[Federal Register Volume 60, Number 90 (Wednesday, May 10, 1995)]
[Proposed Rules]
[Pages 24805-24808]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-11360]



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FEDERAL TRADE COMMISSION

16 CFR Part 444


Regulatory Flexibility Act Review of Trade Regulation Rule 
Concerning Credit Practices

AGENCY: Federal Trade Commission.

ACTION: Termination of review.

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SUMMARY: In accordance with the Regulatory Flexibility Act (5 U.S.C. 
601) (``the RFA'') and a published plan for Periodic Review of 
Commission Rules (46 FR 35118 (July 7, 1981)), the Federal Trade 
Commission solicited comments and data on whether the Trade Regulation 
Rule Concerning Credit Practices (16 CFR part 444) (the ``Rule'') has 
had a significant impact on a substantial number of small entities, and 
if it has, whether the Rule should be amended to minimize any 
significant impact on small entities (59 FR 18009 (April 15, 1994)). 
The Commission also requested comments about the overall costs and 
benefits of the Rule and its overall regulatory and economic impact as 
a part of it systematic review of all current Commission regulations 
and guides. The notice required comments to be submitted to the 
Commission no later than June 14, 1994. Based on the comments received, 
which are summarized in this notice, the Commission finds that there is 
an insufficient basis to conclude that the Rule has had a significant 
economic impact upon a substantial number of number entities of 
otherwise merits revision. The Commission is therefore terminating this 
review.

DATES: This action is effective as of May 10, 1995.

FOR FURTHER INFORMATION CONTACT:
Sandra M. Wilmore, Attorney, Division of Credit Practices, Bureau of 
Consumer Protection, Room S4429, Federal Trade Commission, 6th and 
Pennsylvania Avenue NW., Washington, D.C. 20580. Tel: (202) 326-3224.

SUPPLEMENTARY INFORMATION: The RFA requires the Federal Trade 
Commission to conduct a periodic review of rules issued by the 
Commission that have or will have a significant economic impact on a 
substantial number of small entities. For the purpose of the RFA 
review, the term ``small entity'' is defined under the Small Business 
Size Standards, codified at 13 CFR part 121 and revised by the Small 
Business Administration (49 FR 5024-5048 (Feb. 9, 1984)). In addition, 
the Commission has determined, as a part of its oversight 
responsibilities, to review rules and guides periodically. These 
reviews will seek information about the costs and benefits of the 
Commission's rules and guides and their regulatory and economic impact. 
The information obtained will assist the Commission in identifying 
rules and guides that warrant modification or rescission. This periodic 
review is conducted in accordance with the Commission's plan for 
periodic review of rules (46 FR 35118 (July 7, 1981)).

I. Background and Summary

    The Commission promulgated the Rule on March 1, 1984, (49 FR 7740), 
and it became effective on March 1, 1985. The Rule applies to lenders 
and retail installment sellers (creditors) and prohibits them from 
directly or indirectly taking or receiving from a consumer an 
obligation that includes certain contract provisions determined to be 
unfair, failing to provide a notice to potential cosigners, or using an 
unfair method of calculating late fees.
    In promulgating the Rule, the Commission found that: (1) consumers 
suffers substantial economic and non-economic injury from creditors' 
use of the remedies that the Rule restricts; (2) consumers themselves 
cannot reasonable avoid these remedies or avoid the harsh consequences 
of the remedies by avoiding default; and (3) the overall costs to 
consumers are greater than the countervailing benefits that the use of 
these remedies provide to consumers or creditors.\1\

    \1\See Credit Practices Rule: Statement of Basis and Purpose and 
Regulatory Analysis (SBP), 49 FR 7740, 7743-7745 (1984).
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    The notice that initiated this review requested comments on whether 
any part of the Rule has had a significant impact on a substantial 
number of small entities and, if so, whether any such impact can be 
reduced consistent with the operation of the Rule.
    In addition, the Commission requested comments on a number of other 
issues relating to the operation of the Rule.

II. Public Comments

    In response to the Federal Register notice, the Commission received 
a total of seven comments, four from creditor trade associations\2\ and 
three from legal organizations representing consumers.\3\ The 
commenters' responses to the questions posed in the notice are 
summarized and analyzed below. Unless otherwise noted, the Commission 
is not aware of other information bearing on the issues discussed.

    \2\Comments were received from the Credit Union National 
Association (``CUNA''), which represents 5,000 state and 7,000 
federal credit unions in the United States; the CUNA Mutual 
Insurance Group (``CMIG''), which provides form contracts and 
compliance support, as well as insurance coverage, to CUNA members; 
the Illinois Credit Union System, which represents 645 state and 
federal credit unions in Illinois; and the Missouri Bankers 
Association, a trade association representing 500 commercial banks 
in Missouri.
    \3\Comments were received from the National Consumer Law Center, 
Inc. (``NCLC''); the UAW-GM Legal Service Plan (``UAW-GM''), which 
provides legal services to auto workers and retirees; and the law 
firm of Williams & Eoannou, which represents consumer debtors in 
bankruptcy proceedings and in cases involving possible violations of 
federal and state credit laws.
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1. Continuing Need for the Rule

    Two commenters directly addressed the question of the continuing 
need for the Rule. The UAW-GM and NCLC stated that consumers continue 
to need the protection of the Rule. According to Williams & Eoannou, 
consumers have benefited from the Rule because it ``eliminated the use 
of a limited number of onerous and overreaching boilerplate contract 
provisions * * * the limited utility of which in collecting debts was 
more than offset by their brutally invasive and disruptive impact on 
consumers and their families.'' No commenter discussed any costs 
imposed on consumers by the Rule.

2. Proposed Changes to the Rule to Benefit Consumers

    All of the commenters made some recommendation regarding changes to 
the Rule. Except as noted, the commenters who proposed changes to 
benefit consumers did not discuss the cost to creditors of those 
changes. [[Page 24806]] 
a. Security Interests in Household Goods
i. Definition of Household Goods
    One commenter, UAW-GM, stated that the Rule's definition of 
household goods is too limited. According to UAW-GM, consumers would be 
better protected and the law would be more consistent with other 
federal formulations if the definition of household goods under the 
Rule were changed to parallel the household goods exemption and lien-
avoidance provisions of the Bankruptcy Code, 11 U.S.C. 552 (d)(3) and 
(f)(2).\4\ The exemptions provided under the Bankruptcy Act include 
items not covered by the Rule, notably books, animals, crops, and 
musical instruments, but do not include the Rule's coverage of wedding 
rings and personal effects.

    \4\Those provisions of the Bankruptcy Act provide an exemption 
for:
    The debtor's interest, not to exceed $200 in value in any 
particular item or $4,000 in aggregate value, in household 
furnishing, household goods, wearing apparel, appliances, books, 
animals, crops, or musical instruments, that are held primarily for 
* * * personal, family, or household use. * * *
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    The Commission did not address this question directly at the time 
that it promulgated the Rule, but did indicate that it was aware of the 
lien-avoidance provision of the Bankruptcy Act. The SBP refers to the 
fact that 1978 amendments to the Bankruptcy Act created an exception to 
the old rule that secured loans survived bankruptcy for those loans 
secured by blanket security interests in household goods, 11 U.S.C. 
552(f)(2), discussed above. The reference occurs in a discussion of the 
treatment of the refinancing of purchase money security interests and 
does not indicate that the Commission ever considered conforming the 
definition of household goods in the Rule to the definition contained 
in the Bankruptcy Act provision discussed.\5\

    \5\See SBP at page 7767.
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    Since bankruptcy is one of the situations in which a creditor's 
security interest in the personal possessions of the debtor is most 
likely to be at issue, a consistent federal standard as to which items 
are protected is sensible. However, we have no evidence that the lack 
of such a parallel standard is sufficiently problematic to warrant 
amending the rule.
    Alternatively, UAW-GM proposed that the list of specific items 
included in the definition be described as illustrative and not 
exclusive.\6\ In the SBP, the Commission stated its intention to limit 
coverage to necessities and to the class of goods for which the injury 
to consumers from a security interest exceeds offsetting benefits.\7\ 
Conceivably, the Rule could be expanded to apply to any other items 
meeting that test. However, this could raise certain enforcement 
difficulties. It is not clear that, if a creditor took a security 
interest in items not enumerated as household goods, the Commission 
could establish the requisite knowledge on the part of the creditor to 
bring a civil penalty action for a rule violation.\8\ Again, we have no 
evidence of problems with the Rule's current definition of household 
goods sufficient to justify an amendment to the Rule.

    \6\In contrast, the Missouri Bankers Association stated that 
there should be no expansion of the definition of household goods 
and that any expansion would restrict the collateral that could be 
provided by consumers who are not homeowners.
    \7\See SBP at pages 7767 and 7768.
    \8\Section 5(m)(1)(A) of the FTC Act states that:
    The Commission may commence a civil action to recover a civil 
penalty * * * against any person * * * which violates any rule under 
this Act respecting unfair or deceptive acts or practices * * * with 
actual knowledge or knowledge fairly implied on the basis of 
objective circumstances that such act is unfair or deceptive and is 
prohibited by such rule. (Emphasis added.)
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ii. Property Insurance
    The NCLC presumes that creditors take security interests in the 
consumer's personal property in order to sell excessively priced 
property insurance to the consumer and that the Rule should be amended 
to address this problem. The Truth in Lending Act and Regulation Z 
impose disclosure requirements relating to the sale of property 
insurance by creditors.\9\ Given the legal restrictions on the 
Commission's ability to regulate the business of insurance, this agency 
may not have the authority to address the pricing of insurance directly 
or the expertise to determine what constitutes fair pricing.\10\ We 
found no evidence to justify attempting to do so as an amendment to the 
Rule.

    \9\Section 226.4 of Regulation Z, which implements the Truth in 
Lending Act, allows creditors to exclude such insurance premiums 
from the finance charge if the insurance coverage may be obtained 
from a person of the consumer's choice, if that fact is disclosed to 
the consumer, and if the coverage is obtained through the creditor, 
the insurance premium and the term of the insurance are disclosed.
    \10\See McCarran-Ferguson Act, 15 U.S.C. 1012.
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iii. Cross-Collateralization
    Williams & Eoannou observed that the use of cross-collateral 
security clauses in revolving charge agreements is increasing. The 
commenter notes that the Rule as initially proposed would have 
prohibited such clauses, and that that provision was deleted from the 
final rule.\11\ The Commission is urged by the commenter to amend the 
Rule to prohibit the use of cross-collateral.

    \11\According to the SBP:
    Cross-collateralization occurs when goods purchased from a 
retailer on credit are used to secure credit extended for subsequent 
purchases until the account is cleared. A provision of the proposed 
rule that we have decided not to promulgate would have restricted 
cross-collateral clauses in installment sales contracts. 
Essentially, the provision would have required first-in, first-out 
accounting for credit contracts covering multiple purchases.
    SBP, 49 FR 7740, 7786 (March 1, 1984).
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    The Commission did not adopt the provision initially because it 
found insufficient evidence in the record that the use of cross-
collateral clauses was prevalent or that cross-collateral, when used, 
caused any notable degree of consumer injury. It, therefore, concluded 
that the benefits of the provision would not outweigh its costs.\12\ As 
the comment did not provide specific information about the prevalence 
of cross-collateralization or the degree of injury resulting from its 
use, we find no basis for revising that conclusion.

    \12\See SBP at page 7786.
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b. Notice to Cosigners
    Commenters addressed various aspects of the Rule's cosigner 
provision, which will be discussed in turn below.
i. Definition of Cosigner
    UAW-GM stated that the cosigner definition should be clarified. The 
Rule defines a cosigner as a person who is ``liable for the obligation 
of another person without compensation.'' A person is considered not to 
have received compensation if that person does not receive goods, 
services, or money in return. According to the commenter, in connection 
with the financing of automobiles, the cosigner's name is sometimes 
placed on the title to the vehicle with the name of the purchaser in 
order to avoid the Rule's protections for cosigners.
    The commenter states that this is done without the cosigner's 
knowledge in situations where the cosigner has no actual access to the 
vehicle securing the loan. The cosigner's name on the title suggests 
that he has received an ownership interest in the car in exchange for 
his commitment to pay and is, therefore, not a cosigner within the 
meaning of the Rule. According to UAW-GM, the Commission should amend 
the Rule to make clear that, in the absence of an actual possessory 
interest in the security, the Rule should apply.
    At the time the Rule was promulgated, the Commission 
[[Page 24807]] considered comments stating that the cosigner provisions 
of the Rule could be avoided by requiring potential cosigners to become 
co-applicants for credit. In response, the Commission revised the final 
Rule to define as a cosigner ``any person whose signature is obtained 
after the initial applicant is told that the signature of another 
person is necessary.''\13\ The cosigner definition also states that:

    \13\Id. at page 7778.

    A person is a consigner within the meaning of this definition 
whether or not he or she is designated as such on a credit 
obligation.\14\

    \14\16 CFR 444.1(k).

    Thus, the Commission clearly intended that the definition of 
cosigner turn on the circumstances under which the person became 
obligated to pay rather than how the person is characterized by the 
creditor on the documents evidencing the transaction. Accordingly, the 
current Rule would apply to the situation described by the commenter.
    In addition, the Rule currently states that it is a deceptive act 
or practice for a creditor, ``directly or indirectly, to misrepresent 
the nature of extent of cosigner liability to any person.''\15\ 
Therefore, it should be possible to challenge creditor practices that 
seek to avoid the effect of the rule by concealing the cosigner's 
status. Such a challenge may be made using the existing provision 
without the necessity of amending the Rule.

    \15\16 CFR 444.3(a)(1).
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ii. Cosigner Liability
    UAW-GM also stated that the Rule should provide that a creditor 
cannot collect from a cosigner who was not given the required Notice. 
The commenter observed that the Federal Reserve Board (``FRB'') Staff 
Guidelines on that agency's version of the Rule\16\ say that an attempt 
to collect from a cosigner who did not receive the Notice is a 
violation of the Rule.\17\

    \16\50 FR 47,036 (1985) and 51 FR 39,646 (1986), Q14(a)-2.
    \17\Section 18(f) of the Federal Trade Commission Act requires, 
within 60 days after the Commission issues a trade regulation rule 
declaring certain acts or practices to be unfair or deceptive, that 
the bank regulatory agencies issue a substantially similar rule for 
creditors subject to their jurisdiction unless the agencies find 
that the practices of their creditors are not unfair or deceptive or 
that to promulgate such a rule would ``seriously conflict with 
essential monetary and payment systems policies. . . .'' 
Accordingly, the FRB and other agencies issued their own versions of 
the Rule.
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    The SBP does not indicate that the Commission considered the 
question of the private enforceability of consumer credit contracts 
entered into in violation of the Rule. The FRB, which followed the 
Commission's lead, did consider this question, as did the Federal Home 
Loan Bank Board (``FHLBB'')\18\. Making a contract entered into in 
violation of the Rule unenforceable against the cosigner could 
potentially provide a private enforcement mechanism for consumers and 
give creditors an additional incentive to comply. However, the 
commenter provided no information about the actual experience of 
cosigners with creditors subject to the other regulatory agencies' 
versions of the Rule, including whether their versions effectively 
prevented violations or provided relief to consumers. Consequently, the 
Commission lacks sufficient information to decide that a proceeding to 
amend the Rule in such a manner is justified.

    \18\The FHLBB is now the Office of Thrift Supervision (``OTS''), 
Department of the Treasury.
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iii. The Notice as a Separate Document
    The three credit union-related associations asked that the Rule be 
amended to permit creditors to include the Notice in the documents 
evidencing the consumer credit obligation rather than requiring that it 
be a separate document. The commenters noted that the versions of the 
Rule promulgated by the National Credit Union Administration 
(``NCUA''), the FRB, and the OTS do not require the notice to be on a 
separate document. While the commenters requested this change primarily 
for the benefit of creditors, the Illinois Credit Union System also 
expressed the view that consumers would be better served if they 
received a document that included both the Notice and the terms of the 
credit obligation.
    In the SBP, the Commission explained its reason for requiring that 
the Notice be a separate document:

    The purpose of this requirement is to assure that the cosigner 
will actually become aware of the notice before becoming obligated. 
Thus, the notice document cannot be affixed to other documents 
unless the notice document appears before any other document in a 
package, and it may not include any other statement * * *.\19\

    \19\SBP at page 7778.

    Thus, if the result of combining the Notice with the contract were 
to make the Notice's message less meaningful to the consumer, as the 
Commission believed, this benefit would come with a substantial cost to 
the consumer. On balance, and in the absence of information about the 
experience of cosigners with creditors subject to the other regulatory 
agencies' versions of the Rule, we have determined to retain the 
existing cosigner notice provision.
c. Other Rule Provisions
i. Third Party Contacts
    The NCLC stated that many creditors continue to contact third 
parties in order to coerce consumers into paying debts. When the Rule 
was enacted, the Commission considered, but rejected, a provision to 
prohibit most creditor contacts with third parties.\20\ The Commission 
stated that the record in the rulemaking proceeding did not contain 
evidence of widespread abusive third party contacts, that the cost of 
the provision would outweigh its benefits, and that the Commission 
considered a case-by-case approach more appropriate ``to stem abusive 
third party contacts without restricting legitimate contacts.''\21\ We 
feel that this approach has been adequate to deter abusive third party 
contacts.\22\

    \20\Id. at pages 7785-7786.
    \21\Id.
    \22\Since the Rule was enacted, the Commission has brought one 
case against a creditor for abusive third party contacts and other 
unfair or deceptive debt collection practices. See Avco Fin. Serv., 
104 F.T.C. 485 (1984) (Consent Agreement).
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ii. Attorney's Fees
    The NCLC also stated that consumers who pay creditors' attorney's 
fees are routinely overcharged to subsidize the attorney's unsuccessful 
collection efforts against other consumers. The Commission considered, 
but rejected, a Rule provision prohibiting credit contract clauses 
requiring that debtors pay attorney's fees incurred by creditors in 
debt collection.\23\

    \23\See SBP at pages 7784-7785.
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    The Commission expressed the view that, because the proposed Rule 
provision would not have restricted the power of courts to impose 
attorney's fees on defaulting consumers under state law, the provision 
might have had little effect. While the Commission found that most 
creditors included attorney's fee provisions in contracts when 
permitted to do so by state law, it found that the cost of restricting 
this practice outweighed the benefits of doing so. Although the 
Commission found that attorney's fees tend to be based on a percentage 
of the amount of the outstanding obligation, and sometimes bear little 
relation to the amount of work performed by the attorney, it stated 
specifically that this does not imply that debtors overcompensate 
creditors for their attorney's fees.\24\ Thus the Commission previously 
rejected the premise of the NCLC comment. We have received no 
information in connection with this [[Page 24808]] review that would 
lead us to revise that position.

    \24\Id.
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3. Impact of the Rule on Creditors

    CUNA, the only creditor representative to discuss the subject, 
stated that ``Generally, credit unions have not reported any 
significant economic or regulatory impact on their operations due to 
this rule.''

4. Proposed Changes to the Rule to Benefit Creditors

    The Missouri Bankers Association posited that the Rule provision 
prohibiting the pyramiding of late fees is not sufficiently clear as to 
what constitutes a late fee.\25\ The Association questioned whether a 
returned check fee, for example, would be a late fee under the Rule, 
and, if so, whether the creditor would be permitted under the Rule to 
collect it.

    \25\The three credit union-related associations asked that the 
Rule be amended to permit creditors to include the Notice in the 
documents evidencing the consumer credit obligation rather than 
requiring that it be a separate document, as discussed above.
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    This comment calls for an explanation of the Rule, rather than a 
modification to it.\26\ The Rule does not prohibit a creditor from 
collecting a late fee, nor would it prohibit a creditor from collecting 
a returned check fee. The Rule states that, where a charge is assessed 
with respect to only one late payment and that charge remains unpaid, 
the creditor may not for that reason deem all subsequent payments to be 
late or incomplete and assess late charges with respect to those 
payments as well.

    \26\The Commission has handled inquiries of this nature through 
staff interpretation letters, which are placed on the public record. 
To date, more than 70 such letters interpreting the Rule have been 
issued.
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    In the example provided by the commenter, if one check was returned 
for insufficient funds, the creditor could assess a returned check fee 
if permitted by state law and the terms of the contract to do so. What 
the creditor could not do, assuming the consumer did not promptly pay 
the returned check fee, is to declare all subsequent payments to be 
late or incomplete solely for that reason and assess fees on those 
payments.

5. Effect on Other Regulations

    Except for the comparisons to the Federal Reserve Board and other 
agencies' versions of the Rule discussed above, no commenter discussed 
the Rule's effect on other federal, state or local laws or regulations.

6. Effect of Technology or Economic Conditions

    No commenter discussed the effects, if any, of changes in relevant 
technology or economic conditions on the Rule.

7., 8., and 9. Effect on Small Businesses

    According to CUNA, the Rule applies to 5,000 state-chartered credit 
unions.\27\ CMIG states that the majority of those credit unions have 
assets of $100 million or less. Thus, they are considered to be small 
entities for the purposes of the RFA.\28\ The only burden that the 
commenters who claim to represent such entities identified as having 
been imposed by the Rule on small entities was the requirement 
discussed above of providing the cosigner notice as a separate 
document.

    \27\Federally-chartered credit unions are subject to the NCUA's 
version of the Rule.
    \28\See Small Business Size Regulations, 13 CFR Part 121.601.
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10. The Notice to Cosigner

    No commenter discussed the wording of the notice.

11. Effect on the Cost and Availability of Credit

    As mentioned above, CUNA stated that its members generally reported 
no significant economic impact on their operations due to the Rule. 
Williams & Eoannou stated that the Rule has had no negative impact on 
the cost or availability of credit and that the use of credit by 
consumers has increased since the Rule became effective. NCLC provided 
statistics purporting to show the increase in consumer debt in the 
years following the Rule's implementation. In its view, this increase 
can be explained in part by increased consumer demand for what became, 
as a result of the Rule, a more attractive type of credit. No commenter 
suggested any adverse economic impact from the Rule.

12. Disclosure Alternative to the Rule

    No commenter addressed the question of an alternative Rule that 
would require disclosure of the existence of contract provisions that 
might cause injury to consumers, as opposed to restricting the use of 
such provisions.

III. Conclusion

    The Notice attracted limited public interest. The discussion of 
issues relating to small entities, the parties protected by the RFA, 
was minimal. A number of varying suggestions were made to expand the 
Rule, but none of these had extensive support.
    After carefully considering the comments, the Commission believes 
that they do not present a sufficient basis to conclude that the Rule 
has had a significant impact on a substantial number of small entities. 
Similarly, none of the other issues raised in the comments merits 
revision of the Rule at this time. The Commission is therefore 
terminating this review.

List of Subjects in 16 CFR Part 444

    Federal Trade Commission, Consumer credit contracts, Consigner 
disclosures, Trade practices, Truth in Lending.

    Authority: The Regulatory Flexibility Act, 5 U.S.C. Section 601 
(1980).

    By direction of the Commission.
Donald S. Clark,
Secretary.
[FR Doc. 95-11360 Filed 5-9-95; 8:45 am]
BILLING CODE 6750-01-M