Mr. WHITENER. Now, I note that this publication further says that another type of exemption is-and maybe this would cover our Chapter 13 proposition "judicial officers or others acting pursuant to court order."

Do you think that exemption might properly be written into H.R. 9806?

Mr. KNEIPP. Yes, sir, I think so. Or, as an alternative, the language I suggested earlier. "Nothing herein contained shall be construed as superseding or amending

Mr. WHITENER. It occurs to me if these seven states have identical language already, it may be better to follow the accepted language.

I note they say that five states exempt non-profit organizations. "The exemption is only if no charge is made for the service." Delaware and Hawaii permit a nominal charge, the reimbursement of expenses. New Mexico exempts such an organization when it is organized as a community effort to assist debtors. Pennsylvania exempts welfare agencies which act as debt poolers on behalf of debtors without compensation and profit.

Under your bill the non-profit organization would have no limitation on charges.

Mr. KNEIPP. A nominal sum. They are authorized to charge and collect nominal sums for reimbursement for expenses in connection with such services. The last part of Section 3 of the Broyhill bill.

Mr. WHITENER. You would interpret that to mean a non-profit organization could do no more than recoup its out-of-pocket expenses? Mr. KNEIPP. Yes, sir.

Mr. WHITENER. Now, they say here that five states exempt fulltime employees of a debtor to act as the adjuster of his employer's debt. Four states exempt a creditor when he adjusts a service without charge. What do you think of those exemptions?

Mr. KNEIPP. They seem reasonable, but there may be room for abuse unless they are very carefully circumscribed. I can see what might be involved.

For instance, a person who owes money to Woodward & Lothrop and Hecht's and Garfinkel's might have somebody in Woodward & Lothrop help him adjust his debt and prorate the payments among the three stores. I think that that might be a reasonable approach and it may be part of the Board of Trade's approach. I am not aware of it.

Mr. WHITENER. It appears also that Oklahoma excepts retail merchants trade associations and non-profit groups formed to collect accounts and exchange credit information. I suppose you agree that such an organization might have a credit bureau attached to it?

Mr. KNEIPP. I don't believe the Metropolitan Washington Board of Trade has such a facility and I don't believe the D.C. Chamber of Commerce does.

Mr. WHITENER. On page 8 of the Department of Labor publication-perhaps some of these are repetitious, but is says the usual exemptions are, (1) attorneys; (2) banks, fiduciaries, banks and lending institutions duly authorized and permitted to do business in the

states.

This bill does not exempt those institutions.

(3) Title insurors and abstract companies while doing an escrow business. Do you think that would be a worthwhile addition?

Mr. KNEIPP. Mr. Whitener, I haven't really analyzed the type of operation that might be engaged in by a bank or title company under these circumstances. The business, in my view, is one where an individual turns over his paycheck and then has it parceled out among his debtors for a fee.

Now, whether a bank or a title company would be in this same position, I don't quite see how they would.

Mr. WHITENER. Perhaps we should hear from them or their association before we act finally. Have they been advised of our hearings? Mr. SISK. I think the suggestion is a good one that at least they be given an opportunity to make a statement or to testify. I am not sure how long these hearings will be kept open.

Mr. WHITENER. Exemption (4) is employees of licensees when acting in the normal course of their employment. I suppose that is a licensee under the state law.

(5) Judicial officers or others acting pursuant to court order. We have already dealt with that.

(6) Non-profit religious, fraternal or cooperative organizations offering debt pooling services for their members. We haven't discussed that one. What do you think about an exemption where these organizations are limited to rendering this service for their members?

Mr. KNEIPP. I think that would be included within Section 3 of the Broyhill Bill.

Mr. WHITENER. Exemption (7) Employers offering debt pooling services exclusively for their employees.

Mr. KNEIPP. I think that would be a good addition; yes.

Mr. WHITENER. Now, I note further that the exemption of attorneys under the laws of several states is applicable only when the debt pooling occurs in the normal course of their practice, as we have discussed. In Oregon, it is is applicable to attorneys, who do not specialize in the business of debt pooling.

In Wisconsin it says there are no exemptions.

I think those are things we should consider. I think we might also point out to you and the other interested parties that Mr. Adams advises that his state legislature, in the State of Washington, has also recently enacted a regulatory statute which he has furnished us.

What type of situation did you have in mind when you were discussing the inability of the lender to counsel the type of debtor we are talking about the legality of the contract or the debt?

Mr. KNEIPP. For example, under the District of Columbia Motor Vehicle Installment Sales Act there is a requirement that contracts shall be fully filled out before they are signed by the buyer and the seller and that the notes that might be given be filled out.

Now if, for example, the buyer signs the contract in blank without all of the blanks having been filled in, this would be in violation of District law. It might come about, and I think it has in the past, that the amounts are changed after the papers have been executed by the buyer.

Now, this, to me, would be fraud. Then this would be fraud in the inception of the contract. It would be a real defense that the buyer would have against the seller. Yet he may not know this and the debt adjuster merely wants to know how much he owes. The man says, "Well, I owe the ABC Motor Company $500," not knowing that the

84-181-67-5

contract was not a valid one to start with. This is what I have in mind, sir.

Mr. WHITENER. There may be a wife whose husband has accepted obligations that are not legally her obligation, or a minor may be involved.

Mr. KNEIPP. As I indicated in my statement, the debt adjuster has a vested interest in not finding any infirmities in the underlying

contracts.

Mr. WHITENER. His fee is geared to his pay-out?

Mr. KNEIPP. Yes.

Mr. WHITENER. Somewhat like the executor of an estate.
Mr. SISK. The gentleman from Maryland?

Mr. GUDE. I have no questions at this time, Mr. Sisk. But, I think it would be appropriate to insert in the record the U.S. Supreme Court's opinion in the case of Ferguson vs. Skrupa, and I ask permission to have it inserted in the record. The Court in this case upheld the constitutionality of the Kanas law outlawing debt-adjusting in that State. Mr. SISK. Without objection, the copy of the opinion will be placed in the record.

(The document referred to appears on pp. 63-69:)

Mr. SISK. Mr. Kneipp, we thank you very much for your testimony this morning.

The committee might wish to discuss some points further for possible amendments. I would assume you would be available should we call you?

Mr. KNEIPP. I will be glad to be, sir.

Thank you, Mr. Chairman.

Mr. SISK. At this time the committee will be glad to hear from Mr. Morris Rabinowitch, President, California Association of Credit Counselors, and of Financial Counselors, San Francisco, California.

I might say to the committee that I know Mr. Rabinowitch and something about his operation in California. I know him to be a gentleman of integrity and he is certainly a highly respected citizen of our state of California. Without additional stating of my position one way or another on the testimony he will be giving, I do welcome a fellow citizen from our great state of California.

At this time the committee will be glad to hear you, Morris. Were there other attachments you also wanted to make a part of the record?

STATEMENT OF MORRIS RABINOWITCH, LEGISLATIVE DIRECTOR, AMERICAN ASSOCIATION OF CREDIT COUNSELORS, AND PRESIDENT, CALIFORNIA ASSOCIATION OF CREDIT COUNSELORS, AND OF FINANCIAL COUNSELORS, SAN FRANCISCO, CALIFORNIA

Mr. RABINOWITCH. Yes, there was, Congressman. I think I have submitted copies of the surveys of the State of Illinois Financial Advisory Board on Financial Institutions. I will leave you with a copy of letters from the National Better Business Bureaus and letters from various officials and credit grantors and people throughout the country as an exhibit for this committee if I may, after the testimony. Mr. SISK. At this point your statement will be made a part of the record, without objection.

93

*[372 US 726]

*WILLIAM M. FERGUSON, Attorney General for the
State of Kansas, et al., Appellants,

V

FRANK C. SKRUPA, doing business as Credit Advisors

372 US 726, 10 L ed 2d 93, 83 S Ct 1028, 95 ALR2d 1347

[No. 111]

Decided April 22, 1963.

Argued March 20, 1963.

SUMMARY

A Kansas statute makes it a misdemeanor for any person to engage "in the business of debt adjusting" except as an incident to the lawful practice of law, the statute defining "debt adjusting" as the making of a contract with a particular debtor whereby the debtor agrees to pay a certain amount of money periodically to the adjuster, who shall for a consideration distribute the money among specified creditors in accordance with a plan agreed upon.

The plaintiff, engaged in the business of "debt adjusting," instituted the present suit in the United States District Court for the District of Kansas to enjoin the enforcement of the statute on the ground that it violated plaintiff's rights under the due process clause of the Fourteenth Amendment. The District Court, sitting as a three-judge court, granted the relief asked for. (210 F Supp 200.)

On appeal, the Supreme Court of the United States reversed. In an opinion by BLACK, J., expressing the views of eight members of the Court, it was held that the statute did not violate the due process clause nor, by excepting lawyers, deny the equal protection of the laws to nonlawyers.

HARLAN, J., concurred in the judgment on. the ground that the state statute bore a rational relation to a constitutionally permissible objective.

U. S. SUPREME COURT REPORTS