and vlll carry bi/bmotlan reltabtg to the sender, ihe recipient, ani/ar the 
endostd transadlat. 

Figure 3 - Data Content of Envelope Imprints 



Of these various pieces of information, the postmark was not designed to be, and certainly is not machine 
readable. Note however that, although appearing in a code used for internal processing purposes, a date 
(which normally coincides with the postmark date) already ^>pe.ars in machine readable form on many 
remittance envelopes. Thus the question of technical feasibility for implementation of die proposed bill is 
not, in our opinion, in qu^on. In fact, a machine readable date - part of the ID Tag data - is already on 
many remittance envelc^ies. Rather, the question is the technical feasibility of developing a practical 



' At present the ID Tag is printed on remittBnce mail which is not pre-bar coded. On completioo of the USPS' Remote 
Bar Code program (currently in progress), most remittance mail will have this bar code. However, under present plans, 
some collectian mail - including remittance mail - will be processed in ways which do not inchide printing this code. 



Pc^ 3 Ttstimoiv ofEkctroCom Automation, LP. on Prompt Payment Bill 



145 



scheme which meets the intent of the bill widiont nnposing undue costs or other burdens on payer, payment 
processor, or the postal system. 

ECA has, in the brief period available to us to coosida this question, come up with three potential schemes 
for implementation representing significandy different concepts. We are confidoit that, given more time, 
additional schemes could be developed which are just as technically feasible, but might differ in flexibility, 
cost, and who bears the burden of implemeut a tion. Ahhou^ ECA does not wish to propose or favor a 
specific scheme; we submit those concepts wc have been able to generate as a way of illustrating at least 
some of the potential means available for implementation. 

This scheme places die full responsibility of impl«nentation on the payment processor, but for 
large volume payment [mxessors provides a means for automated capture of the postmark date. It 
requires no change to current USPS mail processing technology. 

The small volume payment processor will implement die legislation by manually referring to the 
existing postmark date. (However, because the die impression in current use is not always legible, 
consideration should be given to how this circumstance shouki tie handled.) Additional costs borne 
by these payment processors will consist of (for each remittance) die handling required to treat the 
envelope as an additional remittance document, and, depending upon the system implemented, 
possibly the cost of key entering the postmark date, perhaps 2-5 seconds of key entry time. 

The large volume payment processor whose net costs would be improved thereby, would have the 
option to preprint identifying data on the remittance return envek^. (The content, format, and 
location of diis data would be determined by die paymrait processor). When the remittance is 
received, each envelope is automatically scanned for the preprinted data and for the existing USPS 
ID Tag. This data is then associated and automatically made available to subsequent (existing) 
computer processing of die remittance. This optim requires the payment processor who 
implements it to pre-pint transaction-specific data on the remittance document of return envelope 
and to create a new process employing new equipment capable of reading the pre-printed data and 
the fluorescent ID Tag. It does not, howevo*, require any manual examination of individual 
envelopes, or manual decisions regarding timeliness except as needed to handle read errors, missing 
codes, and so forth. Fot srane payment processors, there may be additional cost offs^ting benefits 
to the added process; e.g. the ability to segr^ate or prioritize ranittances before the contents are 
processed. 

In our view. Scheme A requires no additional investment by the USPS and therefore has no 
possibility of cost impact on the general postal patron. 

SdtemeB 

This scheme provides means for a potentially Iowct cost, automated capture of the postmark date 
for large volume payment processois and provides a reliably legible postmark date for the use of 
smaller payment processors. It is implemented partly dirough changes in USPS processing 
technology. 



Pagt 4 Tatimav ofElectnCam Aatomatioit, LP. an Pnmpt faymtM BiU 



146 



In sdwme B, die USPS would modiiy its fleet of Automatic Facer/Cancellen (AFCS machines) 
duxHigh vAuA many - bat not all - remittance envelopes must pass. The modifications would 
raable these systems to imprint the Julian postmark date using proven IJP technology in both bar 
code and Arabic numeral formats in a precisely prescribed location on the mail piece. Printing of 
die UP 6elds exc^t when a remittance is mdicated by a printed mark ot code on the envelope 
could be sappnssed so as to have no impact on other mail. 

The small volume payment processor could implement the legislation by manually referring to the 
UP {Hinted Julian date (in Arabic numerals) in lieu of the postmark proper. This will provide a 
more reliably legible source for the date, but additional costs borne by Uiese payment processors 
will be essoitially the same as those in Scheme A. Optionally, the payment processor can design 
the return envelope and enclosed remittance document such that the Julian date is printed by the 
AFCS through an open area (window without glassine) directly onto the enclosure. In diis case, the 
envelope can be discarded after its contents are removed, with no special handling required. 

The large volume payment processor ndiose net costs would be improved thereby could adopt any 
of several options, including the option to set up a new envelope scan process as in Scheme A, but 
using the bar coded Julian date (bar coded using black ink) rather than the ID Tag. In addition, 
diese payment processors would have the option to design the return envelope and enclosed 
remittance documoit such that the Julian date (probably in both numeral and bar code format) is 
printed directly onto the enclosure, eliminating any need to associate the envelope and the 
remittance document In this case the processor would incur die costs of modifying software and 
possibly scaiming hardware to ensure capture, interpretation, and utilization of the bar code. 
However, once the convosion of the system, envelopes, and forms had been accomplished, 
additional pCT-remittance costs would depend on the type of system in use. If a fiiUy automatic 
scanning and reading system is used, per-remittance costs would be very low. If direct or remote 
key entry is employed, the per-remittance cost would consist primarily of key entry time for the 
Julian date. In either case, txcepdan processing for read errors, missing codes, etc. woukl also be 
required. 

Scheme B require an additional investment by the USPS as required to modify AFCS machines. 
However, it should be possible to avoid any cost impact on the general postal patron since each 
instance of utilization of the enhanced capability could be identifi»], and costs potentially confined 
to remittance payers and/or payment processors. 



Scheme C 

This scheme utilizes and expaiKls upon a service called CONFIRM currently under consideration 
by die U.S. Postal Sovice. It solves die problem of associating the postmark date and remittance 
transaction inside the USPS, v^iiich would then sell the derived data as a service to payment 
processors. 

In Scheme C, the USPS would specify a format, such as the Planet Code, for the payment processor 
to {Mint a transaction tag number on the remittance envelope. In its automated processing stream, 
the USPS would th«i scan the code and associate that tag number with the postmark date of the 



' CONFIRM is a Tradenoark of Ae U.S. Postal Service. 

Fagt 5 Tatimoity cfEitetroCom Automation, LP. on Prompt Payment BUI 



147 



envelope takea from die ID Tag bar code. This data would then be forwarded daily, either 
electrooicalty {or possibly via some compatible physical medium) to each participating payment 
pnxxssor as a paid service. The CCMhlKM system, now in its early stages of implementation 
already contemplates capturing data from a pre-printed Planet Code and making it available 
electronically to a subscriber to the service. Scbeme C expands the CONFIRM concept to include 
the association of Planet Code data with ID Tag data taken from the same envelope and might also 
require the inaAing of aivek^ies in some way so the pigment pfxx:essor can distinguish unmarked 
oivelopes as requiring special handling. 

While the smallest volume payment processors might implonent the legislation as in Scheme A, 
this schone might opoi die door to a smaOo- per-remittancc cost for medium volume payment 
processors by making automated association of the postmark date and remittance transaction 
available at a lower entry cost In additioa to the per-remiOance fee payable to the USPS, the 
payment processor utilizing this service would need to modify forms and/ra- envelopes to pre-print 
the transaction tag (encoded as a Planet Code) as well as to make modifications to or replace 
payment processor iwu i ttance processing systems (primarily software) so as to accept data ftam the 
USPS and associate it with transaction processing. Of course, excepdoo processing for remittances 
with no 'match data' from the USPS would still be required. 

Scheme C requires some additimal investment by the USPS as required to deal with specific design 
requirements and added data handling vohmie attributable to this sovice. However, the full cost to 
the USPS of implementation could be directly charged to those payment processors using the 
service in proportion to the vohime processed by each. 

It should be noted that any sdieme we are able to envision will be imperfect I.e. there may be some bar 
codes which are unreadable, or it may not be feasible for the USPS to process some mail pieces in the 
operation in which a code or date mi^ be applied or customer data captured. Only an assurance that some 
percentage of remittances will be correctly processed is likely to be possible. 

Again, ECA does not wish to pn^iose any particular scheme for implemoitation, uot does it offer any 
opinion on the merits of this proposed legislation. We rcommend additional investigation and consultation 
with the affected parties in order to determine the detailed impact and costs of any implementation scheme 
under consideration. In our infonned (pinion, however, the legislaticm is - subject to the constraints noted - 
technically feasible and can probably be implemented in a variety of ways, with substantial flexibility 
available to remittance processois. We would emphaaze, however, that v/bSe implementation costs can be 
minimized and targeted, tbey will not be zero. Afabough we are not in a position to quantify them, we 
expect that the more significant costs will be: per-remittance labor costs for smaller payment processors, 
capital and forms costs for \arga, automated payment processors, and possibly - depending upon the 
implementation scheme - capital costs for the U.S. Postal Sovice. 



Page 6 Testimony ofEUdnCom Aatam^iom. Lf. m Prompt Pay»era Bill ■ 



148 



ElectroCom 
Automation L.P. 

June «, 1996 

vlea Prsaident 

Honorable John M. McHugh 
Cbaiiman, Subconumaee on the Postal Service 
21S7 Raybum House Office Building 
Washington, DC 20515-6143 



ElectroCom is pleased to oSer additional infonnation regarding the CONFIRMtm system being developed by the 
Postal Service. The CONFIRMtm system is the first application being implemented utilizing the Postal Service 
developed PLANET-tv Code. The PLANETtm Code is readable utilizing existing Wide Area Bar Code Readers 
(WABCRs) which arc already depl^cd on the majority of the Postal Service's automated mail processing 
e<|Utpinent Retrofit programs are currently plaimed or underway to install these WABOU on the remainder of the 
automated mail processing equipment fleet This technology, combined with the information network being 
d^loyed to support the Identification Code Traclcing (IDCT) program, will allow the Postal Service to collect, 
correlate, trade and tepon information related to the movement of specific mail pieces within the automated mail 
stream. These programs provide the basis for the required infrastructure necessary to support the implementation 
of the COMFIRMtm system. It is anticipated that this infrastructure will be fiilly deployed and operational by the 
end of 1997, It is ElectroCom's understanding tliat the CONFIRMtm system is currently undergoing trial testing 
utilizing MCI as the telecommunications network provider. Should these tests prove successful, it would not be 
unreas(Hi^le to believe that the CONFIRMim system would be available for commercial use by the end of 1997. 

Assuming that the CONFIRMtM system is commercially available at the end of 1997, the most likely market will 
consist of tnailers who are mailing time sensitive materials and wish to know that the mail pieces are in the final 
stage prior to actual delivery, and financial institutions who wish to know when payments or other financial 
instruments have actually been Introduced into the mail streant This would allow the one to know with certainty 
that the delivery of their inateiials is immii>ent and would allow the other to plan their cash flow more efiftciently 
and minimize the "float" iitherent in the system by being prepared to handle the item prior to it's actual delivery. 
Specific candidates for lueding this type oS information might include banks, savings & loam, mortgage lenders, 
stock brdcers, teal estate brokers. 

In the event that legislation is considered which would contemplate utilizing a system such as CONFIRMtm as a 
basis for compliance, it would be pnidcnt to re-examine the status and availability of the system prior to enacting 
the actual legislation. Specific information pertaining to the current status of the CONFIRMtm system may be 
obtained from the Postal Service Engineering, Research and Development Center, Merrifield, Virginia. For your 
convenience, I have included a Postal Service information sheet on the CONFIRMtm systetiL 

If you have any qoestiOTs or commeius, or require further information, please contact me at (817) 693-5588. 
Sincerely yours. 




£foetroCom Automation LP. • PO. Box 9S080 • Arlington. Tx. 7600S-10BO 



149 

Mr. McHUGH. I thank you, Mr. Bruce. As you may have just 
heard, the two buzzers, two bells, means we have a vote on the 
House floor. I would propose to briefly adjourn the committee while 
I run over and vote. I don't run as quickly as I used to, but I will 
try to run back. I hope you will be able to stay with us. I will try 
to make this as short as possible. 

With that, the committee will stand in recess, actually, until we 
return after this vote. Thank you. I apologize. 

[Recess.] 

Mr. McHuGH. I would say to the audience, you have great pa- 
tience and I appreciate that. Again, my apologies. Of course, what 
happened was, we had two consecutive votes rather than one. But 
I am assured we have some time now, so I trust we won't have any 
further interruptions. 

Our second presenter is Mr. Al Stevens of Opex. 

Mr. Stevens, welcome, sir. 

Mr. Albert Stevens. Thank you, Mr. Chairman, and members 
of the Postal Service Subcommittee. 

On behalf of Opex Corporation and as company president, I 
would like to thank the members very much for allowing us the op- 
portunity to discuss H.R. 1963. During my testimony today, I 
would like to offer a condensed version of the written materials 
previously submitted to the subcommittee. I would respectfully re- 
quest, however, that our written testimony be entered into the 
record in its entirety. 

Mr. McHuGH. Without objection, so ordered. 

Mr. Albert Stevens. Thank you, Mr. Chairman. 

I am pleased to have two other gentlemen accompanying me 
today: my son, Mark Stevens, who is the vice president of market- 
ing, and Bob Dewitt, who is our vice president of engineering. 
Mark has almost 20 years' experience in the incoming mail indus- 
try, and Bob holds numerous patents in the field of mail and check 
processing. 

A bill such as H.R. 1963, hereinafter referred to as "the bill," 
could greatly benefit a company like Opex, since we have much of 
the technical expertise required to ultimately accomplish its objec- 
tives. New equipment sales could potentially bring a windfall to 
Opex. Nevertheless, based on our experience, we believe that there 
are important ramifications for the entire payment processing in- 
dustry if the bill is enacted as currently written. 

While it is certainly possible that existing technologies could be 
harnessed to meet the posting requirements imposed by the bill, 
there is no equipment package currently available that easily en- 
ables payees to credit their customers in the manner prescribed by 
the proposed legislation. 

In this testimony, we will assess changes and developments re- 
quired in our industry to make this bill technically feasible. Opex 
equipment is enjoying tremendous acceptance in the payment mar- 
ketplace, as the following statistics will illustrate. In any given 
month, Opex machines open more than a half billion envelopes. 
Fourteen out of 15 of the largest credit card companies in the Unit- 
ed States use Opex equipment. More than 50 percent of all remit- 
tance processing equipment users also use Opex machines. 



150 

The Opex product line now encompasses automated mail extract- 
ing machines, incoming mail sorters, and document sorting ma- 
chines that accomplish two basic activities: first, sorting and rout- 
ing incoming mail; and, second, providing a means for efficiently 
removing and handling envelope contents. 

Payment processing runs the gamut from fully automated, high- 
volume shops processing millions of payments per month, to low- 
end, small enterprises opening and processing payments by hand. 
There are three basic pa3rment processing methodologies used 
today: manual, semiautomated, and fully automated. Mail handling 
in the semiautomated or fully automated processing modes falls 
under a broader category of machine-processed mail. 

The total amount of mail processed in the manual mode is un- 
known, but it is certainly the largest processing category. Two- 
thirds of all machine-processed payment mail is processed in the 
semiautomated mode, and one-third of the machine-processed pay- 
ment mail is in the fully automated mode. In manual processing, 
as the name implies, payment envelopes are received by the payee 
and opened and processed by hand. This method, along with semi- 
automated processing, comprises the bulk of payment envelope 
processing. 

In semiautomated processing, payments are generally processed 
on single work stations like the Model 50 Rapid Extraction Desk. 
The envelopes are picked up by the machine from its feed conveyor, 
opened on the top and on one or two sides, and moved down a 
transport track. The operator removes the contents, and the next 
envelope cycles into position for processing. An operator working at 
an extraction desk can process an average of 1,300 envelopes per 
hour. 

The goal of fully automated processing is to touch the envelope 
and its contents as little as possible prior of the posting of the 
transaction to customer's account. This is accomplished with a ma- 
chine like the unique Opex System 150, which embraces state-of- 
the-art technology and automatically, in one continuous operation, 
qualifies, extracts, sorts, orients, and presents checks and docu- 
ments for quick remittance processing, at a rate of 8,250 extracted 
pairs per hour. 

Some of the technologies used on the System 150 could be har- 
nessed to assist payees in meeting the requirements of the bill, al- 
though not without some difficulty. As an example, the System 150 
can be equipped with up to four image cameras which capture in- 
formation about the envelope and the extracted contents. 

Incoming mail sorters offer benefits apart from simply identify- 
ing exception items that cannot be processed on high-speed extrac- 
tion machines. They also sort envelopes based on very specific sort- 
ing criteria. This ability to identify specific envelope characteristics 
is important in the context of developing technology that addresses 
the bill. 

Regardless of the payment processing methodology used, rel- 
atively little emphasis is placed on storing and retrieving enve- 
lopes. This makes sense, since payees only receive credit when they 
extract what's in the envelope. They can't take empty envelopes to 
the bank. Even if the envelope is sorted by unique characteristics, 



151 

it is usually then discarded once the extraction process has been 
completed. 

In high-speed, fully automated environments, the envelope is al- 
ways discarded immediately after successful extraction. This fact is 
important in light of the bill, which requires postmarks to become 
the basis for crediting customer accounts when payments are re- 
ceived after the due date. The language of the bill, as currently 
written, is very broad. Any business that receives payments in any 
amount would be affected. 

In manual processing, since payments are already being proc- 
essed by hand, the bill may have fewer clerical ramifications. The 
envelope can be saved, and the postmark can be examined on the 
day that the payment is received. The payment can somehow — and 
the "somehow" is very uncertain — ^be credited as of the postmark 
date. At best, manual processing is highly labor-intensive. When 
compared to semiautomated or fully automated payment process- 
ing, this method yields the lowest productivity and the highest cost 
per transaction. 

The additional sorting and recordkeeping requirements imposed 
by the bill would only serve to further decrease productivity and in- 
crease labor and processing costs. In either the manual or semi- 
automated pajrment processing modes, the person extracting the 
envelope contents will have to stop long enough to examine the 
payment due date, and, if the envelope is received after this due 
date, the postmark. 

While this may seem like a minor inconvenience, the impact on 
productivity would be substantial. We estimate that extraction 
desk processing rates would drop by at least as much as one-third, 
from the average of 1,300 envelopes per hour to an average of no 
more than 900 envelopes per hour. If the bill were implemented 
immediately, the impact would be most severe on the one-third per- 
cent of the pajTTient processing market that uses high-speed, auto- 
mated extraction equipment. 

Short of returning to manual processing, there is no work flow 
available today that allows pajnnents to be accounted for by post- 
mark. As stated earlier, all of today's high-speed extracting equip- 
ment discards the envelope immediately upon extracting its con- 
tents. Even if it were possible to account for envelopes in the high- 
speed environments, there is still a myriad of problems associated 
with reading a postmark. Postmarks are frequently illegible. They 
are often difficult for humans to read, much less machines. 

Some envelopes are never postmarked; for various reasons, the 
postmark is skipped during processing. The postmark on some en- 
velopes is placed directly over the stamp, and the stamp comes off 
during transit; the postmark disappears. Therefore, the ramifica- 
tions of the bill to fully automated payment processing reach far 
more deeply than simply saying, "Keep the envelope and read the 
postmark." 

The Opex System 150 could be equipped with an image camera. 
Why not use that to capture and store an image of the past due 
envelopes? However, still capturing an image of the envelope does 
not adequately address the requirements of the bill. In order to cor- 
relate receipt of envelopes with the crediting of payment, the enve- 
lope must contain something that identifies as being a part of that 



152 

transaction; i.e., something definitive like the customer's return ad- 
dress or account number. Therein Hes the problem. Millions of en- 
velopes do not have a return address on them, and capturing the 
image would therefore prove nothing. 

It is fairly obvious that none of the current processing environ- 
ments is particularly well-suited to implement the bill. There is 
nothing to suggest that any facet of this legislation could be imple- 
mented cheaply or easily in toda/s high-speed shops. However, it 
is not impossible to develop technology capable of implementing the 
bill. Given a time for development, there are technological possibili- 
ties. 

While some solutions could be implemented more easily than oth- 
ers, all of the technological possibilities are wrought with unknown 
research and development costs. Further, no package currently ex- 
ists containing all of the elements to make the bill a reality. Fur- 
ther, payees would have to make substantial changes to their pay- 
ment processing operations in order to implement the required 
technology. Special equipment would have to be purchased at con- 
siderable expense, and the post office would have to play a major 
role, as yet undetermined. 

Under the best of circumstances, it would require a lengthy pe- 
riod of time to implement the bill. Much of the technical difficulty 
in implementing the bill concerns the envelope itself. Postmarks 
are often illegible or missing; return addresses are nonexistent. 

By changing the envelope design it might be possible to eliminate 
some of these problems to meet the demands imposed by the bill. 
For example, a new envelope could be developed which is called, for 
lack of a better name, the "postmark credit date envelope." Cus- 
tomers of payees wishing to avail themselves of the benefits of the 
bill would use this envelope. 

This postmark credit date envelope would have a special window 
on it, similar to todays style of window envelopes. A special post- 
mark bar code could be sprayed through the window directly onto 
the remittance document. By affixing the postmark in this manner, 
the remittance documents and the payments would arrive with the 
postmark information readily available. Machines capable of read- 
ing bar code could utilize this information. 

Consumers not choosing this method for sending their payments 
would simply not be able to claim the benefit of the postmark date, 
since the envelope and its accompanying postmark would be dis- 
carded, as usual, immediately after extraction. 

When a payment is processed, the posting date could be based 
upon a postmark bar code. This would require changes in remit- 
tance processing machines, and these changes would not be trivial. 
This method would work best in fully automated, high-speed envi- 
ronments. However, because the postmark would continue to be 
printed with an alphanumeric character, even semiautomated or 
manual processing shops could identify the postmark and thus use 
these envelopes. 

Consumers would need to be sold on the idea of using these new 
envelopes. Those who did not use the envelope, regardless of the 
reason, would feel that they had been treated unfairly when com- 
pared to those that had used the envelope. 



153 

A bar code technique would have to be developed by the post of- 
fice to spray the bar code on every envelope processed. Every loca- 
tion receiving and postmarking mail, no matter how small, would 
require this bar coding capability. This could be expensive, and it 
would necessitate a long implementation phase. However, using 
the postmark by itself to determine mailing dates is impractical, 
due to poor quality and other problems touched on previously. 

Encrypting the postmark in some yet undeveloped machine-read- 
able fashion other than bar code may also work, and there may be 
some other far-out ideas that would need to be researched. At 
present, we do not see an easy, cheap, or efficient way to imple- 
ment the bill. We estimate, to properly develop the technological 
capabilities required to make this bill a reality, it might take be- 
tween 2 to 5 years. 

As mentioned, the post office would have to change its mail-han- 
dling techniques dramatically and would have to develop, buy, and 
implement new equipment at every postal site in the country. This 
would take time, and it would be costly. 

I would like to thank you, Mr. Chairman and members of the 
committee, for your time. We look forward to addressing any fur- 
ther questions that you may have. 

[The prepared statement of Mr. Stevens follows:] 



154 
Prepared Statement of Albert F. Stevens, PREsroENT, Opex Corporation 

I. Introduction 

Mr. Chairman, and Members of the Postal Service Subcommittee: 

On behalf of Opex Corporation, and as company President, I would like to thank 
the Members very much for allow/ing us the opportunity to discuss H.R. 1963, the 
Postmark Prompt Payment Act of 1995 . I would also like to thank Mark Stevens, Opex's 
Vice President of Marketing, and Bob DeWitt, Opex's Vice President of Engineering, for 
their valuable insights into the technological aspects of this bill. 

Incorporated in 1973, Opex is a leading manufacturer of incoming mail 
processing equipment. Our Home Office is located in Moorestown, New Jersey. We 
also have a Division called Omation which operates out of Mountain View, California. 
Opex manufactures incoming mail sorters, mail openers, mail extraction desks, and 
fully-automated equipment that extracts envelope contents, properly orients checks, and 
stacks checks and documents for later remittance processing. Opex machines can be 
found in all 50 states, Canada, Europe, and Asia. 

I have personally been involved in the incoming mail processing industry for 
more than 23 years at Opex, and an additional 12 years at Columbia House. During this 
time, payment processing has evolved dramatically from the days when every envelope 
was opened by hand to today's line of fully-automated equipment. Opex has 
consistently been at the forefront of developing innovative systems for opening and 
processing incoming mail. In many remittance processing shops, Opex machines begin 
the process of putting bill payments into the collection and crediting streams; envelopes 
containing payments are often taken directly from the Post Office and put on Opex 
sorting and opening equipment. A bill such as H.R. 1963 would, therefore, directly 
affect us, and we would shoulder a great deal of responsibility for devising the 
technology necessary to implement its provisions. 

Based upon our experience, we believe there are important ramifications for the 
entire payment processing industry if H.R. 1963 is enacted as currently written. While it 
is certainly possible that existing technologies could be harnessed to meet the posting 
requirements imposed by H.R. 1963, there is no equipment "package" currently 
available that easily enables payees to credit their customers in the manner described 
by this proposed legislation. 

In this testimony, we will focus on the existing technologies for opening and 
sorting envelopes, and use this as our basis for assessing changes and developments 
required in the industry to make this bill technically feasible. To the extent we can 
predict the future, we will try to estimate a reasonable timeframe, from our perspective, 
for developing and implementing the necessary technology, and also try to assess the 
cost-impact associated with this. 

In order to better understand where Opex fits in the larger picture of payment 
processing, it is important to understand a little of the history of mail extraction 
equipment, and Opex's part in the development of this industry. The Section that 
follows briefly discusses Opex Corporation, both in ternis of its past, as well as where it 
currently functions in the remittance processing marketplace. 



155 



II. Opex Corporation: Past, Present, and Products 



A. Opex's Past 

Originally a small mail-processing division of a conglomerate known as Kenco, 
Opex gained its first technical expertise in the early 1970's. Dollars and engineering 
expertise were added to the mix, and the first two Opex mail opening Systems were 
delivered to the Columbia Record Club in 1972. 

Simultaneous with the development of the Opex machine, a marketing trend 
emerged in which companies found success using direct mail campaigns, courtesy of 
the United States Postal System. Remittance was made through the mail, and an 
industry was born. 

One such company was Columbia Records of Terre Haute, Indiana, whose daily 
volume of mail in 1971 weighed more than a ton. Over 200 employees were required to 
manually process the day's mail. A study was initiated by the company to determine 
what equipment could be purchased to improve the speed and profitability of the 
mailroom operation. For Al Stevens, then Assistant to the VP of Operations at Columbia 
Records, this was a difficult assignment; mail extraction equipment at the time was not 
readily available. 

Alerted by a small article in the Wall Street Journal regarding an extraction 
machine being developed by a relatively obscure company in Cherry Hill, New Jersey, 
Stevens formed a relationship which ultimately resulted in the development and 
production of the first multiple station mail processing machine, the Opex 4.0. Using a 
conveyor system, it fed opened envelopes with exposed contents to operators seated at 
work stations along the conveyor. 

Columbia Records bought two systems for $50,000 each, and Stevens (now the 
company President) and his wife, Joanna, bought Opex. Later, the Stevens' sons, Mark 
and David, were brought into the buisness. 

There were immediate problems, not the least of which was survival. Although the 
early 70's saw sales growth, the first large order for System 4.0 didn't materialize until 
1975. 

In the meantime, Opex allocated meager resources for the development of an 
inexpensive single operator work station for low volume customers. Named the Rapid 
Extraction Desk, the first RED Model 30 sold for $2,995 without the optional $500 slitter. 
Almost all customers bought a slitter for their, machines, and this envelope-opening 
slitter function was designed into later models. The machine was designed to present 
1 ,200 envelopes per hour to the operator. 

This concept for labor improvement via a workstation proved simple, but effective. 
The machine completely and efficiently handled the envelope: It picked the envelope 



156 



up, slit it open and, using suction cups, pulled the envelope open for extraction of the 
contents by the operator. Once empty, the envelope was discarded. 

The single station concept was an instant success, but sales volume didn't provide 
Opex with the cash flow required for effective marketing, so sales for the REDs were 
confined to the east coast. The company had not yet turned the corner toward 
profitability. 

The catalyst which would revolutionize the industry and launch Opex into industry 
leadership was a simple idea: "Why not let the machine respond to the operator rather 
than forcing the operator to respond to the machine?" 

With this premise in mind, Opex created and patented a process called Content 
Activation, a cycling technique for the RED which feeds full envelopes based on the 
operator's demand or speed in emptying envelopes, rather than a mechanical timer 
which forces the operator to perform at a given rate or fall behind. This departure from 
tradition turned the company around. A national sales force was added, and Service 
was expanded as sales grew. 

With a steady annual growth rate, Opex continues to invest in research and 
development. Succeeding generations of faster REDs rich with additional features, and 
a series of new patents, continue to flow from Opex's corporate headquarters in 
Moorestown, New Jersey. 



B. Opex's Present 

Opex equipment is enjoying tremendous acceptance in the payment processing 
marketplace, as the following statistics illustrate: 

♦ In any given month, Opex machines open more than i/2 billion 
envelopes 

♦ 14 out of the 15 largest credit card companies in the U.S. use Opex 
equipment 

♦ More than 50% of all remittance processing equipment users also use 
Opex machines 

As indicated by the product descriptions below, Opex has expanded the scope of 
its business to include more than just Rapid Extraction Desks and letter openers. The 
Opex product line now encompasses incoming mail sorters and document sorting 
machines. By offering a wider array of products, Opex has steadily moved into more 
and more remittance processing shops. 



157 



C. Opex's Products 

In the broadest sense, Opex's product line performs two basic activities: 

♦ Sorting and routing incoming mail; and 

♦ Providing a means for efficiently removing and handling envelope 
contents. 

Opex has developed a complete line of incoming mail processing products to 
accomplish these two tasks: 

1.) MPS-30 Mail Sorter: The MPS-30 is a high-speed incoming mail sorter. At 
a rated speed of 30,000 envelopes per hour, the MPS-30 accepts first class mail directly 
from the Post Office. 

2.) Model 50 Rapid Extraction Desk: The Model 50 is a "desk" that 
automatically opens envelopes. The operator then removes and sorts the contents and 
the machine checks to make sure the envelope is empty before it is discarded. 

3.) MPE 5.0: The MPE 5.0 is a multi-purpose, automated extractor for smaller- 
volume shops. It is similar in many respects (on a smaller scale) to the System 150. 

4.) System 150: The System 150 is the only high-speed automated extraction 
machine in the world. With an output of 8,250 extracted "pairs" (meaning check and 
document) per hour, this machine properly orients checks, identifies changes of 
address, and stacks checks and documents for later remittance processing. 

5.) IQ Sort: The I.Q. Sort helps operators sort stacks of batched documents. 
It displays images which an operator can use to identify full or partial payments, 
changes-of-address, check dates, check signatures, or virtually any other visual sort 
parameter, thus allowing paper documents to be sorted into distinct groups. 



In environments where payment processing has been automated, machines like 
these perform the functions of sorting the envelopes, opening the envelopes, extracting 
the envelope contents, and preparing the contents (check and document) for application 
of the payment to a customer's account. 

However, even though automation is readily available to handle the initial stages 
of remittance processing, many shops still choose to open and sort envelopes by hand. 
The Sections that follow present an overview of these diverse methods of handling 
incoming mail, and how H.R. 1963 would impact these methodologies. 



158 



III. Existing Payment Processing Methodologies 



A. Overview 

Payment processing runs the gamut from fully-automated, high-volume shops 
processing millions of payments per month to low-volume, small enterprises opening 
and processing payments by hand. The choice of whether or not to automate is usually 
driven by other goals within a company, and sometimes by the nature of the payments 
themselves, i.e. the transactions being processed are extremely complex, the mail 
volume is too low to justify automation, etc. The seemingly broad language of H.R. 
1963 affects all of these shops, regardless of payment volume or processing method. 

There are three basic payment processing methodologies used today: Manual, 
Semi-Automated, and Fully-Automated. Each of these is discussed in further detail 
below. Mail handled in the Semi-Automated or Fully-Automated processing modes falls 
under the broader category of Machine-Processed mail. 

For reference, it is helpful to note the approximate percentage of payment 
envelopes handled by the various methodologies: 

♦ The total amount of mail processed In the Manual Mode is unknown, 
but it is certainly the largest processing category 

♦ 2/3 of all Machine-Processed payment mail is processed in the Semi- 
Automated Mode 

♦ 1/3 of all Machine-Processed payment mail is processed in the Fully- 
Automated Mode 



B. Manual Processing 

In Manual processing, as the name implies, payment envelopes are received by 
the payee and opened and processed by hand. Since Opex manufactures machines 
that automate the process of opening incoming mail, it is difficult for us to determine the 
true size and scope of Manual processing. It is safe to say, however, that this method, 
along with Semi-Automated processing, comprises the bulk of payment envelope 
processing. 

Further, because Manual processing encompasses so many styles of doing 
business, it cannot be stated with certainty what happens to the payment once it is 
removed from the envelope. The payment may go into some type of computerized 
system; or, in the case of businesses receiving only a few payments per month, the 
entire transaction may be received, posted and processed by hand without any 
mechanical intervention. 



159 



C. Semi-Automated Processing 

In this environment, payments are generally processed on single workstations 
like the Model 50 Rapid Extraction Desk. The mail comes directly from the Post Office 
and is fed into a unit that looks a lot like a standard office desk. An operator sits at the 
Desk. The envelopes are picked up by the machine from its feed conveyor, opened on 
the top and one or two sides (depending on the brand of workstation) and moved down 
a transport track. Once the envelope is positioned in front of the operator, the sides of 
the envelope are pulled away from the envelope contents by the Desk (which usually 
utilizes suction cups for this purpose). The operator removes the contents, and the next 
envelope cycles into position for processing. 

As the empty envelope continues down the transport path, machine candlers 
electronically examine the inside of the envelope to see if the operator accidentally failed 
to extract a check or document. If the envelope is not empty, the machine alerts the 
operator and will not cycle until all of the envelope's contents have been removed. 

This method is semi-automated because it does require operator intervention; 
the operator must still handle the envelope contents. Once the operator has removed 
the contents, he or she must manually sort the contents prior to forwarding the 
payments to remittance processing machines. 

For instance, if the envelope contains multiple payments (with one payment 
being late and the other "on time"), or if it contains correspondence, or if a check or 
payment stub is missing, special accounting must be made of that particular transaction. 
So-called 'clean transactions" (i.e. those envelopes properly containing one check and 
one document) must also be separated by the operator, since these are the easiest to 
process. Also, all checks and documents must be correctly oriented for further 
processing; they must all face the same direction. 

An operator working at an Extraction Desk can process an average of 1,300 
envelopes per hour. Production ranges on the Extraction Desks vary from 
approximately 450 - 3,000 envelopes per hour, depending upon the complexity of the 
transactions being processed, the document format, clerical demands for reviewing 
documents in preparation for later processing, etc. This figure is also highly-dependent 
on other factors such as the quality of the mail, work rules, and the like. 

Semi-Automated processing works most efficiently when the envelopes are 
uniform, and the mail generally "clean." The envelopes and statements supplied by 
payees to pay utility bills are a good example of "clean" mail. Extraction Desks like the 
Model 50 can also handle non-standard, non-uniform envelopes called "white mail," 
although processing rates are hampered because of the non-uniformity of the 
envelopes. "White mail" is generally received when the payee does not supply an 
envelope in which to return payment. Fully-automated, high-speed extraction machines 
cannot currently handle "white mail." 

Once the mail is received and opened on the Extraction Desks, and once the 
operator has removed and sorted envelope contents, the checks and documents are 



160 



sent to remittance processing machines that actually post the payment to the customer's 
account. This process is illustrated below: 



Incom ing 
Mail 


-^ 


REDS 
Model 50 




Rem ittance 
Processor 



D. Fully-Automated Processing 

The goal of this processing methodology is to touch the envelope and the 
envelope contents as little as possible prior to posting the transaction to the customer's 
account. To accomplish this goal, Opex has developed unique equipment to automate 
the sorting and extracting processes. By using the Opex System 150 automated 
extractor, MPE 5.0 extractor, and/or the MPS-30 incoming mail sorter, it is possible to 
efficiently handle almost all payment envelopes v»/ith minimum operator intervention and 
maximum productivity. 

1. High-Speed Automated Extraction 

The Opex System 150 embraces state-of-the-art technology to automatically 
qualify, extract, sort, orient and present checks and documents for quick remittance 
processing, all in one continuous operation at a rate of 8,250 extracted pairs per hour. 
This is the basic workflow description of the System 1 50: 

♦ The System 150 accepts mail directly from the mail tray / feed area. 

♦ The sort module identifies and outsorts "exceptions" (mail not meeting a pre- 
determined specification) based upon thickness (folded or incorrect number 
of documents) and metal detection (paper clips, staples, coins, etc.), and 
outsorts these envelopes unopened to dedicated bins for later processing on 
Extraction Desks. 

♦ The cutter area opens the leading edge, the top and the bottom of the 
envelope in preparation for extracting the contents. The envelope itself is 
unfolded into one long piece of paper and separated from the contents at the 
extractor. 

♦ The machine verifies whether a successful extraction has been performed. If 
the extraction was not successful (because of tape, excess glue on the 
envelope, etc.) the envelope and contents are reunited in an outsort bin for 
manual processing by the operator. 

♦ Once separated from its contents, each envelope is directed to a removable 
under-counter trash receptacle. 



10 



161 



♦ Checks and documents are separated, then properly oriented and 
sequenced. 

♦ Stacker bins receive finished output in the condition required for remittance 
processing. 

As described above, there are still occasions when Extraction Desks are 
necessary: if the envelope is an "exception item," or if a customer sends in "white mail," 
those envelopes must still be processed in the Semi-Automated or Manual modes. In 
this regard, the term "Fully-Automated" is a bit of a misnomer. 

It is possible to customize the System 150 with various options designed to meet 
specific payment processing objectives. As discussed later, some of the technologies 
used on the System 150 could be harnessed to assist payees in meeting the 
requirements of H.R. 1963, although not without some difficulty. As an example, the 
System 150 can be equipped with: 

H Image Camera(s) Up to four cameras may be fitted to the System 1 50 to 
capture information about the envelope and extracted contents. Image Camera 
options are as follows: 

• Windowless Capability: Machine can extract and orient 
contents from windowless envelopes. 

• Job ID: Allows the machine to run two different jobs 
intermixed by electronically identifying unique characteristics 
of an envelope. 

• Postnet Barcode Read: As an adjunct to Job ID, Postnet 
Barcode Read provides a high level of quality in job 
identification. 

• Damage Detect: This option examines envelopes for damage 
(bent corners, etc.) and outsorts them unopened. 

• Mark Sense: Searches up to five fields (total) in any 
combination on either or both sides of the document. 

• Change of Address: These may be detected either on the 
envelope or on the document. 

S Reorder Module: Gives the machine the ability to change the sequence of 
(re-order) the document and check in the paper path without a decrease in 
productivity. This feature is used in processing the contents of non-windowed 
envelopes. 



162 



As mentioned above, "exception" envelopes must be handled separately. While 
it is possible to feed "exception" items into the high-speed extractor, these items must 
nevertheless be outsorted; this slows down the Fully-Automated payment process. 
Therefore, many payees choose to identify these envelopes prior to loading the mail 
into their high-speed extraction equipment. This is done on high-speed incoming mail 
sorters such as the Opex MPS-30. 

2. High-Speed Incoming Mail Sorters 

Incoming mail sorters offer other benefits apart from simply identifying 
"exception" items; they can also sort envelopes based upon very specific sorting criteria. 
This ability to identify specific envelope characteristics is important in the context of 
developing technology that addresses H.R. 1963. 

As an example of some of the sorts that can be done with envelopes, please 
note the following possibilities available on the Opex MPS-30 incoming mail sorter: 

♦ Gross Thickness / Height Outsort 

The MPS-30 is designed to run First Class mail as defined by the United 
States Post Office. Envelopes which are too thick, too tall or too long to be 
processed through the automated extracting machine will be outsorted. 

♦ Envelope Length Sort Criteria 

Envelopes may be sorted into any stacker bin based upon differences in 
length. The machine "reads" the length of the envelope electronically. 

♦ UMD Sort Criteria (UMD - Universal Mark Detector) 

Universal Mark Detection reads an external mark (or marks) printed on the 
envelope. The MPS-30 UMD "reads" the code, and interprets it according to 
parameters determined by the user. The envelope is sorted into a stacker bin 
according to job program. 31 marking combinations are possible. 

♦ Postnet Barcode 

Two Postnet Barcode read products are available on the MPS-30: 

(a) Fixed position Postnet Barcode sort capability: The barcode may be 
printed on the envelope or on the document through a window, but must be in a 
fixed position. 

(b) Wide Area Postnet Barcode sort capability: The barcode may appear 
anywhere on the envelope that the USPS allows. The barcode may be printed 
on the document and can be read through a window. USPS requirements must 
be met. 



12 



163 



♦ Change Of Address Sort Criteria (Indicated In Check Box On The 

Exterior Of The Envelope) 

As the envelope passes this module, the Change-of-Address area on the 
envelope is scanned. If any writing or check-mark appears in the scanned 
image, the envelope will be directed to a specified bin or bins. 

♦ Fine Thickness Sort Criteria 

As the envelope passes between two rollers, one is displaced, causing a 
variation in an electrical current. This variation is measured by an electro- 
mechanical device called the LVDT, and translated into envelope thickness. 
This device has a resolution of 1/4 of the thickness of a normal sheet of paper. 

♦ Metal Detection Sort Criteria 

As envelopes pass through a magnetic field, paper clips, staples, coins, etc. 
generate an electrical anomaly which is read by the machine, and the envelope 
containing metal is sorted into a pre-programmed bin or bins. 

♦ Remittance Detection Sort Criteria 

This function will determine the presence of a check in the envelope based 
on the MICR ink line. 

♦ Coded Document Detection Sort Criteria 

This module detects a code printed in MICR ink on a document in the 
envelope. 

♦ Proper Check Orientation Sort Criteria (MICR Through The Envelope) 

Designed for payment applications, this module will determine the orientation 
of the check in a windowed envelope. 

♦ Combination Sort Groups 

Any sort criteria may be combined with any other sort criteria to create a 
"custom" sort group. For instance, a length sort criteria may be combined with a 
remittance detection sort criteria, and all envelopes of a given length with a 
check in the envelope will be directed to a specific bin or bins. 

3. Other Automated Extraction Techniques 

Automated payment processing and sorting can also be accomplished with other 
extraction equipment like the Opex MPE 5.0. The MPE 5.0 may be purchased for use in 
conjunction with an incoming mail sorter, or it may be purchased with its own optional in- 
line Sorter Module. In either case, "exception' envelopes containing folded checks, 
multiple transactions, metal, con-espondence, etc. are outsorted unopened. 

Windowed envelopes which have t)een pre-qualified to contain only a return stub 
and an unfolded check are extracted. The contents are sent downline, while the 



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envelope is examined along its full length to insure that it is completely empty before 
being discarded. In the event of an unsuccessful extraction (where the check, for 
instance, may have stuck to a bit of glue in the end-seam of an envelope) the contents 
of the envelope are reunited with the envelope and placed in a "reunite bin." 

The MPE 5.0 comes standard with one stacker unit, and can be configured with 
an additional stacker unit. Transactions containing properly oriented checks can be 
separated from those containing misoriented checks, and directed to "stacker pockets" 
based upon orientation. The Remittance Processor operator or a "runner" delivers 
extracted and stacked work to the Remittance Processing workstation for processing. 

4. Mail Handling In the Context of Fully-Automated Processing 

It is possible, using the equipment previously identified, to utilize various high- 
speed, Fully-Automated machine configurations to quickly accomplish payment 
processing. The possibilities are limited only by the specific needs of the equipment 
user. To illustrate how mail is processed in many Fully-Automated shops, some of the 
combinations are diagrammed below: 



a.) 



Properly Oriented Items 





) 


MPE 
5.0 












/ 


Misonented I 


ems \ 




Incoming 
Mail 


- 


MPS 
30 


' 


System 
150 




Remittance 
Processor 


V 










\ 


Exceptions 








\ 


REDS 
Model 50 







In this illustration, the mail goes directly from the Post Office to the MPS-30. The 
orientation of the envelope's contents is determined first. Properly oriented items go 
directly to the MPE 5.0; misoriented items go to the System 150, since that machine can 
automatically orient these. Exception items are processed on the Extraction Desks. 
Once properiy sorted and oriented, all items go to the Remittance Processor for further 
processing and posting to the customer's account. Once the contents have been 
removed from the envelope at each point of the extraction process, the envelopes are 
discarded. 

b.) 





/ 


Remittance 
Processor 










/ 






Incoming 
Mail 




MPE 
5.0 


/ 








\ 


r*'"""' 








\ 


REDS 
Model 50 




Remittance 
Processor 



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In this illustration, the mail goes directly from the Post Office to an MPE 5.0 
equipped with a sort module. "Clean" mail (one check, one document, properly 
oriented) is opened, extracted, and sent directly to Remittance Processors. All other 
mail is diverted to Extraction Desks where it is processed prior to going to the 
Remittance Processors. Once the contents have been removed from the envelope at 
each point of the extraction process, the envelopes are discarded. 



c.) 



Clean 



/ 


Remittance 
Processor 










/ 






Incoming 
Mail 


^ 


System 
150 


/ 








\ "'"'" '""' 


r*'""-' 






\ 


REDS 
Model 50 




Remittance 
Processor 



In this illustration, the mail goes directly from the Post Office to a System 150. 
The envelopes are opened and the contents of the "clean" envelopes are extracted, 
oriented, and stacked. "Exception" items are processed on the Extraction Desks. Once 
properly sorted and oriented, all items go to the Remittance Processor for further 
processing and posting to the customer's account. Once the contents have been 
removed from the envelope at each point of the extraction process, the envelopes are 
discarded. 



E. Summary 

Regardless of the payment processing methodology used, relatively little 
emphasis is placed on storing or retrieving the envelopes - this makes sense since 
payees only receive credit when they extract what's /n the envelope; they can't take 
empty envelopes to the bank. Even if the envelope is sorted by unique characteristics, it 
is usually then discarded once the extraction process has been completed. 

A rare exception to this general rule occurs in the Semi-Automated mode, when 
an Extraction Desk is equipped with a stacker module to receive and store empty 
envelopes; the stacker replaces the trash bin normally included with the workstation. 
The handling costs and storage problems associated with using a stacker module make 
this an unusual and unpopular choice for handling the envelopes. In high-speed, Fully- 
Automated environments, the envelope is always discarded immediately after 
successful extraction. 

Current high-speed extraction and incoming sorter technology allows equipment 
to determine if there are special "marks" on an envelope, or to determine the presence 



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of certain characteristics such as a change of address; it does not allow for the storage 
of the actual information itself, e.g. what the new address is. 

This fact is important in light of H.R. 1963, which requires postmarks to become 
the basis for crediting customer accounts when payments are received after the due 
date. Since the postmarks are currently on the envelope, payees will have to alter their 
current payment processing methods to account for envelopes aM their postmarks. It 
will not be enough merely to know that a postmark exists on the envelope; the actual 
date of the postmark will have to be determined. The ramifications of this requirement 
on existing payment processing methodologies are discussed in the Section that follows. 



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IV. Ramifications of H.R. 1963 for Existing Payment 
Processing IVIethodologies 

The language of H.R. 1963 as currently written is very broad. Any business that 
receives payments in any amount would be affected. Every transaction, regardless of 
how simple or complex, and regardless of the method used to process the payment, 
would be impacted by this new accounting process. Payee organizations would have to 
implement new record-keeping procedures. Multiple datastreams would be required to 
address the following questions: 

♦ "When did we receive the payment?" 

♦ "When did we post the payment?" 

♦ "How long did we keep the payment before we posted it?" 

♦ "As of what date do we have to credit the customer?" 

In today's payment processing environment, these are difficult questions to 
answer. The language of H.R. 1963 would, however, force payees to provide accurate 
answers. Finding the answers would also produce wide-ranging ramifications for current 
payment processing techniques: 



A. Manual Processing 

Since the payments are already being processed by hand, H.R. 1963 may have 
fewer clerical ramifications. The envelope can be saved and the postmark can be 
examined on the day the payment is received. The payment can somehow (and the 
"somehow" is very uncertain) be credited as of the postmark date. 

Even in this Manual environment, there are still practical problems created by the 
bill: Do you save all of the late-payment envelopes for future reference? Do you create 
the space necessary to archive them? Do you store an image of the envelopes or an 
image of the postmarks? It would seem that the labor, storage media, and required 
storage space would be too overwhelming for many Manual processing shops, 
especially since these are usually the smaller, lower-volume payees to begin with. 

Further, it is important to note that the inefficiency of Manual processing helped 
fuel the development of automated processing in the first place. At best. Manual 
processing is highly labor-intensive. When compared to Semi-Automated or Fully- 
Automated payment processing, this method yields the lowest productivity and the 
highest cost per transaction. The additional sorting and record-keeping requirements 
imposed by H.R. 1963 would only serve to further decrease productivity, and increase 
labor and processing costs. If this bill drives payees away from more efficient 
automation, the additional payment processing costs would almost certainly be borne by 
consumers. 



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B. Semi-Automated Processing 

In either the Manual or Semi-Automated payment processing modes, the person 
extracting the envelope contents will have to stop long enough to examine the payment 
due date, and, if the envelope is received after this due date, the postmark. While this 
may seem like a minor inconvenience, the impact on productivity could be substantial. 

Consider, for example, the multiple-payment envelopes described earlier. An 
envelope could contain two or more payments, each of which must be accounted for by 
the operator; one could be "on time" based upon the postmark date while another could 
be truly late. Further, since the envelope must be retained to verify proof of mailing, the 
operator would have to somehow devise a method to make this particular envelope's 
audit trail tie into two or more transactions. It is unknown how this could be done, 
exactly, but performing this additional task would further erode productivity. 

1. Impact of H.R. 1963 if the Intent is Only to Determine "On Time" 

Payments for Purposes of Applying Late Fees 

The severity of the productivity loss is largely a function of how the language of 
H.R. 1963 is interpreted. If the intent of this bill is simply not to impose late charges on 
customers who mail their payments "on time," then the workstation operator needs to 
make only one determination: Was the postmark made on or before the due date, or 
after the payment due date? The payments containing a tnjiy late postmark could then 
be processed separately from those that are considered as being "on time." If the 
postmark was made prior to the due date, the payment system would have to be 
modified to adjust any accrued late fee charges. 

Under this scenario, payees may choose to ignore the postmark altogether, and 
simply operate under an arbitrary presumption. For instance, a payee may choose to 
assume that if a payment is received no more than three days after a due date, it was 
mailed "on time." Thus, if a batch of payments is due on the 15th of a month, every 
payment received through the 18th may be presumed to have been mailed by the 15th. 
Payments received after the 18th could be treated as being presumptively late (and the 
payee would take his chances); or, each of those envelopes could be examined in depth 
to determine the actual date of mailing. In either case, the negative impact on 
productivity would be minimized. 

However, very few payees operate with a single cut-off date each month. Since 
there are multiple payment due dates, the approach described in the above paragraph 
would hardly be viable. 

2. Impact of H.R. 1963 if the Intent is to Actually Credit Accounts 

Based Upon the Postmark Date 

If, on the other hand, the language of H.R. 1963 is interpreted to mean that the 
payment is actually credited as of the postmark date, then the operator must make 
several different sorts accounting for each possible day an envelope could have been 
mailed. This is extremely cumbersome. 



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It would not be an exaggeration to suggest that Extraction Desk processing rates 
could drop by at least as much as 30%, from an average of 1 ,300 envelopes per hour to 
an average of no more than 900 envelopes per hour. Obviously, since it w/ould take 
longer to process payments, and since payees would be giving "back credit" for 
payments mailed several days before receipt, the cost per transaction would rise, and 
payees would no doubt be required to pass some of these increased costs along to 
consumers. 

Further, not all Extraction Desks allow the envelope to be examined easily. On 
the Opex Model 50 RED, the envelope is stopped at various points on the transport 
track, and these stoppages allow the envelope to be retrieved and examined, if 
necessary. Not all workstations are designed in this manner. 

Many utilize a continuously flowing conveyor to move the envelopes along. On 
these workstations, the envelope is opened on three sides and the conveyor carries the 
envelope past the operator in a production-line fashion, with the operator extracting the 
contents while the envelope is moving past. While it is possible to stop these machines 
during processing, it would be impractical and highly unproductive to stop them after 
every envelope passes, which in essence would have to be done to comply with this 
interpretation of the bill. 



C. Fully-Automated Processing 

if H.R. 1963 were implemented immediately, the impact would be most severe 
on the 33% of the payment processing market that uses high-speed automated 
extraction equipment. Short of returning to Manual processing, there is no workflow 
available today that allows payments to be accounted for by postmark. As statecf 
earlier, all of today's high-speed extraction equipment discards the envelope 
immediately upon extracting its contents. 

1. Problems with Postmarks 

Even if it were possible to account for envelopes in high-speed environments, 
there are still myriad problems associated with reading a postmark. Postmarks are 
frequently illegible; they're often difficult for humans to read, much less machines. 
Some envelopes are never postmarked - for various reasons, the postmark is skipped 
duhng processing. The postmark on some envelopes is placed directly over the stamp, 
and the stamp comes off during transit; the postmark disappears. Therefore, the 
ramifications of H.R. 1963 to Fully-Automated payment processing reach far more 
deeply than simply saying, "Keep the envelope and read the postmark." 

2. Problems with Return Addresses 

There are those who might be tempted to ask, "The Opex System 150 can be 
equipped with an image camera. Why not use that to capture and store an image of 
past-due envelopes?" 



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As mentioned earlier, it is true that the image camera can perform many 
functions in the context of high-speed extraction, such as examining postnet barcodes 
and determining changes of address. However, simply capturing an image of the 
envelope does not adequately address the requirements of H.R. 1963. In order to 
correlate receipt of envelope vi/ith the crediting of a payment, the envelope must contain 
something that identifies it as being related to a transaction, i.e. something definitive like 
the customer's return address. Therein lies the problem; Millions of envelopes do not 
have a return address on them, and the captured image of them would therefore prove 
nothing. 

3. Problems with Storage 

Another problem involves the sheer number of envelopes and payments affected 
by this bill. As mentioned previously, there are almost one billion payments processed 
each month. High-Speed extraction users can easily process in excess of 40,000 
envelopes per shift. At that pace, incredible amounts of storage space would be 
required to house the actual envelopes. Even if an image of the envelopes or 
postmarks was stored, it would not take long for this to become burdensome. 

4. Presumption of "On Time" 

Similar to Semi-Automated processing, companies may choose to ignore the 
postmark and envelope altogether, and simply operate under an arbitrary presumption 
as described above, i.e. that envelopes are received "on time" unless a certain number 
of days have passed since the due date. Operating under this presumption, and 
assuming the postmark (or some variation thereof) could be automatically read with a 
high-degree of accuracy (a very big assumption), high-speed incoming sorting machines 
could be programmed to presume that postmarks more than three days past the due 
date, for example, are late. These envelopes could be sorted into a special "late pocket" 
on the machine, where they would be examined later and credited according to the 
actual postmark date. 

Rather than go to the expense and trouble of keeping all envelopes, the payee 
might only keep the envelopes that made their way into the "late pocket," since these 
are the ones most likely to become the source of customer disputes. It is equally 
possible, however, that in the event a customer complained to a payee about the date a 
payment was credited, the payee would simply give in, credit the payment as having 
been received "on time," and dismiss any forfeited late charge or penalty as a "cost of 
doing business." Even though there is tremendous potential for abuse under this 
scenario, it may ultimately be cheaper for the payee to handle H.R. 1963 in this manner 
than to store millions of envelopes and attempt to account for every postmark. 



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D. Summary 

It is fairly obvious that none of the current processing environments is particularly 
well-suited to implement H.R. 1963. The Manual and Semi-Automated modes are 
probably best equipped, but even they would find productivity adversely affected. The 
Fully-Automated, high-speed processor is least equipped to deal with this bill. There is 
nothing to suggest that any facet of this legislation could be implemented cheaply or 
easily in today's high-speed shops. 

However, while completely impractical, it is not impossible to develop technology 
capable of implementing H.R. 1963. If given enough time for development, there are 
technological possibilities. The complexity of these possible solutions is directly related 
to how H.R. 1963 is interpreted: If the goal of this legislation is simply to separate late 
payments from "on time" payments using the postmark date (and therefore determine 
which customers should get a late charge and which should not), then the solutions are 
easier. If the intent of this bill is to treat each transaction as being received as of the 
postmark date, the solutions are far more complicated, since each payment has to be 
examined and posted by it own postmark date. 

Possible solutions to meet these challenges are explored in the next Section. 



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V. Possible Solutions for Implementing H.R. 1963 



It must be remembered that any solution proposed here is only hypothetical. 
While some solutions could be implemented more easily than others, all of the 
technological possibilities are wrought with unknown research and development costs. 
Further, while parts of the technology are already available, no package currently exists 
containing all of the elements necessary to make H.R. 1963 a reality. 

Further, even if the technology were readily available, payees would have to 
make substantial changes to their payment processing operations in order to implement 
the required technology. Special equipment would have to be purchased at considerable 
expense, and the Post Office would have to play a major, as yet undetermined, role. 
Under the best of circumstances, it would require a lengthy period of time to implement 
H.R. 1963. 



A. Changes in Envelope Designs 

Much of the technical difficulty in implementing H.R. 1963 concerns the envelope 
itself. As stated earlier, postmarks are often illegible or missing, return addresses are 
non-existent, etc. By changing the envelope design, it might be possible to eliminate 
some of these problems and meet the demands imposed by the bill. 

For example, a new envelope could be developed which is called (for lack of a 
better name), the "Postmark Credit Date Envelope." Customers of payees who wish to 
avail themselves to the benefits of H.R. 1963 would use this envelope; traditional 
envelope styles could still remain for general business use, personal correspondence 
and the like. 

This "Postmark Credit Date Envelope" would have a special window on it similar 
to today's style of windowed envelopes. A special "postmark barcode" could be sprayed 
through the window directly onto a remittance document. The barcode would contain 
essential date information. In addition to this special barcode, the postmark could be 
printed underneath in standard alpha-numeric format, so that everyone could see the 
date without having to interpret the barcode. Since the window would be in a uniform 
location (perhaps to the left of the current stamp area), customers choosing not to use 
the special envelope could still have a postmark; it would be sprayed directly onto the 
envelope in the area where the window would normally be found. 

By affixing the postmark in this manner, the remittance documents and 
payments would arrive with the postmark information (and any other customer 
information included in the barcode) readily available. Machines capable of reading 
barcode could utilize this information. Consumers not choosing this method for sending 
in their payments would simply not be able to claim the benefit of the postmark date, 
since the envelope (and its accompanying postmark) would be discarded as usual 
immediately after extraction. 



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When the payment is processed, the posting date could be based upon the 
postmark barcode. This would require changes in remittance processing machines, and 
these changes would not be trivial. 

Payees could even sort the mail in advance on a high-speed incoming mail 
sorter by date or by a range of dates. By adapting the barcode reading capability of a 
high-speed extractor like the System 150, check and document pairs could be extracted 
automatically and sorted into designated sort bins by date. This would assist payees in 
crediting customer accounts properly. 

This method would work best in Fully-Automated, high-speed environments. 
However, because the postmark would continue to be printed with alpha-numeric 
characters, even Semi-Automated or Manual processing shops could identify the 
postmark date and thus use these envelopes. 

While all of this sounds like a very simple idea, it is far from foolproof. First, 
consumers would need to be sold on the idea of using new envelopes. As indicated by 
the number of people who still refuse to use Zip Codes, this is not an easy task. 
Further, those who did not use the new envelope, regardless of reason, would feel that 
they have been treated unfairly when compared to those who used the envelope. 

Second, envelope manufacturers would have to be convinced to make this new 
envelope; its styling would have to be prescribed by statute, and carefully crafted 
envelope standards would have to be created. It would probably take an edict requiring 
bills to be paid in this manner to make this a reality. 

Third, barcode reading, despite its accuracy, is still not invincible. The quality of 
barcode readers and sprayers would need to improve considerably in order to assure 
payees that their customers are being property credited. Also, a barcoding technique 
would have to be developed by the Post Office to spray the barcode on every envelope 
processed. Every location receiving and postmarking mail, no matter how small, would 
need this barcoding capability. This would be expensive, and it would necessitate a 
long implementation phase. 

Fourth, in this kind of barcode spraying environment, what happens to the 
postage stamp? How is it canceled? Does part of the barcode spray simply cover the 
stamp so that it cannot be used again? Will the stamp go directly on the remittance 
document, thereby potentially interfering with the barcode reading? Also, the addition of 
another window on the envelope may degrade the Post Office's service, since mail 
processing equipment tends to jam more frequently when processing windowed 
envelopes. 

These, and many other questions, require an answer. Certainly, it would not be 
a quick process to develop new envelope standards and equip everyone with the ability 
to spray and read barcodes. It would also be very expensive to design and implement 
the equipment required to make this process feasible. 



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B. Change the Method of Affixing a Postmaric 

The idea discussed in "A" above really involves changing the concept of the 
traditional postmark. Using barcode to replace or supplement the current postmark is 
certainly one of the more intriguing ways to address H.R. 1963. However, using the 
current postmark by itself to determine mailing dates is impractical due to poor quality 
and the other problems touched on previously. In light of this, it may make more sense 
to change the postmark itself. 

How would this be done? No one knows, for certain, and most of the ideas 
seem almost like Buck Rodgers in concept. 

One idea is to punch some sort of identifying mark through the envelope. It 
could be a series of pinholes punched through the envelope and remittance document, 
or it could be a pre-defined series of holes punched only into the envelope. Depending 
upon the sequence, the holes, or "punches." could be read by a special machine which 
would interpret the date and sort accordingly. This method would require everyone to 
implement automated equipment to read the "punches." The "punches" would replace 
the traditional postmark. 

Another idea involves using a laser. While at first blush this may seem 
somewhat absurd, more and more applications are being developed for the laser. A 
laser could put pinholes into envelopes and documents for later reading as described 
above. Or, a laser could somehow bum special date and account information into an 
envelope or document designed for this purpose. It is unknown exactly how a laser 
could be used, but in exploring the realm of the "what if s," this concept cannot be left 
out. This laser-generated "postmark" would replace the mark as we currently know it. 

Again, these concepts are on the outside edge of possibilities. However, since 
the language of H.R. 1963 is so broad, and since its impact on traditional payment 
processing methods is so broad, one cannot dismiss radical ideas to implement the 
directives of this bill. 



C. Change the Method of Sorting Envelopes 

The ability of high-speed incoming mail sorters to identify and separate 
envelopes by specific characteristics could be utilized by payees as they seek to meet 
the posting requirements of H.R. 1963. Again using barcode, envelopes could be sorted 
by a postmark date sprayed directly on the envelope. This concept is similar to that 
discussed in "A" above, but it would not require the adoption of new envelopes. 
However, the same problems discussed above would apply, i.e. the ovenwhelming cost 
and logistical burden placed on the Post Office and payees to implement this system. 

Rather than spraying barcodes directly on the remittance document, the 
barcodes could be sprayed on the envelopes themselves. The envelopes could then be 
sorted by date on high-speed incoming mail sorters, such as the MPS-30. This would 
still be somewhat impractical given the wide range of dates on which an envelope could 



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possibly be sent. Perhaps the barcode information could be used in a simpler fashion, 
i.e. determine by barcode whether an envelope is "late" or "not late" rather than 
determine the specific postmark date on the envelope. Then, a payee could process by 
hand all of those envelopes deemed to be "late," and properly credit them by postmark. 

Implementing this system would not be easy, and it would take its toll on 
productivity and cost-efficiency. The technology to perform this type of sorting does not 
currently exist, and it would take time to develop the proper sorting techniques. It would 
also be expensive, both for the Post Office and for those requiring the sorting 
equipment. 

In the end, barcoding may not prove to be the answer at all. Encrypting the 
postmark in some (as yet undeveloped) machine-readable fashion other than barcode 
may work better. Envelopes would be sorted using this encrypted postmark. 

But regardless of whether or not barcode or some other encryption device is 
used, the entire payment processing system would have to be automated. This could 
only be done at tremendous cost to the payment processing industry. 



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VI. Conclusions 



A. Understanding Payees 

Because of Opex's position in the mailrooms of many of America's largest 
payees, we see firsthand how payees handle the millions and millions of payments they 
receive each month. It is safe to say that these payees work as quickly as possible to 
process their customers' payments. After all, it is in their best interests to open the 
envelopes and deposit the payments. Time is indeed money, and every day lost means 
a considerable amount of money lost by payees - and this is not money that can be 
replaced simply by collecting late fees. 

There is a perception on the part of many that payees conspire to hold their 
customers' payments until they are late, just so they can collect these late fees. 
However, our experience shows just the opposite. The ill-will and increased labor costs 
associated with collecting such fees in large numbers would threaten the existence of 
companies who made this a common practice. 

Further, consider how many advertising dollars are spent today attracting and 
retaining creditworthy consumers. By tailoring special credit card offers, for example, 
companies attempt to gain the loyalty of new customers - customers with whom they 
would like to establish a long-term relationship. Holding payments just to collect 
additional interest or late fees directly betrays a company's efforts to increase its 
customer base, and in fact would drive its customers straight to the competition. 



B. Understanding Consumers 

Almost every consumer has been faced with the situation where they mail a 
payment four days before due, only to have it received two weeks after the deadline. 
This is certainly a problem, but is the solution to make payees responsible for correcting 
something over which they have no control? If the payees could manipulate postal 
service and deliveries, that would be one thing; but the reality is that payees are at the 
mercy of the United States Postal Service. 

Forcing payees to pretend they have had money they never really received (i.e. 
pretending they had the payment on the day of the postmark) does nothing to improve 
the quality of mail service consumers have a right to expect. There is no incentive for 
the Post Office to improve its procedures. There is no penalty imposed on them for not 
delivering the payment for several days; the cost is borne entirely by the payees and 
their customers. 

Service by the Post Office could actually worsen under this bill. Consumers who 
previously implored the Post Office to deliver "on time" could now be silent on the issue, 
since, as long as the envelope was postmarked "on time," it wouldn't matter when the 
payment was actually delivered. In fact, they would be better off with a delayed delivery, 



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since that would keep the money allocated for the payment in their bank accounts 
longer. 

Many consumers mail their payment the moment a bill is received. Many wait a 
week or so, depending on individual paydays. Some wait until the very last minute to 
make the payment. H.R. 1963 would encourage everyone to wait on mailing their 
payment until the day it is due. In fact, since the language of H.R. 1963 seems to 
suggest that the benefit of the postmark date is only realized if the payment is received 
after it is due, there is actually an incentive to wait until the due date to make the 
payment. This could create dramatic peaks and valleys in mail volume that would tend 
to slow service. 



C. Understanding the IRS 

The IRS is an agency that currently credits payments as being "on time" as long 
as the postmark falls on or before a certain date (April 15th). Opex is not in a position to 
testify on how the IRS conducts its business; testimony in this regard is best solicited 
directly from the IRS. However, a general comparison of IRS processing techniques to 
other businesses in the payment industry can be made, and it is quite enlightening. 

The IRS has a concentrated workload beginning in January, peaking in April, 
and then tapering off again. According to the December, 1995 Checks and Checking 
Industry Newsletter, the IRS processes fifty million 1040's once a year. While this is 
certainly a lot, it must be remembered that the payment industry processes a 
billion payments every month. 

For the most part, the IRS processes its 1040's in a Semi-Automated fashion on 
single station extractors. This makes sense since 1040's, unlike many other remittance 
documents, are unique forms requiring, in many instances, special handling and special 
examination. This workflow is one step removed from manual extraction, and is 
relatively labor intensive. 

As noted many times previously, many high-volume payment processors use 
automated machines which extract envelopes at the rate of 8,000+ per hour, reducing 
the amount of labor used to complete the job by a factor of 8 to 1. The machines 
separate the envelopes from their contents, and discard the envelopes. To make these 
payees operate in the same manner as the IRS would be equivalent to making these 
payees take at least 8 steps backwards. Payment processing efficiency would 
decrease, while labor and the cost per transaction would certainly increase. This would 
not benefit consumers, and the corresponding cost to payees could ultimately force 
some out of business. 



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D. Understanding Opex 

A bill such as H.R. 1963 could benefit a company like Opex. Opex manufactures 
equipment that stands at the front line in payment processing. Further, Opex has much 
of the technical expertise that would ultimately be required to implement the provisions 
of this bill. Specialized mail sorting, barcode reading, and extracting equipment would 
be in immediate demand if this bill passes. 

But Opex, or any other company like Opex, could only meet this demand if the 
technology were developed and available for immediate use. It is not, and it is not trivial 
to develop it. 

At best, we estimate that to properly develop the technological capabilities 
required to make this bill a cost-efficient reality, it might take between 2-5 years; and 
this is only if all other research and development efforts were halted in favor of 
developing this technology. This is not something that we, or any other company like us 
of which we are aware, could afford to do. 

Further, while our internal efforts may take 2 - 5 years, this does not take into 
account other outside events that would have to occur in order for this bill to work. As 
mentioned, the Post Office would have to change its mail handling techniques 
dramatically. It would have to develop, buy, and implement new equipment at every 
postal site in the country. New standards would have to be developed. This would take 
considerable time and would cost an enormous amount of money. 

Payees would either have to automate with new, expensive capital equipment, or 
be forced to discard their current high-speed (and extremely efficient) methodologies in 
favor of more manual processing. This would take time and could cost millions or even 
billions of dollars. Consumers would pay the price either in less efficiency or higher 
costs. 

At present we do not see a reasonable, easy, cheap or efficient way t^ 
implement H.R. 1963. In today's world we can never say that it would be impossible to 
develop the requisite technology. However, in our opinion, spending considerable time 
and engineering resources to make this bill feasible is not the best way to create the 
gains desired by consumers. 

Further, we can say with certainty that the need for a bill like H.R. 1963 (if indeed 
there is even a need) is prohibitively outweighed by the cost to those involved in terms 
of the time, money, and resources required to accomplish its stated objectives. In the 
long run, consumers would probably not realize the benefit they expected, but payees 
would realize increased costs and decreased efficiency in payment processing. 



28 



179 



Written Response to Questions Regarding H R. 1963: 

Asked by John M. McHugh, Chairman, Postal Service Subcommittee 

Committee on Government Reform and Oversight 



1 . Question: Do you feel that the type of technology mentioned by ElectroCom in their testimony and 
being developed at the Postal Service to allow a customer to know when a payment is in the mail stream 
and on its way, would be beneficial to your financial and business customers? 

I. Response: My knowledge of the system under development at the Postal Service is limited, especially 
as it relates to its background and origin. With that in mind, I shall give my response. In an effort to expand 
my base of information, I consulted with several major credit card operations as well as a major utility 
company expert. In short, they see no reason to spend money to install the proposed system from the Post 
Office. A summary of some of the reasons may be helpfiil: 

A. The operations center that prepares and stuffs the invoices/statements would be required to 
print the return envelope with a code based on information contained on the customer document. 
Therefore, a scanner that reads the document while it is on the enclosing machine would have to be in sync 
with a printer that would print or spray that customer's reply envelope. This would require all bill stuffmg 
machines to be upgraded through replacement or retrofit. I am not an expert on this aspect of the industry 
and do not know if such equipment exists and if it does, at what cost. 

B. The current payment systems would require alterations in hardware, work flow, and software to 
integrate the new Postal information data. If the primary thrust of the Postal data was to allow the 
customer to reduce late fees, account for late payment statements, or guard against unwarranted 
disconnection of power or service, then the modified system would have to place those accounts into a 
suspense category pending receipt of the actual payment. The suspension of company activity (collection, 
service shut-off, etc.) would have to be limited in duration, say 4 or 5 days, after which the normal policies 
of the company would be invoked. Consider the limitations of the Postal notification: 

(1) The envelope may not contain a check; 

(2) The actual check amount is unknown until it is received and applied to the account;' 

(3) The envelope may not belong to the payer; and/or 

(4) The envelope may not be the current or most recent return envelope and therefore 
send erroneous data to the processor. 



2. Question: You discuss on page 23 of your prepared statement the idea of designing an entirely new 
envelope to which a date could be sprayed onto the payment coupon and caution that this change "would 
not be trivial." Can you give us an idea of what type of equipment retrofitting and cost are involved with 
this possible approach? 

2. Response: In addition to responding to the type of equipment that would require retrofitting, I will 
include the advantages and disadvantages with size of customer taken into account. Our idea of modifying 
the envelope with an open window through which a barcoded date and Julian date could be sprayed on the 
document was similar to an idea advanced at the hearings by ElectroCom. I am not prepared to provide an 
actual estimate of equipment costs for this approach and I would hate to speculate. Preparing an estimate 
would involve an investment of staff hours that I have not yet committed to this project. It is hoped that the 
discussion that follows will be beneficial in directing the need for further study. 



180 



Response to Letter of John M. McHugh April 23, 1996 



A. Factors favoring this approach: 

(1) Both machine-readable and human-readable dates are on the document and not the 
envelope. This conforms more closely to today's payment systems that discard the envelope in the first 
step of the paper flow process. It is also more compatible with the feed and transport design capabilities of 
the various processing systems in use today than other systems proposed at the hearing. 

B. Factors arguing against this approach: 

(1) The USPS would have to invest in replacing or retrofitting all of the AFCS to 
incorporate the equipment designed to print the new postmark. As pointed out in the ElectroCom 
testimony, "many - but not all - remittance envelopes'" pass through the AFCS, which therefore results 
in a less than 100% solution for complying with HR 1963. In the exception identified here, compliance 
requirements would thus have to be relaxed in order to meet the guidelines of HR 1963. 

(2) The design of the modified AFCS machine would require, among other things, the 
ability to print on the document through the window to machine-readable specifications without snagging 
or tearing the window through which the postmark is located -- and do all of this while still canceling the 
stamp to validate its use. To the extent that the normal barcode print quality and read rates are less than 
100%, the requirements of the bill would need to be relaxed to take into account these exceptions. 

(3) Systems at the customer's operations center would require modification to provide for 
an interest or late fee credit. Smaller and less sophisticated systems that are less expensive and designed for 
the smaller user may not be as flexible in incorporating the hardware/sofhvare required for this task. Those 
customers may be forced to completely replace their systems or discontinue using the USPS as a carrier for 
payment delivery. 

Large users would be faced with designing a system that would meet the bill's 
requirements while at the same time minimizing the cost impact. On the surface, it would seem simple to 
implement HR 1963. However, when processors receive payments from their customers, they would have 
to pause and verify whether or not the customer is due an interest credit based on the date the payment was 
mailed, prior to depositing the check in the bank. Large users have very complex systems, and while some 
have similarities, few (if any) are actually alike. 



Therefore, it is a complex task to respond to the question of how much it would cost to implement 
this system. It is not simply a matter of calculating the added time and expense involved in added key 
strokes or additional sort passes. For illustration purposes, I have hypothesized a solution below that will, 
in broad brush terms, outline some of the larger areas of impact: 

One method would include printing a machine-readable code on the invoice/statement that would 
be viewable through the return envelope's window. The outgoing document would have to be designed to 
accommodate the printing of the code and the print programs would have to be revised accordingly. The 
payment would be returned in an envelope supplied by the customer containing a special window for the 
new cancellation barcode. With the aid of high speed sorters, the envelopes would be grouped into one of 
three payment classifications: 

(a) Not past due; 

(b) Past due, but "on time" based on postmark; or 

(c) Past due and late based on the postmark date 



Under this scheme, the three sort classifications would be superimposed on top of current 
incoming sort plans (if any are used), thereby slowing mail flow, increasing handling costs, and making the 



181 



Response to Letter of John M. McHugh April 23, 1996 

use of the postal system less attractive for delivering payments. The customer would be faced with 
investing in high speed sorting systems. 

The next major decision would involve modifying the payment system to properly process the 
three types of payment mail. Several approaches exist and the best solution would be influenced by the 
configuration currently in use. The system may be modified to run three different jobs, one for each type of 
payment classification as described above. 

The next major decision would require the establishment of a policy for dealing with customer 
claims of "on time" payment. This policy will help drive the decision of how best to retain documents, as 
well as the associated retrieval system. 

The question of how best to implement the changes will require major users to assign systems 
analysts to develop the proper solution. The entire system would have to be uniquely designed, beginning 
with the generation of the invoice/statement through each step of the process of payment application, 
record storage and retrieval. Purchasing, programmers and policy-makers will have significant 
assignments in the next phases of solution development. 



The penetration of the changes in the systems are deep and complex. I hope that I have supplied 
enough detail to provide a sufficient level of understanding without unnecessarily complicating my 
response. 



3. Question: To what extent, if at all, do you see the credit industry moving away from hard copy 
payments and moving to electronic payments? 

3. Response: That's an important question and one that we study on an ongoing basis because our core 
business is directly affected. In recent years, we have seen the credit industry increase its use of direct-mail 
marketing. While electronic payments have increased, they have not kept pace with the overall base 
percentage of customers who pay by mail, especially in the credit industry. The marketing and promotional 
opportunities associated with sending a customer's invoice/statement are reason enough for corporate 
marketing departments to keep sending mailings to their customers. On the other end of the payment 
processing flow is the Federal Reserve, which has a desire to move to electronic check presentment. 

In my own judgment, the next change to the payment system that consumers will accept involves 
truncation of checks. The largest threat to the current system falls into two areas: 1.) The cost of services 
purchased fi-om the USPS; and 2.) The quality of service from the USPS, including delivery time and 
accuracy of mail receipts. It is my opinion that these two areas should be the focus of attention and 
improvement by the USPS. I am concerned because there is a direct correlation between the success of the 
USPS and the long-term success and viability of our business. 



4. Question: Based on your experience in this area, to what degree has technology changed the methods 
by which payments are processed compared with ten years ago and what technological initiatives do you 
see that will be the next transitory step in the processing of bill payments? 

4. Response: In the area of mail extraction, the past decade has seen great changes in automating the 
extraction of "clean single" payment mail. In large volume payment shops, we have improved the quality 
of work performance as well as the work environment by reducing manual intervention. Also, mail 
processing workstations now incorporate in their designs several "user friendly" factors. Processing speeds 
have increased in the payment processing systems through the use of faster computer processors. The use 
of image processing has produced a major shift in the processing methods of large volume payment shops. 



182 



Response to Letter of John M. McHugh April 23, 1996 



As stated in my response to question # 3, 1 see the next major shift to be towards a system that still 
starts with the customer writing a check and mailing it in along with the invoice. The actual check will not 
be returned and the transaction will become electronic at the point of fu-st deposit. 1 expect that this shift 
will evolve over the next decade. 



4.A. Question: Without giving away any proprietary information what are some of the ideas 
your research and development departments are working on that will impact this part of your business? 

4. A. Response: We recently created a solution for several of our customers, and we are 
confident this solution will be helpful and valuable to non-customers, as well. It is a low cost addition to 
our existing high speed sorter. We set up a barcode that is non-standard and therefore not recognized as 
valid in the postal system. The customer can create their own scheme for imbedding useful information on 
the return document as a barcode. Upon receipt, the mail can be sorted based on customers' needs as 
defmed by the barcode. This may displace some of the benefits that might be realized fi-om the USPS' 
developmental work. 

We have other projects that may be of interest to you, but at the present time these are proprietary. 
We will be able to discuss some of them in the next 3 to 4 months. 



1 trust this information, and these responses, are helpful to you as you continue to evaluate the 
ramifications of HR 1963. Thank you for the opportunity to answer these questions. 



183 

Mr. McHuGH. Thank you, Mr. Stevens. 

Last, Mr. Tod Mongan of BancTec? 

Mr. Mongan. BancTec, yes. 

Mr. McHuGH. BancTec. We appreciate your being here, sir. 

Mr. Mongan. Thank you, Mr. Chairman. On behalf of myself and 
Mr. Klier, who accompanied me here today, we thank the Chair for 
allowing us to testify. 

I also ask that the testimony that will be submitted in written 
form be admitted. 

Mr. McHuGH. Without objection, so ordered. 

Mr. Mongan. BancTec is a leading provider of hardware, soft- 
ware, and systems solutions for pa3mient processing applications. 
We are a Dallas-based company, with approximately $500 million 
in annual revenues. We have been specialists in check and pay- 
ment processing operations for over 25 years. 

Banks, telephone companies, utilities, retailers, credit card proc- 
essors, insurance companies, government agencies, and companies 
in other industries use our products to efficiently read relevant in- 
formation from checks and payment stubs. We encode and sort pay- 
ment checks, and forward updated information to their host com- 
puters. 

Today, most companies' payment processing operations are high- 
ly automated, utilizing advanced optical character recognition tech- 
nology to read and process their customers' payments. Some com- 
panies with lower payment volume use automated work stations at 
which operators manually feed the payment stubs and checks into 
the work station and key the payment amount for each transaction. 

Many higher volume processors have further automated their op- 
erations by using high-speed document transports, many of which 
include image-based processing systems. These image-based sys- 
tems create electronic images of paper documents, enabling compa- 
nies to do much of their processing work by viewing electronic doc- 
ument images on computer screens rather than by handling the ac- 
tual paper documents. 

We offer both types of systems, but the trend in the industry for 
the past few years has clearly been toward use of image processing 
to maximize processing efficiency and reduce document storage and 
handling costs. 

Whether a company uses lower-speed work stations, work station 
oriented technology, or higher speed image-based technology, there 
is one clear goal, to get all of the company's customers' pa5mients 
posted and deposited as soon as possible. This is the measure of 
their success and is the reason why companies spend millions of 
dollars on automated equipment with companies like BancTec. 

The automated systems developed, installed, and maintained by 
BancTec enable companies to efficiently process several hundred 
thousand payment transactions per day. I brought a video that 
shows a t3T)ical day's processing operation at a large telephone 
company processing center. With your permission, I would like to 
show about a 5-minute tape. 

Mr. McHuGH. Please. 

Mr, Mongan. Before we start that, let me just say one thing. The 
first part of the tape shows what we are calling a "work station 
process," where there is an operator sitting at the station, feeding 



184 

documents manually and keying the information. The other is the 
very high-speed processing system. 

Mr. McHuGH. Maybe if we could dim the lights, it may improve 
our mood, if nothing else. A little volume. 

[Videotape shown.] 

Mr. MONGAN. As you can see from the video, payment processing 
today is a very fast-paced, highly efficient operation. The key for 
the processors is really to get the payments posted to the accounts 
and deposit the checks in the bank. 

If H.R. 1963 is passed in its current form, this highly efficient 
method of processing would no longer be used — or could no longer 
be used. Under the proposed legislation, the payment due date can- 
not be retrieved from the scan line in the payment stub, as it is 
today. The payment due date would have to be retrieved from the 
postmark date on the payment envelope, resulting in major prob- 
lems for document processors, system vendors, and consumers. 

As we see it, the legislation gives rise to two problems: the prob- 
lem of matching postmark dates with specific payment trans- 
actions. Today envelopes are not part of the information retrieval 
process. After document extraction, payment envelopes are candled 
to ensure that all the contents are removed, and recycled or de- 
stroyed. They don't remain with the process. 

Under the proposed legislation, postmark information would 
have to be manually keyed in by the operators working with the 
actual envelope in a work station format, as shown on the tape, or 
payment processing would revert to being a much slower, more 
manually administered process, increasing the time span between 
receipt and final processing. 

The second problem would be automatically reading the post- 
mark date. Using today's recognition technology, BancTec's pay- 
ment systems could not successfully read and interpret the date in- 
formation on stamped postmarks. Under the proposed legislation, 
in order to get the postmark date into the data stream, human op- 
erators would have to key in the postmark date as each envelope 
is opened, or a high-speed payment processing system would have 
to use some kind of character recognition or bar code technology to 
automatically read the postmark date. 

Using human operators to key in information from postmarks for 
each payment, rather than using a machine to read the information 
in the stub document scan line, will result in significantly in- 
creased error rates and substantially increased labor costs. This 
could lead to problems with late payments due to data errors or 
could lead to lugher product production prices; again, defeating the 
bill's purpose. 

Adding bar code to each envelope would alleviate the problem 
with reading smeared or illegible postmarks and keystroke errors, 
but it would not solve the problem of how to get the bar code post- 
mark date information into the data stream and match it with the 
account number, amount due, and other information from the 
check and stub. 

BancTec sees a couple of possible solutions. The first solution 
would involve the use of human operators to presort all the enve- 
lopes by postmark date prior to the beginning of the payment proc- 
essing operation. The limitation we see in that is, envelope 



185 

presorting would be labor-intensive and, again, would considerably 
slow down the process. This method would also require a large 
number of production runs, some with a relatively small amount of 
documents, further reducing the efficiency. 

This solution would defeat the purpose of the bill by lengthening 
the payment processing time and increasing labor and other proc- 
essing costs, which would be passed on to the customers. There 
would still be opportunities for errors when human operators fail 
to put pajrments in the proper postmark date batches. 

The second possible solution would be to use the pajonent proc- 
essing operator and/or a system to automatically read the postmark 
date from the envelope. The limitations with that, as BancTec sees 
them, are keying at the work station would again slow down the 
operation considerably. 

Operators would have to handle and view an entirely new docu- 
ment, a presplit envelope. They would have to find the postmark 
date, try again to determine exactly what it is, key in the date 
twice, to ensure accuracy, before disposing of the envelope. They 
would then look at the check amount and key in the amount paid 
twice, again, to ensure accuracy. That would double the document 
handling requirements and the amount of data to be keyed in every 
transaction. 

In a high-speed environment, the question is, can current tech- 
nology be used to read the postmark stamps? The answer to that 
question is no; the technology does not now exist. Postmarks, in ad- 
dition to not containing a standard OCR-recognizable print font, 
are often smeared, partially printed, on the back of the envelope, 
or at times not present at all. 

Automated systems would have to be added to the postal facili- 
ties that could add bar codes, put the postmark date on envelopes 
prior to turning envelopes over to payment processors. The addition 
of bar coding requirements at the postal facilities would add sub- 
stantial cost to the mail/postal process. If the bar code or other 
readers were placed on mail opening equipment, the question 
would arise as to how to get the postmark date information from 
the mail opening system to the pajnnent processing system. 

BancTec does not manufacture or market mail opening devices, 
nor do mail opening device vendors currently manufacture payment 
processing equipment. Most companies' payment processing equip- 
ment purchase decisions are independent from their mail opening 
equipment purchase decisions. Today, there is no method of read- 
ing postmark date information from a mail opening device, passing 
that information to a payment processing device, and matching the 
postmark date information to the specific payment stubs and 
checks. 

In order to provide a document processing system with today's 
functionality, speed and ease of use, which could read and transmit 
postmark date or bar code information, systems developers like 
BancTec would have to develop new document transport mecha- 
nisms that could process envelopes at high speeds, read the bar 
code information, which would be attached to the envelope at the 
post office, and place the interpreted postmark date into that data 
stream. This would require a multimillion-dollar investment by 



186 

BancTec, or other companies, in the development and testing of 
new hardware and software. 

In summary, vendors and companies that send and process bills 
have worked together over the past decade to develop a highly effi- 
cient method of processing payments. Among our customers, a 
great majority of pa3nTients are processed the same day they are re- 
ceived from the postal facilities. In some cases, volume surges, late 
postal deliveries, equipment problems could cause pajonent proc- 
essing to be delayed by a day or more. 

The task to develop new systems that would enable document 
processors to transport and read information from envelopes and 
efficiently place that information into a data stream would require 
significant development expenditures. 

Since much of the industry data that we have seen states that 
an increasing percentage of payments will be made electronically in 
the years ahead, we would have to seriously consider the viability 
of entering into such a development project. 

The only option would be for companies to revert back to a much 
more labor-intensive form of payment processing, thereby increas- 
ing cost, possibly error rates, and reducing the efficiency of the 
process. 

We thank you for the opportunity to testify here and welcome 
any questions. 

[The prepared statement of Mr. Mongan follows:] 



187 

Prepared Statement of Tod Mongan, Senior Vice President and General 
Counsel, BancTec, Inc. 

Statement For The Record 

BancTec, Inc. on HR 1963, the Postmark Prompt Payment Act of 1995 

Submitted to the Subcommittee On The Postal Service Of The Committee On 
Governmental Reform and Oversight 

February 28, 1996 

BancTec, Inc. thanks the Subcommittee on The Postal Service for the opportunity to submit a 
statement for the record on H.R. 1963, the "Postmark Prompt Payment Act". 

BancTec is a leading provider of hardware, software and systems solutions for payment 
processing applications. We are a Dallas-based company with approximately $500 million in 
annual revenues. We have been specialists in check and payment processing operations for 
over 25 years. Banks, telephone companies, utilities, retailers, credit card processors, 
insurance companies, government agencies and companies in other industries use our 
products to efficiently read relevant information from checks and payment stubs, encode and 
sort payment checks, and forward updated payment information to their host computer. 

Today, most companies' payment processing operations are highly automated, utilizing 
advanced optical character recognition technology to read and process their customers' 
payments. Some companies with lower payment volumes use automated workstations, at 
which operators manually feed the payment stubs and checks into the workstation and key in 
the payment amount for each transaction. Many higher volume payment processors have 
further automated their operations by using high speed document transports, many of which 
include image-based processing systems. These image-based systems create electronic 
images of paper documents, enabling companies to do much of their processing work by 
viewing electronic document images on computer screens rather than by handling the actual 
paper documents. We offer both types of systems, but the trend in the industry for the past 
few years has clearly been toward the use of image processing to maximize processing 
efficiency and reduce document storage and handling costs. Whether a company uses lower 
speed workstation-oriented technology or higher speed image based technology, there is one 
clear goal - to get all of the company's customer payments posted and deposited as soon as 
possible. This is the measure of success in most payment processing operations centers and 
is the reason companies like General Telephone, Sears, Citibank, AT&T Universal Card, 
USAA Insurance, Pacific Gas & Electric, MBNA, General Electric Capital Corporation, and 
Ameritech spend millions of dollars on automated equipment with companies like BancTec. 
The automated systems developed, installed and maintained by BancTec enable companies 
to efficiently process several hundred thousand payment transactions per day. I have brought 
a video that shows a typical day's processing operations at a large telephone payment 
processing center. With your permission, I would like to now show about five minutes of 
footage from the video. 

As you can see from the video, payment processihg today is a fast-paced, highly efficient 
operation. One key point that needs to be restated is that currently the payment due date is 
embedded in the "scan line" of a payment stub. This scan line is encoded in a special 
standardized font called OCR-A that is easily read by automated systems. With current 



188 



technology, automated payment processing systems can read due dates, account information 
and related data far more efficiently and accurately than humans can. In a typical transaction, 
an envelope is opened and documents extracted by a separate mail opening device, such as 
the Opex 100 model shown in the video. The envelope is then separated from the check and 
payment stub. After opening and extraction, the stub and check are sent together - along with 
thousands of other document pairs - down the document transport device, which 
automatically reads the scan line to determine the payment due date, the full dollar amount 
due, the minimum dollar amount due, the customer account number and other essential 
information. The system can either scan the handwritten amount on the customer's check to 
determine the amount paid - or can present electronic images of the check to operators who 
view the image on a PC and immediately key in the amount paid. When all of the information 
is collected and balanced, the transaction is considered completed, the data is forwarded to 
the payment processor's host computer, and the customer's account is updated. The check 
payment amount is then encoded with magnetic ink at the bottom right hand side of the check, 
and all checks are sorted and readied for bank deposit. This typical payment transaction 
would be included in a batch of 200-300 documents that would take less than an hour to scan, 
balance and process. If processed by itself on a high speed system, the payment, consisting 
of a stub and check, could be totally processed in less than one minute. 

If HR 1963 is passed in its current form, this highly efficient method of processing could no 
longer be used. Under the proposed legislation, the payment due date could not be retrieved 
from the scan line in the payment stub as it is today. The payment due date would have to be 
retrieved from the postmark date on the payment envelope, resulting in major problems for 
document processors, systems vendors, and consumers. The legislation gives rise to two 
problems: 



o 1. Problems with matching postmarks with specific payment transactions. Today, after 
document extraction, payment envelopes are "candled" to ensure that all all contents were 
extracted and are then recycled or destroyed. Envelopes are not now part of the information 
retrieval process in payment processings Under this proposed legislation, postmark 
information would have to be manually keyed in by operators working with the actual paper 
envelope. Payment processing would revert to being a much slower, more manually 
administered process, increasing.the time span between receipt and final processing - 
defeating the purpose of the bill. 

o 2. Problems with automatically reading postmark data. Using today's recognition 
technology, BancTec's payment processing systems could not successfully read and interpret 
the date information from stamped postmarks. As you know, postmarks are often smeared, 
illegible, double stamped, stamped on the back of the envelope, or nonexistent. Also, the 
color red used on some postmarks is one of the most difficult colors for imaging systems to 
read and interpret. 

Under the proposed legislation, in order to get the postmark date in the data stream, human 
operators would have to key in the postmark date as each individual envelope was opened - 
or a high-speed payment processing system would have to use some type of character 
recognition or bar code technology to automatically read the postmark date. Using human 
operators to key in information from postmarks for each payment rather than using a machine 
to read the information in the stub document scan line will result in significantly increased 



189 



error rates and substantially increased labor costs . This could lead to problems with late 
payments due to data entry errors and could lead to higher product prices - again defeating 
the purpose of the bill. 

Adding bar coding to each envelope would alleviate the problem with reading smeared and 
illegible postmarks and keystroke errors, but it would not solve the problem of how to get the 
bar coded post mark date information into the data stream and match it with the account 
number, amount due and other information from the check and stub. 



POSSIBLE SOLUTIONS: 

1. Use human operators to presort all envelopes by postmark date prior to beginning 
the payment processing operation. 

Each group of documents would be presorted by postmark date and processed as a separate 
batch. The postmark date information would be inserted into the data record during the 
payment processing cycle. 

Limitations: 

Envelope presorting would be labor intensive and again, would considerably slow down the 
process. This method would also require a large number of production runs, some with a 
relatively small amount of documents, further reducing efficiency. This solution would defeat 
the purpose of the bill by lengthening payment processing time and by increasing labor and 
other processing costs - which could be passed on to customers. There would still be 
opportunities for errors when human operators fail to put payments in the proper "postmark 
date" batches. 

2. Use the payment processing operator and/or system to automatically read the 
postmark date from the envelope. 

This could theoretically be done in one of two ways. In a lower speed workstation 
environment, a human operator could view each envelope and key in the postmark date as he 
or she keys in the payment amount. In a high speed environment, the system could attempt 
to read and interpret the postmark date directly from the envelope. 

Limitations: 

Keying at the workstation would again slow down the operation considerably. Operators 
would have to handle and view an entirely new document, a pre-split envelope. They would 
then have to find the postmark date, try to determine exactly what it is, and key in the date - 
twice - to ensure accuracy before disposing of the envelope. They would then look at the 
check amount and key in the paid amount - twice - to ensure accuracy. That would double 
document handling requirements and the amount of data to be keyed in on every transaction. 

In a high speed environment, the immediate question is "can current technology be used to 
read postmark stamps". The answer to that question is no, the technology does not now 
exist. Postmarks, in addition to not containing a standard OCR recognizable print font, are 
often smeared, partially printed, on the back of an envelope, or at times, not present at all. 
Automated systems would have to be added at Postal Facilities that could add bar codes 



190 



with the postmark date on all envelopes prior to turning the envelopes over to the payment 
processor. The addition of bar coding requirements at the Postal Facilities would add 
substantial costs to the mail postal process. If bar code or other readers were placed on mail 
opening equipment, the question would arise as to how to get the postmark date information 
from the mail opening system to the payment processing system. BancTec does not 
manufacture or market mail opening devices nor do mail opening device vendors currently 
manufacture payment processing equipment. Most companies' payment processing 
equipment purchase decisions are independent from their mail opening equipment purchase 
decision. Today, there is no method of reading postmark date information from a mail opening 
device, passing that information to a payment processing device and matching postmark date 
information to specific payment stubs and checks. 

Requirements For New Technolog y 

In order to provide a document processing system with today's functionality, speed and ease 
of use which could read and transmit postmark stamp or bar code information, systems 
developers like BancTec would have to develop new document transport mechanisms that 
could process envelopes at high speeds, read the bar coded information (which would be 
attached to the envelope at the post office), and place the interpreted postmark dale into data 
stream. 

This would require a multi-million dollar investment by our Company in the development and 
testing of new hardware and software. The development schedule would span several years. 
During the next decade a far greater percentage of payments will be made electronically - 
through PCs, across the internet, thorough direct credit, etc. Vendors like BancTec will have 
very little incentive to enter into multi-million dollar development projects on totally new 
transport technologies when the requirements for processing paper documents will likely 
decline in the near future. 

SUMMARY: 

Vendors and companies that send and process bills have worked together over the past 
decade to develop highly efficient methods of processing payments. Among our customers, a 
great majority of payments are processed the same day they are received from the Postal 
facility. In some cases, volume surges, late postal deliveries, or equipment problems could 
cause payment processing to be delayed by one day. 

The task to develop new systems that would enable document processors to transport and 
read information from envelopes and efficiently place that information into a data stream 
would require significant development expenditures. Since much of the industry data that 
we've seen states that an increasing percentage of payments will be made electronically in 
the years ahead, we would have to seriously consider the viability of entering into such a 
development project. The only option would be for companies to revert back to a much more 
labor intensive form of payment processing, thereby increasing costs and error rales and 
reducing processing efficiency. 



191 



^ 



BANCTEC 



4435 Spring Vallsy Road 
Dallas. TX 75244 

(214)430-7700 



May 23. 1996 



The Honorable John M. McHugh, Chaimian 

Subcommittee on the Postal Service 

Committee on Government Refonn and Oversight 

House of Representatives 

2157 Raybum House Office Building 

Washington, DC 20515-6143 



RE: H.R. 1963 and Your Letter Dated March 26. 1996 

Dear Mr. McHugh; 

Following are my responses to your questions posed in the above-referenced letter 

1. Do you feel that the type of technology mentioned by ElectroCom In their 
testimony and being developed at the Postal Service to allow a customer to 
know when a payment is in the mailstream and on its way, would be 
beneficial to your financial and business customers? 

In general, we believe that the technology mentioned by ElectroCom could help 
implement the irrtent of H. R. 1 963 to have the post mark date be the date of payment. 
These changes would only add cost to the business of our customers, the payment 
processors, as they are forced to purchase new technology for processing payments in 
the new form. These costs, in our opinion, would be passed on to the consumer. 

2. You seem to be saying in your prepared statement that electronic payment 
technology via computers and other methods will soon usurp the 
remittimce of paper payment transactions and will eventually malce the 
subjec:! of today's hearing moot. As the Chairman of this Subcommittee, 
with oversight of the Postal Service, I am curious as to what your reseeux:h 
tells you about where we are on that time scale and when you anticipate 
this transfer from paper to electronic processing to be accomplished? 

Based on our research, payments by check still dominate, however, the trend is 



192 




May 23, 1996 
Page 2 



definitely toward electronic payments. A new research report from Synergistics 
Researc h Qsrp ., Atlanta, suggests that although electronic payments have supplanted 
'~" ansumers still write an average of about 20 checks a month. 

^been tracking consumer check-writing activity since 1988, when it 

ansumer wrote 28.4 checks a month. That average dropped to 
24 checks a month in 1990 and remained at that level until late last year, when it 
dipped to 19.6 checks a month. Bill payments account for a mean of 53.7 percent with 
point of sale purchases accounting for 21 percent of all checks written. Synergistics 
says. A series of consumer focus group discussions conducted by the National 
Automated Clearing House Association eariier this year found consumers receptive to 
the idea of checks being truncated at the point of sale or by a remittance processor, 
provided they are given the choice of whether or not to participate. Those consumers 
most apt to embrace truncation have already adopted other forms of electronic banking, 
NACHA reports. We feel these trends indicate a willingness of consumers to accept 
electronic forms of payment and we believe this trend will continue to accelerate. The 
full impact of the growth of electronic payment will be driven by the level of penetration 
of home PC's, the availability of home banking services from banks, which is now in its 
infancy, and the ability of the banking infrastructure to support electronic payments 
from a physical and economic viewpoint. Our forecast is that a significant penetration 
of electronic payments, say greater than 60 percent, will occur no eariier than within the 
next ten years 

3. To what extent, if at all, do you see the credit industry moving away from 
hard copy payments and moving to electronic payment processing? 

In our view, the credit industry, in regards to electronic payments, is not significantly 
different than any industry that processes payments from consumers where payments 
for products and services are due. The one exception Is that credit industry payment 
processors are generally banks and will have ready access to provide electronic 
payments for credit debt when home banking proliferates Therefore, we feel our views 
stated in our response to question number 2 apply equally to all payment processors, 
including the credit industry, with the credit industry possibly being the quickest to 
convert to electronic payments by a few years for the reason stated. 

4. Based on your experience in this area, to what degree has technology 
changed the methods by which payments are processed compared with 
ten years ago and what technological initiatives do you see that will be the 
next transitory step in the processing of bill payments? 



193 



May 23. 1996 
Page 3 



Without giving away any proprietary information what ar* some of 
the ideas your research and development departments are working 
on that will imisact this part of your business? 



^a significant change in the methods by which payments are 
processed over the last ten years. Most notable Is the growth of computer price 
performance, image technology and software, which have allowed payment processors 
to maintain efTidencles and quality while experiencing high volume growth rates. We 
see the same technology initiatives continuing in the next decade; but spreading to the 
automation of the back offices of remittance processors, which will allow them to 
achieve cost savings in those departments which are still manual and error prone. This 
trend will also spawn initiatives of enhanced post payment customer service ofFerings 
due to technological enhancements. One example of this trend Is the migration to 
image archival/retrieval of checks and payment coupons to replace microfilm BancTec 
provides such a product and has seen an increasing demand from our existing 
customers and the United States Federal Reserve, which is aggressively moving 
towards check truncation as the banking system accepts electronic processing. 
BancTec intends to Impact this part of our business by continuing to invest In image 
techr>ology and software products which will allow us to participate in this trend. We 
also plan to form alliances with other vendors who we believe will be key players in the 
electronic banking world of the future. 

Very truly yours, 

Tod V. Mon^a^ 
Senior Vice President 
and General Counsel 



194 

Mr. McHuGH. Thank you. We appreciate it. 

Mr. Mongan, let me start with you, while it's still fresh in my 
mind. As I looked at the tape, I didn't see how that system works 
to process payments that are considered late now. How does that 
operate? 

Mr. Mongan. Well, whether or not the payment's late, the sys- 
tem uses the current day's date, the processing date or the day that 
they are running the process. So be it February 28th, today, you're 
running the process, that date is entered into the system. The due 
date for the payment is usually taken off of the scan line of the 
stub that you submit with your remittance payment. 

Those two are then compared, and if the due date is prior to the 
current processing date, after the payment would be considered not 
made on time and any grace period — then the processor would 
probably assess a late fee or an interest payment. 

Mr. McHuGH. But how does that happen? Where there is a con- 
flict, where the machine is reading a due date or the end of the 
grace period, however it may work, that is prior to the — excuse 
me — that is after the current date, that is late, does it kick it out? 
Does it automatically assess it? 

Mr. Mongan. No, no, no, no, no. The system you see, and what 
we do, is really the front-end processing of the payment processing 
system. I mean, we just capture the data off the documents. We do 
some checking of correctness; that we've read the information cor- 
rectly. There are scan lines built in — excuse me — what we call 
"check digits," and run them through routines to check whether or 
not the scan line was properly read. 

That information is just stored. And, as you saw at the very end 
where we said we put it on a tape, that's the communication that 
goes to the processor's host system. So we develop a data record for 
that pajonent, put it on a tape, and send it to the host computer. 
That host computer's system is the one that actually determines 
what they are going to do with the pa5mient, as to whether or not 
it's late or on time; if you assess a late fee, how much is the late 
fee, or how much is the interest payment. 

So our system merely captures the document. It doesn't care 
what the date is. It just puts it into the record and sends it to the 
processing host computer. 

Mr. McHUGH. So then they take your computer tapes, and they 
are all sequentially listed on that tape, and presumably the main 
computer for, in this instance, New York Tel, as it is processing the 
tape you've provided, it will assess a late charge to those that come 
through as indicated being late. 

Mr. Mongan. I would assume. Nolan knows a little more about 
the New York Tel system. That's normally the way it would work. 
They make the decision in the final processing, when the accounts 
are posted. 

Mr. McHuGH. Am I correct, Mr. Klier? 

Mr. Klier. That's correct. In this case. New York Telephone's 
host computer programs would determine if any fees or — well, 
there would be no interest in a telephone company payment — ^but 
if any late fees would be imposed, that would be determined by 
their computer programs, after the payment had been processed 
and they had read the tape into their system. And then notification 



195 

of those fees would be generated by their host computer and sent 
out to the customers. 

It works much the same in all of the systems that are out there. 

Mr. McHuGH. Right. So there is no, at that point, actual human 
intervention that you're aware of? I mean, it's machine-generated. 

Mr. MONGAN. Correct. 

Mr. Klier. Correct. 

Mr. McHuGH. Well, I'm curious, then, based on what we heard 
this morning, that companies most often don't even assess it. We're 
getting the feeling, and it may be absolutely true, that late fees are 
an exception. And even if they are beyond the grace period, usually 
a day or 2 or 3 or 4 or 5 after that — according to Congressman 
Owens, 5 days — ^there's no fee. 

How does that work? 

Mr. Klier. Well, I can't speak for specifically how they process 
their work, but I know, in many banking institutions, there are 
hard copy reports printed, and managers assess those, and then 
they either waive or implement the fees. 

Mr. McHuGH. So there is human intervention. 

Mr. Klier. There can be human intervention, yes, which can 
make decisions to waive or implement certain policies. 

Mr. McHUGH. I appreciate your inability to comment across the 
board for everyone, but what I'm trying to determine is, if there is 
human intervention, even in these highly automated systems, to 
determine whether or not there should be a fee, based on whatever 
guidelines they internally construct, the addition of another re- 
quirement on those only that are adjudged late doesn't seem to me 
to be particularly onerous. But if it's all done by computer, you 
have a different animal. 

There's a problem of converging here some of the testimony that 
suggests there are all kinds of consideration given with other testi- 
mony that this is all done mechanically, and anything you put in 
as a requirement places an incredible challenge to the technology. 
Be that as it may. 

Mr. Mongan, were you aware, when Mr. Bruce made his presen- 
tation, of what is happening on the top, with the new bar coding 
system, not universally yet in application, as I understand it, by 
the Postal Service, but being developed, apparently, relatively ag- 
gressively? 

Mr. Mongan. Not until the testimony. Well, you could say before 
the testimony, when I scanned over the written documents. 

Mr. McHuGH. So, when you prepared your testimony, you were 
not aware of it? 

Mr. Mongan. No. 

Mr. McHuGH. Well, now that you've heard him — obviously, 
you're not an expert on it, as I don't think any of us are — does that 
solve some of the very real problems that you pointed out in devel- 
oping a way by which this might work? 

Mr. Mongan. Well, the biggest problem, from our standpoint, 
would be — and I mentioned, I think, in our testimony — is, how do 
we match up the pa3Tnent document and check with the envelope? 
And then what do we do with those people who don't use the stand- 
ard envelope that the processor gave them? 



196 

I mean, most of your large companies could probably conform to 
this, you know, your AT&T's and that, Citibank, Nynex could do 
that. But the vast majority of your payments — I think that's a little 
bit of the dichotomy that you're getting in the testimony today, too. 
The earlier panel had a lot of credit unions. Well, those are — I 
mean, they can't afford to even buy a work station to process. They 
don't have enough payments to do that. So those people aren't 
going to be able to afford to print this kind of information, or, if 
they did, it would be useless to them unless you put it in readable 
form, human readable form. 

Mr. McHuGH. Yes, because, obviously, by the existing bar codes 
on the front of the envelopes, a lot of companies are already read- 
ing envelopes; true? 

Mr. MONGAN. Yes. Sure. 

Mr. McHuGH. OK. 

Mr. MONGAN. Yes. It's just a matter of trying to match up that 
envelope, because, as you saw with the Opex machine, I mean, that 
envelope, once the document is split away from the envelope, the 
envelope is gone, you know. There's no way to keep the two to- 
gether. That's the most difficult, from my viewpoint, technology 
hurdle that we have to get over. 

Mr. McHuGH. Mr. Stevens, you mentioned in your breakdown of 
manual, semiautomated, and automated that you can't tell pre- 
cisely, but in your opinion the manual mode was by far the largest 
done. 

Mr. Albert Stevens. Yes. 

Mr. McHuGH. I read your comments, and I understood the Eng- 
lish language that you used to say you can't guess, but can't you 
really? Can you give us some kind of rough estimate as to — 50 per- 
cent? Obviously, you think it's at least a third. 

Mr. Albert Stevens. Well, I guess it's potential business, but 
it's difficult to know, since there are operations that we would not 
visit. So it's difficult to have a handle on it. 

Mr. McHuGH. Would it be your opinion that those who are cur- 
rently manual are there because their volume is so low that it just 
doesn't make economic sense? 

Mr. Albert Stevens. That's, I would say, primarily the case. It's 
not a matter of choice that they want to spend more labor dollars. 
Because the unit price to handle manually is significantly greater. 
For example, if I had a tray of mail and I were opening it by hand 
and processing it, I might be able to do 100 items an hour. On our 
extracting desk, it's significantly more than that. So you get a great 
labor savings by using semiautomated equipment as opposed to 
manual. 

When the volumes are real small, the envelope sizes tend to be 
quite varied, and the condition of the mail tends to be worse be- 
cause it's rubber banded and kind of tossed around as opposed to 
put in nice, neat trays for delivery. 

Mr. McHuGH. Do you have a sales department? 

Mr. Mark Stevens. Yes. 

Mr. Albert Stevens. Right there. 

Mr. McHuGH. You're it? 

Mr. Mark Stevens. This is it. 

Mr. McHuGH. A good-looking department you are, too. 



197 

You must have — I used to sell insurance, obviously not well, or 
I'd still be doing it — but, I mean, we have ways by which we screen 
clients. Some are more likely consumers of our product than others. 
I would assume that you look at a client and make a prejudgment 
on their volume, as to who needs your product and who can benefit 
from it, and who doesn't. What's your rule of thumb cutoff? Who 
are you going to talk to first? I mean, at what point does their vol- 
ume suggest they need your product? Not that everybody doesn't 
need your product; I think they do, but, you know. 

Mr. Mark Stevens. Because Congress needs a few pieces of 
equipment, probably. 

Mr. McHuGH. Gro talk to Bill Thomas from California. 

Mr, Mark Stevens. In general, we look for people who receive 
incoming mail volumes anjrwhere over 1,000 pieces of mail a day. 
That tends to be sort of a magical cutoff for us. Anyone who would 
have volumes under that really is relegated to a manual process. 
So, as we go out knocking on the doors, doing some cold-c^ling in 
our spare time, what you find is many, many, many accounts that 
receive 400, 500 pieces of mail a day, they can't cost-justify the 
semiautomated piece of equipment. 

Mr. McHuGH. OK. Who might be 1,000 pieces a day? Would it 
be a retail store that's just special to a neighborhood, a mom and 
pop kind of operation? 

Mr. Mark Stevens. Grenerally, anybody that would mail you a 
bill. 

Mr, McHuGH. A florist? Would a florist? Do good-sized florists? 

Mr, Mark Stevens, No, they would not be big enough to do that. 
They would have to have a very significant client base. If you think 
about 1,000 payments a day, that's 20,000 payments that they are 
mailing out in a given month. That's a huge base of operations. 
Most florists, for example, or shoe stores, those sorts of folks just 
don't have that kind of client base to be able to justify that. Even 
small, local insurance companies really wouldn't have that kind of 
clientele unless they centralize their billing to a given site, 

Mr. McHuGH. OK. Would all of you gentlemen more agree or 
more disagree with Mr. Bruce's comment when he noted — it was on 
page three — ^that the question of the technical feasibility for imple- 
mentation of the proposed bill is not in question, he felt; rather, it 
was, given time? 

Let me ask you, Mr. Bruce, how much time? 

Mr. Bruce. The end of 1997, 

Mr. McHuGH. Is this the direction that we're probably headed to- 
ward anyway? Let me just tell you, as I watched this tape, as my 
gray hair suggests, I can remember walking in to the local depart- 
ment store when they had the vacuum tubes and you would pay 
at the counter, and they would put the tubes in, and it would shoot 
over to the accountant sitting up in a wire basket up above the 
floor. 

When you think about how, because of the innovation and the 
aggressiveness — and I mean that in a positive way — of corporations 
and companies like yours, how far we've come in this technology, 
it's a little hard for me to understand why this may be such a dif- 
ficult thing to achieve. I understand it may not be there right now, 
but, we ought to be able to do this. 



198 

Mr. Bruce. The reason that I say the end of 1997, sir, is that 
we are currently deploying phase three of the RBCS system, the re- 
mote bar coding system, which is what puts this ID Tag on the 
back of the envelope. We have currently deployed 112 out of 250 
systems. We will finish our portion of that deployment in June 
1997. Unfortunately, we are not deplojdng all parts of the RBCS 
system. The Postal Service saw fit to contract out some portions of 
that to other vendors, and they will not finish their deployment 
until sometime around the end of 1997. 

At that point, it can legitimately be said that the vast majority 
of the remittance mail, which is collection mail, will be coming in 
through AFCS ISS systems, and they will be bar coded in this fash- 
ion. 

Mr. McHuGH. Any other gentlemen have a comment? 

Mr. Dewitt. If you don't mind. 

Mr. McHuGH. Please. 

Mr. Dewitt. I would like to add that only solves the problem for 
automated processors. As we've testified, the vast majority of even 
our customers are not automated. Work station is a manual proc- 
ess. The extraction machine just aids in moving and cutting the 
mail. So the bigger problem is, what do you do with those people? 

Mr. McHuGH. OK. Fair comment. Let me ask you, under a cur- 
rent work station, standard work station that you might place on 
the market, how do they process a late payment? How does it go, 
"Aha," or something go, "AJha, this is late"? 

Mr. Albert Stevens. In almost all of the payment shops, they 
ignore the due date, because that's something that is really man- 
aged within the software in the payment system. So they just sim- 
ply process. Now, the only exception I can think .of is in life insur- 
ance or automobile insurance policies, where you may have an acci- 
dent and your policy is past due, so you, real quick, try to get a 
payment mailed in so that it's not out of force. 

So the insurance industry has certain pajonents that they look 
at manually on our work station. As they pull the payment out, 
they look at the payment due date. If it's past due, they physically 
set that aside, and they physically save the envelope. Some are try- 
ing to achieve other methods to handle that. But in comparison to 
traditional pajonent processing, it's extremely slow. 

Mr. McHuGH. What other Mnds of methods in the insurance in- 
dustry are they tr3dng to develop? 

Mr. Albert Stevens. Well, I think they are trying to get a way, 
and some have been able to identify the date that the mail has 
come in. And that's carefully controlled and usually cleaned up 
every day. And by using the incoming receipt date and adding the 
average number of days that it takes in transit, they can really key 
off of that. I think they have been — some have used that technique. 

Mr. McHuGH. You heard, in my discussion with Mr. Klier, there 
may or may not be human intervention in the fully automated sys- 
tem. Is there human intervention in the semiautomated system 
when something is late? You feed it down onto tapes, but when 
there is a late fee being assessed, is it kicked out and reviewed by 
human hand? 

Mr. Albert Stevens. Normally, no. Normally, that is prepared, 
other than as I mentioned, in the insurance industry, in some 



199 

cases. It's just processed through the system, and usually someone 
in the accounting stream, either doing the posting or else, in the 
case of an automated posting system, it's a part of the software 
that handles it. 

Mr. McHuGH. I believe it was Mr. Stevens who estimated those 
that are fully automated as about a third? 

Mr. Albert Stevens. About a third of those customers that use 
our equipment are fully automated, the high-speed machines that 
take the contents out of the envelope and throw the envelope away. 

Mr. McHUGH. Would the rest of you agree that's pretty close to 
industry standard? 

Mr. Dewitt. I would like to add, that's by mail volume, not by 
customer count; right? We did that by mail volume? 

Mr. i^LBERT Stevens. Oh, that's by volume. 

Mr, Dewitt. So 30 percent of the volume that's processed on our 
equipment is done on the fully automated machines. We didn't 
break it down by customer. 

Mr. Albert Stevens. It's not by customer. 

Mr. McHuGH. OK. That's an important distinction. 

Mr. Albert Stevens. Yes, it is. 

Mr. McHuGH. Mr. Bruce, any idea? 

Mr. Bruce. We don't do internal. 

Mr. McHUGH. You don't do internal. OK. 

Well, you have — particularly Opex has provided a voluminous 
amount of information, and we deeply appreciate that. I have im- 
posed upon all of your time, much more than reason would suggest. 
I want to note for the record and to state my personal appreciation 
that you all traveled here on your own expense and at no cost to 
the taxpayers of this Nation, and we appreciate that, as well. 

As you may have heard me suggest to the first panel, as we try 
to reconcile some of the comments we heard this morning from 
them with the testimony that you have presented, if we could im- 
pose upon your generosity again and perhaps submit some written 
questions for your responses. As I'm sure you appreciate, we are 
not of the expertise that you good folks are, and we would very 
much appreciate the chance to call upon you for that. 

Also, you may have an opportunity to rethink some of the com- 
ments or some of the things you heard, and, if that is the case, we 
would greatly appreciate anything you may wish to volunteer to us, 
too. 

This, obviously, is a very complex situation. As I tried to make 
clear in my opening comments this morning, it is not our intention, 
in any way, to unduly burden the flow of commerce in this country, 
but rather to try to strike some kind of balance between the legiti- 
mate interests of the business community with those responsible 
consumers who, through no fault of their own, find themselves sub- 
jected to various fees and penalties that perhaps are not fair, given 
the scheme of things. 

So with the best of intentions, we will call this hearing to a close, 
and with our appreciation to all of you. We will stand in adjourn- 
ment. Thank you. 

[Whereupon, at 1:50 p.m., the subcommittee was adjourned.] 

[Additional material submitted for the record follows:] 



200 



The Institute of Real Estate Management 
of the NATIONAL ASSOCIATION OF REALTORS® 

Comments on H.R. 1963 
Postmark Prompt Payment Act 



The Institute of Real Estate Management (IREM) appreciates this opportimity to 
comment on H.R. 1963, the Postmark Prompt Payment Act of 1995. We agree with the 
intent of the legislation that conscientious bill payers who pay creditors in a timely fashion 
should be protected from penalties for mail delays which are no fault of their own. The goal 
of averting unfair late fees, adverse credit ratings, and other consumer penalties is laudable. 
However, we foresee unintended adverse consequences for consumers associated with the bill. 
Owners and managers of multifamily rental properties are concerned about the impact on the 
operation of properties as a result of the bill's requirement that rent checks received in the 
mail would be determined paid on time if they were postmarked by the due date. These 
concerns may force owners and managers to eliminate practices, such as grace periods, 
currently in place which benefit tenants. In the case of rental payments, we believe adequate 
collection systems exist which protect the tenants, property owners and managers. Therefore, 
we are opposed to H.R. 1963. 

IREM, an affiliate organization of the NATIONAL ASSOCIATION OF 
REALTORS®, is a professional association of over 9,500 members engaged in the 
management of all types of income-producing real estate. IREM members have achieved the 
CERTIFIED PROPERTY MANAGER® (CPM®) designation, completed a rigorous education 
and training program, possess significant experience, and are held to a strict Code of 
Professional Ethics. The Institute also recognizes achievement by management firms and site 
managers. The ACCREDITED MANAGEMENT ORGANIZATION (AMO®) designation is 
awarded to firms engaged in property management which have met IREM's high standards in 
the'areas of training, experience, integrity, and financial stability. The ACCREDITED 
RESIDENTIAL MANAGER® (ARM®) recognition award may be earned by site managers 
who demonstrate proven experience, education, and ethical conduct. The collective 
experience of IREM members relating to rent collection practices has been called upon to 
shape the concerns we have with H.R. 1963. 

H.R. 1963, the Postmark Prompt Payment Act of 1995, provides that the payment of a 
"bill, invoice, or statement of account due," if made by mail, shall be considered made on the 
date on which the envelope is postmarked, not the date on which it is received by the creditor. 
We believe that if this proposal becomes law, property owners and managers will be forced to 
alter widely accepted industry rent collection practices to a degree that could ultimately harm 
tenants and other consumers. 



201 



We believe it is legally unclear whether the lease provisions regarding the tenant's 
obligation to make rental payments is accurately described as a "bill, invoice, or statement of 
account due." However, for the purposes of our argument, we will assume rental payments 
are intended to be covered by the legislation. 

Rental payments are determined by the terms and conditions of a lease agreement 
entered into by a property owner or manager (lessor) and a tenant (lessee). Lease agreements 
are generally for a period of time. The lease agreement is a legally binding contract. The 
amount of payment and the dates on which the payments are due is agreed to in advance and 
is included in the contract. Rental payments are typically due on the fu-st of each month. 
Tenants clearly understand their obligation to make rental payments in the stated amount by 
the stated date. Tenants are responsible for ensuring that rental payments arrive to the 
property owner by the due date. In fact, they have a contractual obligation to do so. 

Property owners and managers are cognizant of the fact that rental payments are 
sometimes delayed in the mail. While mail delivery is generally timely and accurate, we are 
all aware of documented instances of abysmal on-time delivery performance in certain parts of 
the country. Despite this record, many property owners and managers allow for rental 
payments to be made by mail so long as they are received by the due date. If tenants insist 
on using the mail as the preferred method of delivery of rental payment, registered or certified 
mail could be used to increase the likelihood that it will arrive to the property owner on time. 



Many apartment complexes provide rental payment drop boxes on the premises or in 
the management office. This allows for timely rent collection and provides convenience for 
the tenant. If H.R. 1963 is enacted, tenants may be encouraged to mail rental payments on 
the due date, as opposed to dropping it off at the rental office, with the knowledge that the 
payment would not be received by the owner for several days. This would ensure a delay in 
cashing rent checks and would free up money in the account for other purposes. A 
disincentive would be created for those who pay their rent on time and in person. The cost to 
the owner would be the lost value of money for several days. This cost could be substantial 
in large properties where large sums of money are collected each month. As a result, owners 
may prohibit use of the mail as a delivery method for rental payments and require that all 
payments be made in person. 

Under current practice, many prop)erty managers establish a formal due date for receipt 
of payment ~ usually the first of the month -- but allow a grace period to accommodate 
postal delays and other minor lapses by tenants. H.R. 1963 would, in effect, indefinitely and 
uncontrollably extend grace periods. The resulting uncertainty could force property owners 
and managers to altogether end the practice of allowing grace periods, a practice which 
generally benefits both parties. 



202 



The practical and administrative burdens associated with H.R. 1963 would result in 
increased costs to property owners and managers. The Act would essentially make the U.S. 
Postal Service a partner with the property owner and manager in the rent collection process. 
While practices vary depending on local ordinances and industry norms, property owners and 
managers generally allow for a five day grace period for receipt of rental payment (originally 
due on the first of the month). If rental payment is not received by the end of the grace 
period, legal eviction proceedings may be initiated. If an owner were to begin an eviction 
process and the payment arrived a week later postmarked by the due date, that action would 
have to be canceled. However, the legal fees for preparation and filing would already have 
been incurred. We are certain the U.S. Postal Service will not be held liable for such losses. 

In many instances property owners and managers attempt to contact the tenant to 
inquire about unpaid rent. Tenants may claim that the "check is in the mail." Owners may 
request that payment be delivered immediately via an alternative method. The rental 
payment that is currently "in the mail" would be returned or destroyed upon receipt by the 
owner. If the tenant failed to provide the alternative payment, would owners be required to 
wait until the payment arrived via mail to determine if it was paid on time? What if the 
payment was never delivered? At what point would it be appropriate to commence eviction 
proceedings? 

The bill would significantly impact property owner and managers' ability to implement 
unlawful detainer actions. States like California allow for a three day "Notice to Pay Rent or 
Qmt." As currently implemented, tenants have three days to make payment before an 
unlawful detainer is initiated, if served personally. But courts allow an extra five days if the 
notice is served by mail. Under the Act, owners and managers would be required to wait an 
undetermined period of time to make certain the payment was not postmarked within the three 
day period. If the courts continue to allow an extra five days if filed by mail, the three day 
period would become an eight day period. The eight day period would become a thirteen day 
period before the court action can be filed. Since most non-payers do not open their doors to 
property owners and managers, when their rent is delinquent, the majority of notices are 
mailed. Therefore, owners and managers would lose an extra week of economic rent under 
the Act. If H.R. 1963 were enacted, many owners and managers would eliminate grace 
periods so that legal action could be initiated earlier to avert additional lost revenue and 
control costs. In addition, increased costs would be passed on to tenants in the form of higher 
rents. 

The bill introduces the possibility of fraud. Many tenants have access to postmark 
meters used by private businesses and commercial tenants. The postmark dates posted on 
letters is not limited to the actual postmark date. It would be easy for postmarks on letters to 
be backdated in order to avoid late payments. Backdating of postmarks may be even more 
prevalent with commercial rental payments. This practice would undermine the intent of the 
H.R. 1963. 



203 



Real estate professionals and their staff responsible for administering payments 
received in the mail would be forced to closely examine postmarks on envelopes in which 
rental payments arrive to determine their payment dates. As a practical matter, postmarks are 
often missing or illegible rendering this task nearly impossible. Owners of multiple 
apartments and large management companies would incur increased costs with the addition of 
staff dedicated to the processing and examination of postmarks on rental payment envelopes. 
Expensive equipment capable of reading postmark dates would need to be purchased. 
Canceled envelopes would need to be retained creating additional recordkeeping requirements. 
Again, these increased costs would be passed along to tenants. 

We appreciate this opportunity to comment on H.R. 1963. We hope our comments 
have clarified our concerns about the bill's effect on the property management industry. 



204 

Prepared Statement of Mary E. (Betty) Wysocki, Chair, Government Affairs 
Committee, National Association of Credit Management 

Mr. Chairman and members of the Committee. I am Mary E. (Betty) Wysocki, 
Corporate Credit Manager for Huttig Sash & Door Company, which is headquartered in 
Chesterfield, Missouri. My company distributes and manufactures windows, doors and 
millwork products which are used by the building construction industry. I want to thank 
you for the opportunity to offer this testimony regarding the effects that H.R. 1963, the 
Postmark Prompt Payment Act of 1995, will have on the Huttig Sash and Door and other 
companies around the country. 

Today, I am presenting this testimony in my capacity as the Chair of Government 
Affairs Committee of the National Association of Credit Management (NACM). The 
NACM represents the corporate credit interests of some 33,000 member companies whose 
credit management practices operate in a manner similar to the way that Hutting Sash and 
Door procedures are establish. 

By way of background, the NACM is celebrating its 100th Anniversary this year. 
Founded in 1896 and representing American business credit executives from all 50 states 
and in over 26 countries around the world, the NACM's mission is the constant 
improvement and enhancement of the business trade profession. The NACM membership 
is comprised of American businesses of all kinds -- manufacturers, wholesalers, service 
industries, and financial institutions. Our members range from the smallest businesses to a 
majority of the Fortune 500. The daily decisions by our members regarding the extension 
of unsecured trade credit from one company to another allows the U.S. economic model to 
run smoothly and profitably. 

It is important to distinguish the type of credit we extend from credit that is 
extended to American consumers. Business and trade credit refers to the extension of 
products and services from one company to another company. Business and trade credit 
does not include consumer credit cards nor any transactions with credit unions. Rather, it 
is unsecured credit in which one business provides goods or services to another business 
with the expectation of payment for those goods in a specified period of time. 

Because of our experience in dealing with the extension of business credit on a 
daily basis, the NACM certainly understands and appreciates the difficulties that many 
consumers face in incurring late payment charges for payments mailed on time. The 
damage to an individual's credit ratings can oftentimes take years to rectify. In these cases, 
our members believe that greater certainty of a payment date can be beneficial to 
consumers. 

However, by extending the requirement that the postmark on the envelope to be 
proof of timely payment to non-consumer transactions, the consequences on American 
business practices could be extremely debilitating. It would be our hope that the 
committee could apply the use of a postmark for payment consideration only to consumer 



205 

Page two of three 



transactions and exempt transactions among businesses. Such an exclusion would 
recognize the fundamental differences between the way that consumer transactions are 
managed and the methods by which American businesses pay their invoices. 

Unlike most consumer transactions, business payment practices are characterized 
more by incentives for companies to pay their bills early or on time rather than by penalties 
for paying late. Many companies offer discount terms for the payment of bills within a 
specific (and shortened) period of time. The purpose of such discount periods is to 
enhance the cash position of the selling companies. 

In fact, for those trade creditors who do not offer discount terms, the majority do 
not access "late penalties" even when contractually allowed. The assessment and rigid 
enforcement of any "late penalty" places the vendor at a competitive disadvantage in his 
market. Most business trade grantors would rather ensure that a cooperative relationship 
exists between the buyer and seller than to assess some financial penalties to the buyer that 
could compromise this relationship. 

Additionally, as opposed to consumer transactions, there is rarely a fixed payment 
date in a high percentage of trade credit transactions. A business to business relationship 
may have multiple transactions on a daily basis. Charge-backs and crediting against a 
multitude of orders reflect the on-going nature of the relationship among business credit 
transactions rather than monthly or installment payments of consumer transactions. 

The NACM welcomes this opportunity to offer testimony to the House Postal 
Service Committee. We feel strongly about this issue because of the potential impact it 
could have on the American business community. The tens of thousands of credit 
managers who comprise our membership feel that the potential cost to American 
businesses to comply with the language of H.R. 1963 as it has been introduced could be 
extraordinarily steep. 

The costs of such compliance would obviously have to be passed on to the 
manufacturers, retailers and sole proprietors to whom our members sell their goods and 
services. Those costs will ultimately have to be recaptured from the American consumer. 
It is for these reasons that the NACM believes that the American business community, in 
the form of business and trade creditors should be exempt from the scope of H.R. 1963 

We have also taken the liberty of offering language that would create the limitation 
of the scope of H.R. 1963 to only consumer payments. We have included the proposed 
language as an amendment to H.R. 1963 that adequately addresses the problem for the 
business credit industry. 

On behalf of the members of the NACM, we appreciate your interest in our issue 
and look forward to working closely with you on this legislation. I would be happy to 
respond to any questions you may have. 



206 

Page ihrce of tluce 



PROPOSED LANGUAGE TO AMEND H.R. 1963 
(Proposed language is indicated by bold italics) 

With regard to H.R. 1963, the "Postmark Prompt Payment Act of 1995"-- 
Section 2. (a) Chapter 26 of title 39, United States Code, is amended by adding at the end 
the following: 

Section 2606:(b) Subsection (a) shall not apply with respect to any payment ~ 

(4) for transactions between merchants for goods and services. 

(e) For purposes of this section ~ 

(3) the term "Merchant", as defined in Article 2, Section 2-102 of the Uniform 
Commercial Code, means a person who deals in goods of the kind or otherwise by his 
occupation holds himself out as having knowledge or skill peculiar to the practices or 
goods involved in the transaction or to whom such knowledge or skill may be attributed 
by his employment or an agent or broker or other intermediary who by his occupation 
holds himself out as having such knowledge or skill. 

(4) the terms "betA/een merchants ", as defined in defined in Article 2, Section 2- 
102 of the Uniform Commercial Code, mean in any transaction with respect to which 
both parties are chargeable with the knowledge or skill of merchants. 



207 

Prepared Statement of the Coalition of Higher Education Assistance 

Organizations 

The Coalition of Higher Education Assistance Organizations (COHEAO) 
represents more than 300 colleges, universities, and commercial entities involved 
in the processing and servicing of federally supported student loans. The coalition 
is deeply committed to maximizing student repayment of loans supported by the 
U.S. Department of Education and the Department of Health and Human Services 
including Federal Perkins Loans, Federal Family Education Loans, Federal Direct 
Student Loans, Health Education Assistance Loans, and health profession student 
loans. 

COHEAO is genuinely sympathetic with the intent of H.R. 1963, the Postmark 
Prompt Payment Act of 1995, to assure that payments on debts made by borrowfers 
are promptly posted to accounts, thereby minimizing the accrual of additional 
interest. We believe that the legislation in its present form, however, is not 
workable. As student loan professionals with extensive experience processing 
student loan repayments, COHEAO members believe that the manual processing 
required by this legislation would greatly hinder automation of payment 
applications; slow down payment posting; and increase processing costs. 

COHEAO members further believe that the problem of deciphering 
postmarks and handling borrower inquiries regarding the postmark used to post a 
payment on an account will significantly increase administrative costs and lead to 
confusion on the part of student borrowers. 

Today's highly automated payment processing systems send out milhons of 
bills per month for student, loan and general receivables. At the University of 
Illinois at Chicago alone, over 40,000 bills are sent monthly to students. The 
majority of these payments are through automated systems. These systems would 
have to be dramatically altered and perhaps even replaced by a time-consuming 
manual process to verify postmarks as stipulated by the legislation. 

Additional concerns raised by COHEAO members include: 

■ This bill will promote inefficiency of systems and increased storage 
requirements at a time when institutions are making significant strides 
toward greater automation and reduced paper. The additional costs that 
would accompany such changes will be ultimately reflected in the total cost of 
borrowing for students. 

■ The postmark is often missing or illegible on many pieces of mail. 
Deciphering postmarks and handling the inevitable borrower inquiries 
regarding postmarks will significantly increase administrative costs, and lead 
to confusion on the part of student borrowers. 



208 



■ Most institutions try to be flexible to ensure that the majority of students' 
payments are deemed timely despite the inefficiencies of the mail system, 
customer procrastination and other legitimate problems. Schools currently 
have incentive to do this since handling customer complaints and having to 
adjust accounts is time consuming, labor intensive, and threatens customer 
relations. 

■ Since the postmark, v^ould override any system due dates, institutions would 
have to make manual adjustments to payments received past the due date 
but having appropriate postmarks. Retroactive balance adjustments would 
have to be made for any interest assessed and finance charges would have to 
be recalculated. Making this a standcird practice would be not only costly, but 
also unfair to the institution since it is having to waive late charges before 
any funds are received. 

■ Significant changes to current systems would be required to accommodate the 
recording of the postmark. In some instances, storage of envelopes would be 
necessary, especicilly in instances where the postmark may be hard to read. 

■ Significant employee time would be spent to research student complaints 
about "postmarks". 

■ Under the arrangements of the bill, some students could be enticed to mail 
their payments later than they do currently. This could result in many more 
payments arriving after the due date than do currently. 

■ Cash flow would be adversely affected if more students waited until the last 
day their balance was due to submit payments. Even students who pay in 
person could possibly stop this practice when they realize that they now have 
a float working to their advantage by subnutting payments via mail at the last 
minute. This would slow down payment posting and hinder automation of 
the payment application. And perhaps inevitably, schools would have no 
choice but to tighten the repayment period if cash flow is significantly 
affected. 

As stated earlier, COHEAO shares your desire to treat debt payments fairly. 
We believe, however, that H.R. 1963 is the wrong solution for student loan 
payments. We do not receive significant complaints from students regarding 
postmarks, as this program is highly regulated and borrowers are well informed 
about payment responsibilities. 

COHEAO thanks you for your interest in and attention to our concerns. We 
would appreciate an opportunity to meet with you or testify before this committee 
as your deliberations on H.R. 1963 proceed. 



209 

Joint Prepared Statement of Alliance of American Insurers, American 
Council of Life Insurance, American Insurance Association, the Council 
OF Insurance Agents and Brokers, Health Insurance Association of Amer- 
ica, Independent Insurance Agents of America, National Association of 
Independent Insurers, National Association of Insurance Brokers, Na- 
tional Association of Life Underwriters, National Association of Mutual 
Insurance Companies, and National Assocl\tion of Professional Insurance 
Agents 

This Statement is submitted in opposition to H.R. 1963 by national trade associations 
representing the insurance industry whose members use the mail to collect payments for products 
and services. Some of our concerns are similar to other business opponents of the measure. 
Others are more specific to the business of insurance. Our Statement will highlight those areas 
where the proposed legislation creates unique problems for insurers. 



The insurance industry is a state regulated industry. As such we are subject to cancellation 
and non-renewal statutes in all 50 states. These statutes are modeled on the National Association 
of Insurance Commissioners (NAIC) model act Each of these individual state laws require a 
grace period for virtually all types of policies before they can be cancelled for any reason, 
including non-payment of the premium. If an insured misses a payment, or it is late, they have a 
grace period before the insurer can even begin a cancellation process. Therefore, H.R. 1963 is 
unnecessary as it applies to the insurance industry and would preempt long-standing and effective 
state regulation in this area. 

If enacted, H.R. 1963 would substantially increase the cost of processing payments and 
create additional uncertainty for all businesses, and especially for insurers. The legislation is not 
necessary to protect consumers since grace periods are routinely provided by contract, and by 
state law in the case of insurers. The legislation would work against those consumers who pay 
their accounts promptly by creating a costly and inefficient system which would seem to only 
benefit those few consumers who do not pay on time. The legislation would result in additional 

1 



210 



govemmenud interference in private contractual matters and in the state regulation of the business 
of insurance. 

Insurers process many millions of payments each month. All but the very smallest insurers 
use an automated system to keep costs down and to make sure that payments are promptly 
credited to a customer's account or policy. These payments are spread over the entire year. H.R. 
1963 would require manual checking of each of these bill payments and millions of postmarks. 
This would add greatly to company and, ultimately, consumer costs. Automated processes, if and 
when they become available, would be very expensive. 

Additionally, insurers would have to develop a procedure to archive envelopes, 
particularly in those situations in which policies are canceled. For liability policies, which include 
auto, homeowners, several different types of commercial liability and workers' compensation, the 
existence or non-existence of coverage could become an issue, even after the policy period itself is 
over. Payment envelopes would have to be maintained at least for a period equivalent to the state 
statute of limitations. Another problem, particularly for insurers with many rural policyholders, is 
that some envelopes are not stamped with a legible postmark, or in some cases, any at all. For 
insurance transactions, this could lead to additional litigation. 

Unlike the IRS situation, where tax payment timing and terms are dictated by federal law, 
most business payment terms are set by private contracts. For insurers, notice of cancellation 
requirements are set by state law. While the Truth-in Lending Act gives the federal government 



211 



some authority in the bill payment area, H.R. 1963 would result in a major intrusion of 
government into areas which are currently regulated by state law or governed by private contract. 
Further, it is an intervention which would be contrary to the interest of business and most 
consumers. 

In summary, H R. 1963, the Postmark Prompt Payment Act of 1995, would cause an 
administrative nightmare for account processors for businesses using the mails, significantly 
increase the costs incurred by those businesses in handling customer payments, and result in 
unnecessary cost increases for consumers of affected products and services everywhere. For all 
these reasons, the insurance industry urges the subcommittee not to approve H.R. 1963. 



212 



CITIZENS PROTECTING YOUR RIGHTS 

P.O. BOX 2413 
AURORA, IL. 60507-2413 

FAX: 708 879-3393 

February 27, 1996 



Rep John McHugh '^' 

Postal Subcommittee 

B-349 C 

Raybum House Office Building 

Subcommittee of the Postal Service 

Washington, D. C. 20615 

Dear Mr. McHugh: 

I understand you are the sponsor of the Postmark Prompt Payment Act and that 
testimony will be heard before the Postal Subcommittee of the House Government 
Refonn and Oversight Committee on February 28, 1996. It is also my understanding 
that this bill, if passed, would consider bills paid as of the date of the postal mark, 
rather than the date of the receipt. 

I support this bill and numerous consumers who are inundated with late payment fees 
due to unfair billing practices by credit card companies, mortgage companies and the 
like also would welcome relief from the loan shark tactics of these groups. 

In brief, I would like you to understand that the reason i support this bill is simply 
^cause nearly all the credit providers have been violating FAIR BUSINESS 
PRACTICES by sending bills postmarked from 4-9 days after the closing date of the 
statement. Considering that it takes, on the average of, 4-6 days for a bill to arrive to 
the debtor's destination, this does not allow any time for a payment to be made on 
time. Additionally, the trend has been to add a $10 to $15 late payment fee on 
ordinary credit card bills. Most recently. Mortgage Companies have started the same 
practices. They don't even postmari< the bill until 5 or 6 days after the statement date 
and then it arrives with less than four days to turn it around and send it back to the 
company without a $55 or more late charge. (Mortgage companies charge a 
percentage rather than a set late charge). 

I believe you should understand that your efforts may be futile in that the wording of 
your bill says absolutely nothing about the date the bills are mailed. If cun-ent 
practices continue, the Credit Companies and Mortgage Companies will simply start 
sending bills out later and later after the statement date and it will be totally impossible 
for a consumer to return the payment before the bill is due. I have been collecting 
payment envelopes and bills for a number of years and I have complained about this 
problem to the companies as well as to the LAW. I would be very happy to bring them 

1 



213 



into Congress and your Committee so you could see how widespread the problem is. 

Another way out for the Credit Companies is already being practiced by some of the 
largest companies. The company simply takes out a FIRST CLASS PERMIT. That 
means the envelope is NEVER POSTMARKED. It is simply printed out with a FIRST 
CLASS PERMIT EMBLEM in the upper right hand comer of the envelope along with 
the perniit number To add insult to injury, the FIRST CLASS PERMIT gives the big 
company a reduced rate for postage, while we, the consumers, pay through the nose 
for postage. In discussing FIRST CLASS PERMITS with the postal service, I found 
that they do not have to deliver permit mail immediately. The postal services says 
permit mail will get out within up to seven days of its arrival at the post office. Without 
postmark and considering the practices currently used by the Credit Companies on the 
consumer, I would say your bill will have ABSOLUTELY NO TEETH. Additionally, 
there is no indication of the penalty for violation or recourse instmctions. (And now 
you'll tell me that's the Justice Department's duty.) 

It doesn't seem to matter what the companies do - they rule. They rule because, no 
matter what the consumer does, he loses. He cannot fight back - he has no 
resources. If he fights back anyway, he goes bankrupt and loses his job because of 
lost time from work to be in court. 

As with any problem, I generally try to determine how widespread the problem is, why 
it occurs, and what the underiying motivation is. 

My conclusion is that GREED takes a large chunk of the blame. Additionally, I believe 
the practice is designed to blackmail the consumer/debtor into using what the banks 
generally call ACH transfers. This is where payments are automatically withdrawn 
from our checking account each month. Underiying this is the ability to control our 
finances in minute detail. That means we would have even less freedom than we 
have today (which is darned little as it is). 

In addition, I have had the occasion to intervene for people who have been trying to 
stop an ACH transfer for months and they cannot get them stopped. Once they do 
get them stopped, it is neariy impossible for them to get their money back. It seems 
the Consumers' only alternative is to take the company to Court, but then again, the 
ability to shift the blame is so great that the Consumer/Debtor is left out in the cold. 
Additionally, electronic funds are at the mercy of computer hackers. I vividly 
remember the First National Bank of Chicago problem here in Illinois, wherein 
hundreds of thousands of dollars were embezzled via the lightening speed of 
computer transactions. As I recall, none of that money was recovered. Hundreds of 
thousands of dollars were embezzled in Elgin, Illinois by an official of the government. 

Please read the enclosed newsletter. I will be publishing an addendum to that 
newsletter that will detail unfair credit practices perpetrated upon the consumer by the 
largest Credit Issuers. 

2 



214 



Could you please have this presentation read to the Subcommittee on the 28th and/or 
incorporated in the form of testimony in favor of your bill? I would very much 
appreciate your help in this matter. 

Sincerely 

Yvonne Dinwiddie, President 
Citizens Protecting Your Rights. 

cc: Bill Clinton, President of the United States 
Dennis Hastert, U. S. Congressman, Illinois 
Carol Moseley Braun, U. S. Senator, Illinois 
Robert Dole, Senator and Majority Leader of the Senate 
Lamar Alexander, candidate for President of the United States 
Pat Buchanan, candidate for President of the United States 
Steve Forbes, candidate for President of the United States 



215 




lA. 



North America's Oldest 
Creditors' Rights Organization 



Established 1895 



COMMERCIAL LAW LEAGUE OF AMERICA • 

STATEMENT FOR THE RECORD 

FROM THE COMMERCIAL LAW LEAGUE OF AMERICA 

ON H.R. 1963 

THE POSTMARK PROMPT PAYMENT ACT OF 1995 

SUBMITTED TO 

THE SUBCOMMITTEE ON THE POSTAL SERVICE 

OF THE 

COMMITTEE ON GOVERNMENT REFORM AND OVERSIGHT 

February 28, 1996 

The Conmercial Law League of America ("CLLA" or "the 
League") appreciates the opportunity to submit its statement 
for the record on H.R. 1963, the "Postage Prompt Payment Act 
of 1995." 

The CLLA is North America's oldest creditors' rights 
organization and is currently celebrating its 100th 
anniversary. Its opinion has been sought regularly and 
frequently by members and committees of Congress on a variety 
of issues relating to the collection of debts as well as 
bankruptcy matters. It is the publisher of the award winning 
Commercial Law Journal and is accredited by the American Bar 
Association to certify attorneys as specialists in the fields 
of creditors' rights and business bankruptcy. 

H.R. 1963 would provide that the date of the postmark 
used by the U.S. Postal Service to cancel a stamp would be 
the date a payment is considered to have been made regardless 
of when that payment is actually received by the intended 
recipient of the payment. 

The CLLA strongly opposes enactment of this legislation. 

One of the arguments made by the proponents of this bill 
is that consumers should not be penalized because of the 
vagaries of mail service in the United States. We agree 
wholeheartedly. However, we also note that most major 
grantors of consumer debt provide nearly two weeks as a 
"grace period" to account for the problems with mail 
delivery. 

Most mortgage contracts state that the due date for 
payment is the first of the month. Yet, virtually every 
mortgage document further provides that late penalties will 
not be added unless the payment is received after the 15th of 
the month. It is a rare occurrence for a payment mailed 
prior to the true contractual due date of the first of a 
month to be delivered so late that it isn't received until 
after the 15th of the month. 

Rather, the more typical situation is that payments are 
mailed by the consumer much closer to the end of the "grace 
period" with the hope that the payment will be received by 
the 15th. The reasons for this might be the mistaken belief 
that while the contractual due date is the first of the 
(REF: LEGISLATION; HR1963.P0S.PPR) 1 

150 North Michitan Avenue, Suite 600, Chicago, IL 60601 Phone (3U) 781-2000 Fax: (312) 781-2010 



216 




lA. 



North America's Oldest 
Creditors' Rights Organization 



Established 1895 



COMMERCIAL LAW LEAGUE OF AMERICA » 

month, he or she, by his or her own custom, really has until 
the 15th. Effectively this proposed legislation would 
create, in all likelihood, an extension of the contractual 
due date to the 15th of the month. 

Thus one of the fundamental flaws with this legislation 
is that it has the potential effect of changing the 
contractual due date of the first to the end of the "grace 
period" . 

If this were the only flaw, then arguably the credit 
granting industry could simply enforce the true, contractual 
due date and there would be no need for any "grace period" by 
recognizing the postmark for the purpose of determining the 
actual payment date of the bill. The irony of course is that 
many of the consumers who have been using the "grace period" 
to delay paying their bills and thus playing the "float" 
would be worse off than they currently are if the true 
contractual due date were enforced and the postmark were the 
governing factor. 

However there are other fundamental flaws that make the 
proposed legislation completely unworkable. The flaws go 
beyond the fact that millions of dollars would need be to 
spent by the credit granting and payment processing industry 
to be able to electronically read the postmark, retain the 
envelope and be able to retrieve it as needed. 

One of the underlying concepts behind this legislation 
is that if the Internal Revenue Service can use postmarks for 
determining payment date for income tax returns, then the 
credit granting industry could do so as well. What makes 
the postmark work for the IRS on income tax returns is that 
they are due on a single date. 

Contrast this to the typical situation for the consumer 
and for the credit grantor. Virtually every day can be a 
due date for a different batch of consumers or a different 
batch of transactions. The due date may be a function of 
when the purchase was made, when the credit card was 
approved, a date selected by the consumer for his or her own 
convenience or even some other seemingly arbitrary date. 

Interestingly enough, the IRS has a similar situation 
with some of its own required filings. The date that 
deposits for trust fund taxes must be made varies from 
employer to employer depending upon a variety of factors. 
Much like consumer debt, these funds could be due on almost 
any given day of the week. Like consumer debt it is a moving 
target. How does the IRS handle this type of similar 
situation? The postmark on a payment is not controlling. In 
fact, it is irrelevant to the IRS. 

Rather, it is the date of actual receipt as evidenced by 
either the IRS itself or a depository bank. That is how the 
IRS and the federal government handles the "moving target" 
(REF: LEGISLATION; HR1963 .POS .PPR) 2 

150 North Michigan Avenue, Suite 600, Chicago, IL 60601 Phone: (312) 781-2000 Fax: (3U) 781-2010 



217 




LIA. 



North America's Oldest 
Creditors' Rights Organization 



Established 1895 



COMMERCIAL LAW LEAGUE OF AMERICA • 

type due date for debt. Postmarks don't work for that type 
of debt and the IRS recognizes that fact. To try to apply an 
approach that works for a single fixed due date to a "moving 
target" due date won't work and is fundamentally flawed. 

The fallout from using the postmark to determine payment 
date would make a shambles out of the retail collection 
efforts and upon enactment would effectively make every debt 
collector potentially in violation of the Fair Debt 
Collection Practices Act (FDCPA) on every single attempt to 
collect a debt. 

The outstanding balance that a consumer owes at any 
given time would itself become a "moving target" and a demand 
for payment could be made for an incorrect amount if a 
payment had been postmarked but not received. Under the 
FDCPA, making a demand for an improper amount (see 15 U.S.C. 
1692(e)) subjects the debt collector to a potential $1,000 
civil damages, plus several additional thousands of dollars 
in attorneys fees payable to the debtor's counsel, regardless 
of any actual damages proven by the consumer. 

The FDCPA has been held by the courts to be a strict 
liability statute, and even technical violations are subject 
to what many consider to be extortion by plaintiffs' counsel. 
The result in a significant number of these cases is a 
minimum payment to the consumer and thousands of dollars 
in attorney's fees to the consumer's lawyer. The "no harm, 
no foul" rule just doesn't apply when dealing with the 
FDCPA. 

with the postmark as the date, no one could be certain 
what the outstanding balance was on a debt at any point in 
time. Thus, any demand letter, even one with disclaimers, 
would be a potential hand grenade ready to explode in the 
hand of the collector. The chilling impact is beyond belief. 
The CLLA strongly opposes enactment of H.R. 1963 and any 
similar legislation that would make the postmark the 
controlling date for determining when payment is received. 

Thank you for considering this position paper and if we 
can provide any additional information, please contact us. 



(REF: LEGISLATION; HR1963 .POS .PPR) 3 



ISO North Michigan Avenue, Suite 600, Chicago, IL 60601 Phone: (312) 781-2000 Fax: (312) 781-2010 



218 




\l::ViU,iIi |-in.!!KK!i SriVilVS A 

Statement for the Record from the 

American Financial Services Association 

on H.R. 1963, the "Postmark Prompt Payment Act of 1995' 

submitted to 

The Subcommittee on the Postal Service 

of the Committee on Government Reform and Oversight 

February 28, 1995 



The American Financial Services Association ("AFSA"), organized in 1916, is the 
national trade association for the consumer financial services industry, representing a diverse 
group of providers from small independently-owned finance companies to some of the nation's 
largest diversified financial services companies. Our members provide all forms of consumer 
financial services, including credit card loans, first and second mortgages and home equity loans, 
automobile, mobile home and automobile fmancing, imsecured personal loans, and insurance. 

AFSA member companies are major users of mail. Because mail payments represent the 
principal payment mechanism for consumers, our members and their customers are directly 
impacted by the provisions of H.R. 1963. 

AFSA believes the Postmark Prompt Payment Act should not be enacted. It would 
impose an unnecessary financial burden on financial services providers in the form of increased 
pajTnent processing costs, billing dispute costs and other expenses. Rather than encouraging 
solutions to mail delays that would benefit business and consumers alike, the Act would penalize 
businesses which receive payment mail late due to Postal Service delays — a problem business 
owners are powerless to address. 

The Act would also appear to have a negative impact on the Postal Service, creating 
strong incentives for businesses to encourage their customers to move fi-om the mail to electronic 
payment technologies. 



•■)]'■> 1 iphtcenlh Sircel. N W. Washinglon, DC 2l)006 Telephone. (202) 2%-5544 Fax: (202) 2230121 



219 



The Delayed Delivery Problem 

Delayed delivery of payments by the Postal Service is a problem that affects consumers 
and businesses alike. While some consumers may prefer to mail payments at the last minute in 
order to receive a few days' "float" while the payment moves through the mail, most prefer 
knowing that payments will reach their addressees shortly after they are deposited in the mail, 
avoiding late charges. 

Businesses would recognize significant benefits if mail moved more rapidly, since such 
pajinents cannot be put to work by businesses until they are received, hideed, large-volume 
mailers frequently arrange to pick up their incoming payments at the local Post Office, rather 
than wait until it is delivered, so that the payments can be processed more rapidly, and have 
worked with the Postal Service on other ways of expediting mail delivery, such as the use of 
machine readable envelopes and more detailed postal codes." 

While H.R. 1963 creates a presumption that mail is delivered on the day it is postmarked, 
same day delivery of the mail is a rare occurrence. (Indeed, the Postal Service, for a very 
substantial fee, offers next day delivery through its Priority Mail service). Our members' 
experience indicates that most first class mail is delivered 3-4 days after it is mailed. 

With regard to the payments which arrive late, we are aware of no reliable information 
which indicates that postal delays, as opposed to late mailing, are to blame. Nevertheless, 
businesses and consumers have long learned to anticipate the time that mail takes to move to its 
addressees by mailing early. By simply mailing payments a few days before they are due, the vast 
majoritN' of consumers are able to make payments on a timely basis. In addition, most major 
creditors provide an additional "grace period" (of varying duration) beyond the payment date 
stated on the customer's statement. This addition^ time period takes into accoimt the possibility 
that a payment arrived late due to a delay in the mail which the consumer could not have 
anticipated. Allowing this extra time period avoids the ill will that might result if payments that 
arrived shortly after the due date consistently resulted in extra finance charges or late payment 
fees. 

H.R. 1963 addresses a "problem" which most consumers never experience, and which is 
avoidable in all but the rarest cases. Unfortimately, as is discussed in more detail below, the 
bill's solution to this problem would have a detrimental and costly impact on all business users. 



Requirements for Credit Card Account Payments 

The Truth in Lending Act (15 U.S.C. Section 101 et seq.) establishes the standards for 
crediting payments to open end consumer credit accoimts and for providing periodic statements 
to consumers who hold such accounts. Section 164 of the Act requires payments on such 

' Such initiatives underscore the reality that businesses are supportive of measures to expedite mail delivery. 

In order to put payments to work, businesses must process incoming mail promptly. They cannot be indifferent to 
mail delays or allow payments to sit around unopened in the hope that the delays will generate additional late fee 
income on a small percentage of payments. 

2 



220 



accounts to be credited to the account upon receipt. This requirement is implemented by Section 
226.10(a) of Federal Reserve Board's Regulation Z, which states that payments to an account 
shall be credited "as of the date of receipt, except when a delay in crediting does not result in a 
fmance or other charge ...." 

Regulation Z also establishes the responsibility of credit grantors in cases where a 
payment is received on a timely basis, but after a billing statement reflecting a finance or service 
charge has been sent to the customer. In this situation, the customer's account must be adjusted 
during the next billing cycle to remove such charge(s). This requirement removes any incentive 
a creditor might have to delay processing a payment once it is received. Of course, creditors 
have another incentive to process payments promptly: incoming payments must be processed 
rapidly so they can be deposited to the creditor's account. 

The presumption established by H.R. 1963 that payments sent through the mail are 
received when postmarked, whether or not actually received by the addressee on that date, would 
have a severe impact on consumer credit providers which process millions of statements and 
payments each month. It would impose substantial operational expenses, by requiring creditors to 
discern postmark dates and retain evidence of when a payment was postmarked (by filing 
envelopes or retaining photo images of payment envelopes). It would also reduce creditors' 
ability to cover the costs of offering credit, and their ability to allocate the costs attributable to 
late payments to those customers who fail to make their payments on time. 



Operational Impact 

Large credit card issuers process millions of incoming payments monthly. Individual 
employees in a large processing center typically handle 2000 or more payments each day, using 
high speed mail equipment and computer data entry. Each payment envelope must be opened and 
its contents (the customer's payment check and, in most cases, the return portion of the billing 
statement) quickly reviewed to assure that the payment will be credited to the proper account and 
in the proper amoimt. Information such as the payment date, amount and account number are 
automatically recorded by scanning equipment, while clerical personnel confirm that the payment 
information conforms to the amount on the check which accompanied the billing statement. A 
photo image of the customer's payment check is made and automatically filed (for retrieval in the 
event of a subsequent inquiry by the consumer), and the original forwarded for deposit. The 
envelope containing the payment is discarded. 

The entire process of recording incoming payments is completed in a matter of seconds 
per payment. Prompt handling, and the recording of only the essential information for each 
account, is essential to minimize the cost of processing and thereby to keep the cost of credit 
affordable. 

H.R. 1963 would increase the amount of time needed to process account payments by 
requiring creditors to interpret, record and retain information about the postmark on the payment 
envelope. Often, however, envelopes do not bear a readable postmark date. (Our members 



221 



estimate that more than 10% of remittance mail falls into this category). Others contain 
postmarks that require careful examination in order to discern the date. 



Illegible Postmarks will Increase Processing Costs 

The bill does not indicate how unreadable postmarks would be treated — an issue that 
would have to be resolved to avoid misunderstanding and billing error disputes. 

Since H.R. 1963 would link a consumer's responsibility for finance charges and late 
payment fees to a payment's postmark date, creditors would be required to find some way to 
retain and retrieve payment envelopes (or photo images of them). This would require the 
acquisition of equipment capable of high-volume processing and employee training in its use, 
adding new and considerable costs. The additional time required to read, retain and copy 
millions of envelopes per month would translate into ftirther costs; a delay of even a few seconds 
per payment results in a multi-million dollar additional expense for a large creditor. 



Dispute Resolution Costs will Increase 

One of the consequences of H.R. 1963 will be increased consumer uncertainty about the 
crediting of payments and a higher volume of disputed billing statements. Today, customers who 
believe that a creditor failed to post a payment promptly have in their possession an easy means 
of checking on the creditor: a copy of the payment check bearing the date on which the creditor 
deposited it for payment. If, for example, the check reveals that the creditor deposited the 
payment on the date payment was due, but failed to post the payment on or before that date, the 
customer has clear evidence of the error which will assure a prompt crediting of the payment 
(and the removal of finance charges and late fees) in the subsequent billing cycle. On the other 
hand, if the consumer's check bears a deposit date several days after the payment date, it may 
refresh the recollection of the consumer as to when the payment was mailed, and satisfy him or 
her that a delayed posting date was the result of late mailing date, not creditor error. 

H.R. 1963 makes the cancellation date on the customer's check irrelevant, since in many 
cases payments will have be credited as of a date which precedes the receipt and depositing of the 
payment check Under H.R. 1963, only the creditor, but not the consimier, will have the 
information needed to determine if a payment was properly credited on the postmark date. 

Rarely, if ever, does a consumer know the postmark date of a payment which has been 
deposited in the mail, or retain documentation of it. Depending on how the payment was mailed 
(e.g., taken to a post office, deposited in a mail box on the street or in an office building, left in 
the customer's letter box for posting by the letter carrier) a postmark may not be placed on the 
envelope until one or several days after the consumer "mailed" it. 



222 



Nevertheless, the inevitable result of the enactment of H.R. 1963 will be to create the 
understanding among consumers that payments should be credited on the day they are "mailed."^ 
When consumers discover payments that are not posted on the mailing date, they may assume 
that a billing error has occurred, and request a correction. Creditors will be required to retrieve, 
and mail to the customer, a copy of the envelope in which the payment arrived to demonstrate to 
the consumer that the payment was credited on the postmark date. In some cases, a microfilm 
copy of an envelope will not resolve the customer's concern, since customers often mail 
payments in envelopes which bear no return address. Such customers may not be satisfied that 
the copy which is sent to them is of the envelope they used in making the payment. 

The regime established by H.R. 1963 will result in a significant increase in the number of 
consumer inquiries which will be made about alleged errors in crediting payments. While most 
will prove to be unfounded, the cost of investigating and responding to them is likely to be 
enormous. 



Finance Charges and Late Fees 

The principal impact of H.R. 1963 will be to prevent creditors from collecting finance 
charges, and (in many cases) late fees, on payments which are received after the date on which 
the customer agreed to make a payment, when the payments are postmarked on or before the due 
date. Finance charges and fees are not simply arbitrary means of generating revenues for lenders, 
or a way of taking advantage of Postal Service inefficiencies. They are the means by which 
creditors are reimbursed for the considerable expenses they incur in extending credit — expenses 
which range from the cost of obtaining the fimds that were loaned to the consumer, to the 
expenses of billing and collecting accounts and writing-off uncollectible accounts as bad debts. 
These costs cannot be offset until payment is received, regardless of when postmarked. 

Consumers who use credit have had access to the creditor's ftinds for weeks (and 
sometimes for months) and have used the funds to acquire goods or services. Consumers 
understand that their cost of credit depends on how they use their credit accounts. When credit 
card payments are made in frill before a "grace pjeriod" has expired, the consumer may pay 
nothing at all for the use of these funds. Consumers who pay their account on a timely basis, but 
in an amount less than the balance due, will incur a finance charge on the unpaid balance. Those 
who make no payment, or pay late, will generally also incur a late fee. H.R. 1963 would, of 
course, prohibit the recovery of some of these costs by preventing the collection of finance 
charges and late fees on debts which have not been repaid, but which would be deemed to have 
been received. 

If creditors are compelled by H.R. 1963 to fmance credit extensions which remain unpaid 
(even for a few days), but are prohibited from imposing finance charges for this period, they will 



' The Washington Post's report on the Subcommittee's hearings on H.R. 1 963, headlined "Giving New 

Meaning to 'Check's in the Mail'" (October 20, 1995), illustrates the ease of confusion between the mailing date and 
the postmark dale of a payment. 

5 



223 



incur considerable costs which will have to be recovered in some way.' Whether this takes the 
form of higher finance charge rates or annual card fees, reductions in payment grace periods, or 
changes in credit standards to reduce bad debt losses by restricting credit to more affluent 
individuals, the consumer will ultimately bear the cost of the supposed benefit conferred on some 
by H.R. 1963. Moreover, while the law currently allows the cost of late payments to be borne by 
those whose payments are in fact not made on time, H.R. 1963 would require all consumers to 
absorb this cost. 



Impact on Securities Firms 

The presumption that payments are received on the date they were postmarked would 
appear to create a number problems for firms engaged in the securities brokerage business. 
Securities broker-dealers are subject to statutory and regulatory requirements establishing 
transaction time fi-ames which are inconsistent with the presumption of receipt established under 
H.R. 1963. 

Pursuant to the Securities Exchange Act of 1934, the Board of Governors of the Federal 
Reserve System has established requirements for extensions of credit to customers through 
margin accounts. Under Regulation T (12 C.F.R. Section 220.1 et seq.), a deficiency in a margin 
account must ordinarily be satisfied within 3 business days after the deficiency was created (e.g., 
by a securities purchase order) by "receipt of funds or securities" (emphasis added). If the 
deficiency is not satisfied within this period, the broker dealer is required to liquidate securities 
in the customer's account to cover the amount of the deficiency, and thereby to reduce the 
amount of credit that is extended to the customer. 

H.R. 1963, by deeming that a payment is received on its postmark date, not on the date 
that the funds or securities are received, would establish an inconsistent requirement which is 
particularly worrisome in an environment when the value of the payment itself continually 
fluctuates. While the customer's payment on a securities transaction may not be received for 
several days after a transaction was executed, the Act would deem the payment to have been 
made on the date it was postmarked, creating uncertainty as to the value which must be credited 
to the customer's account. A change fi-om receipt date to postmark would £ilso affect the 
customer's responsibility for late payment fees which are currently imposed on the basis of the 
payment receipt date, not its posting date. 



' The Internal Revenue Service's use of postmark dates for crediting tax payments has been offered as 

evidence that method would work in the private sector, but no mention has been made of the considerable cost of this 
practice. By encouraging taxpayers to delay mailing their payments until the due date (without incurring the 
penalties or interest that would be due if the IRS charged them on returns not received by the due date), this practice 
clearly reduces government revenues and increases the Federal budget deficit. The additional costs are paid by all 
taxpayers, including on-time and early filers, rather than by those pay late. There may be public policy reasons for 
allowing the IRS to forego revenues and shift costs in this manner each April (although none come to mind), but they 
do not justify imposmg a similar requirement on private businesses every month. 



224 



Finally, the use of payment postmark dates would affect securities firms' ability to 
comply with the requirement that they obtain permission from the Federal Reserve Board to 
extend credit to margin account customers for an additional period of time if settlements on 
transactions are not received on time. While payments which are in the mail may be deemed to 
have been received under H.R. 1963, the fum does not in fact have them or know that they have 
been mailed, and would therefore be required to seek permission to continue extending credit to 
the customer. The new accounting and recordkeeping requirements that would be engendered by 
this requirement would be costly. 

We are aware of no evidence that existing practices of securities firms with regard to 
payments sent through the mail are harmfial to consiuners. These practices have been established 
in accordance with requirements established by, and monitored by, the Securities and Exchange 
Commission, the Federal Reserve Board, state securities regulators and industry self-regulatory 
organizations. Transactions subject to these requirements should not be subject to inconsistent 
standards established by the Postal Service. 



Expedited Delivery and Crediting of Payments 

Rather than enacting a presimiption that payments which arrive late were received on the 
date they were postmarked. Congress should consider measures that would expedite the delivery 
of mail containing payments, and the prompt crediting of payments once they are received. 

The Postal Service should be directed to implement procedures to reduce delays in 
delivery for payments which can be achieved without increasing mailing costs. For example, the 
Postal Service could establish procedures to give payments priority over other types of 
First-Class mail. This could entail the use of payment envelopes which are specially coded, 
colored, or machine readable, so that they could be processed and delivered on an expedited 
basis. The Postal Service could also establish special mail collection procedures (e.g.. specially 
marked mailboxes) for payment mail which would allow such mail to be processed separately 
from other First-Class mail. Finally, to reduce imcertainty as to when payments have actually 
been received, the Postal Service could be directed to postmark payment mail on the date it is 
actually delivered, rather than (or in addition to) the date a consumer places it in the mail. 

Concerns that some businesses may not post payments promptly upon receipt could also 
be addressed by less drastic means than the provisions of H.R. 1963. As noted above, consumer 
credit providers are already required to post payments as of the date they are received, and may 
not collect interest or late fees on a payment that was received on or before its due date. If there 
is evidence that other businesses are not processing payments in the same manner, Congress 
should explore imposing a similar requirement on such businesses. 



225 



Unfunded Federal Mandate 



The Postmark Prompt Payment Act would impose significant payment processing costs 
on state, county and municipal governments. These entities, like private businesses, utilize the 
mail to collect income and property taxes, payments for a wide variety of services (e.g., college 
tuition, automobile registration, water service, trash collection), and penalties for parking tickets, 
littering and other offenses. The Act would appear to cover all such payments (to the extent the 
government entity seeking payment provides an invoice, bill, or statement to the customer), and 
would require these entities to change systems that are currently credit payments on the date of 
receipt to comply with the date-of-postmark requirement of the Act. The cost of complying with 
this new federal requirement, and the need for federal support for these mandated costs should be 
explored. 



Conclusion 

H.R. 1963 raises serious questions which should be carefully considered before further 
action is taken on this legislation. 

There is a need for reliable information on the dimension of the perceived problem, and 
the extent to which late payments are attributable to Postal Service delays and consumer 
procrastination, as opposed to business delays in crediting payments. Business should not be 
punished for delays over which they have no control. 

The interplay of the Postmark Prompt Payment Act with accounting principles and with 
the requirements of banking, securities and consumer protection laws should be considered. 
Businesses should not be required to change established systems for crediting and accoimting for 
payments merely because some payments arrive late due to Postal Service or customer delays. 
Exemptions from the Act for payments subject to Truth in Lending or other legal requirements 
may be needed. 

The Act's impact on the profitability and employment in the financial services sector 
and on the Postal Service should be explored. 

The operational and revenue impact on state, local and mimicipal govenmients, and the 
need to provide federal fiinding for such costs should be reviewed. 

The real solution to delayed payment crediting is improved Postal Service delivery of 
payment mail. The Subcommittee should explore the extent to which changes in Postal Service 
practices could expedite the handling of payment mail. 



226 



Testimony 



TESTIMONY OF 

MARC E. LACKRITZ 

PRESroENT 

SECURITIES INDUSTRY ASSOCIATION 




HEARING BEFORE THE 

SUBCOMMITTEE ON THE POSTAL SERVICE 

HOUSE GOVERNMENT REFORM AND OVERSIGHT COMMITTEE 

FEBRUARY 28, 1996 



Chairman McHugh, Representative Collins, Members of the Subcommittee, the 
Securities Industry Association ("SIA")' appreciates the opportunity to submit its views 
on H.R. 1963, the Postmark Prompt Payment Act of 1995. This legislation would give 
new meaning to the old excuse "the check is in the mail" by making the U.S. Postal 
Service postmark stamp date the presumed date of receipt regardless of xvhen a payment 
actually was received. We understand the purpose of the bUl is to protect consumers who 
are punished for late payments through no fault of their own. This bill has tremendous 
emotional appeal on the surface; however, a careful examination of its consequences 
leads us to conclude it would cause more harm than good for investors and consumers. 
Not only would H.R. 1963 conflict with many of the securities industry's clearance and 



The Securities Industry Association is the trade association representing the business interests of 
more than 700 securities firms in North America. Its members are securities organizations of 
virtually all types - including investment banks, brokers, dealers and mutual fund companies. SIA 
members are active in all phases of corporate and public finance. Collectively, they provide 
investors with a full spectrum of securities and investment services and account for about 90% of 
the securities revenue in the United States. 

Securities Industry Association 

1401 Eye Street, NW • Washington, DC 20005-2225 • (202) 296-9410 • Fax (202) 296-9775 
120 Broadway, New York, NY 10271-0080 • (212) 608-1500 • Fax (212) 608-1604 



227 



settlement procedures which would increase both systemic and investor risk, it would 
also require securities firms to violate existing federal law regarding the sale of securities. 
For these reasons, SIA is opposed to H.R. 1963 in its current form. 

To understand why we are opposed to such ostensibly consumer-oriented 
legislation, it is useful to include some background about the securities industry and its 
regulatory system. The U.S. securities industry has helped create the world's most 
efficient capital markets through its vitality, innovation, creativity, and resourcefulness. 
Even in economic downturns, the industry has an unparalleled record of raising capital to 
fund corporate growth and public improvements. The strength of the industry reflects 
directly on the economic vigor of the United States, making our markets the envy of the 
world. 

The strength and integrity of our industry and markets, however, depends on a 
balanced regulatory system that emphasizes full and fair disclosure of information and 
investor protection. The securities regulatory system is multi-faceted — not only do we 
have oversight at the federal and state level, but we are also subject to a considerable 
degree of self-regulation through self -regulatory organizations ("SROs") and the 
compliance departments of individual firms. Our regulatory system was created in the 
1930s as a reaction to the excesses which led to the stock market crash o' 1929. It has 
changed relatively little over the last 60 years - mainly because it works so well, as 
demonstrated by a high degree of investor confidence and record levels of growth in the 
markets. 

Congress has amended the regulatory system only at times when it has viewed the 
system as insufficiently flexible to address new problems as they have developed. For 



228 



example, in the aftermath of the stock market crash of 1987, Congress passed the Market 
Reform Act to give the SEC and SROs the tools necessary to respond to excessive market 
volatility. Since that time, the SEC and the securities industry have worked extensively 
to curb harmful volatility and further reduce risks by improving the clearance and 
settlement process. As a result of these efforts, the time frames within which securities 
transactions must settle are extensively regulated by the SEC and SROs. H.R. 1963 is 
inconsistent with this carefully designed system. 

Upon executing a trade, a broker-dealer sends the customer a confirmation 
statement, which literally confirms the details of the trade. This statement includes the 
settlement date, the price of the security, and the amount of money due from the 
customer. By no later than the settlement date — typically three business days after the 
date of the trade — the customer must pay for the securities. In cash accounts, clients pay 
the full purchase price of the securities with cash or by check. In margin accounts, 
however, customers can finance their purchase by borrowing part of the purchase price 
from the broker-dealer. The balance of the purchase price in excess of the amount that 
may be financed by margining, however, must be paid no later than settlement date. 

The Securities Exchange Act of 1934 gives the Federal Reserve Board ("Fed") 
authority to establish requirements "with respect to the amount of credit that may be 
initially extended and subsequently maintained" for the purchase of securities. ^ The Fed 
adopted Regulation T' to govern credit extended by broker-dealers for securities 



Section 7. Such restrictions on credit were deemed necessary to prevent brokerage firms from 
lending too much money on stocks and also to protect customers from borrowing on too thin a 
margin, thereby preventing a repeat of the market crash. 

12 C.F.R. Section 220.1, et seq. 



229 



purchased in both cash and margin accounts.'' Regardless of the type of account, Reg T 
requires customer to make "prompt" payment for all securities transactions for the 
protection of both the customer and the broker-dealer. The Fed has consistently defined 
"prompt" to mean that the payment must be received by the settlement date. 

In June 1995, the industry moved to a three day settlement cycle — "T+3" — which 
means that customers generally have three business days from the date of the trade to 
remit funds to their broker-dealer.^ The primary reasons for decreasing the settlement 
cycle from five days to three days were to curb market volatility and reduce risk in the 
clearance and settlement system. H.R. 1963 directly contradicts this policy — by deeming 
a payment is received on the date it is postmarked, the bill would force broker-dealers to 
hold trades open for an undetermined jjeriod while they wait for the mail. 

In addition to requiring payment to be made by the settlement date, Reg T also 
specifies that if payment has not been received after five business days, a broker-dealer 
must liquidate the customer's position or obtain an extension from the firm's SRO.* 
Failure to do so constitutes an unlawful credit extension, regardless of whether the check 
is in the mail by the fifth day. Deeming that payment is received on its postmark date and 
not on the date that the funds or securities are received would force broker-dealers to 
choose between alienating a customer by liquidating his or her position or suffering losses 
if the value of the shares declined during the time the check is in the mail. In addition, 



In general, the required margin for each security held in a margin account is 50 percent of current 
market value of the security, as calculated according to a formula in the rule. See 12 C.F.R. 
Section 220.3(g). 

17C.F.R. 240.15c6-l. 

12 C.F.R. Section 220.8(b). In addition, Reg T also requires that a margin call must be satisfied 
within five business days after a margin deficiency is created or increased. 12 C.F.R. Section 
220.4(c)(3). 



BOSTON PUBLIC LIBRARY 

^^ 3 9999 05983 617 9 

broker-dealers would incur tremendous liability if they liquidated transactions for non- 
payment, only to discover that the customer's payment was postmarked prior to the 
liquidation date. Any possible benefit a customer might gain from H.R. 1963 would be 
outweighed by market volatility, an increase in disputes that go to arbitration, and 
litigation between clients and their brokers. 

H.R. 1963 raises many other issues: Would a firm be liable for interest on credit 
balances in client accounts from the postmark date? What would the bill's impact be on 
the hold period for clearing checks? Would the firm have to rebate margin interest 
charges to clients based on the postmark date? These are only some of the questions that 
the legislation does not address. 

Given the importance of efficient clearing and settlement mechanisms to our 
financial system, SIA urges you to consider carefully the impact of any proposed change 
prior to its adoption. H.R. 1963 would require an extensive overhaul of some of the most 
important components of our financial system if it were enacted. In our view, the 
uncertainty in the market produced by such an effort would far outweigh any expected 
benefits. 

Mr. Chairman, we are aware of your strong desire to enact legislation and SIA 
wants to play a constructive role in this process. We would respectfully suggest 
examining a more targeted approach that addresses the problem of unreliable mail 
delivery service, and the subsequent unfair late fees. We caution the subcommittee 
against adopting legislation that inadvertently harms consumers and investors, the very 
group you are trying to help. We look forward to working with you in the months ahead 
and thank you for this opportunity to submit our views. 



5 

o 



ISBN 0-16-053895-5 



7801 




60"538957 



90000