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O ctober 17, 1975 Consumers and Creditors With the spread of automated billing systems, consumer com plaints about problems in correct ing errors—or obtaining refunds in the case of unsatisfactory goods—eventually became a con cern of Congress. The Fair Credit Billing Act (FCBA) was the result. This Act set forth the rights of consumers in the settlement of billing errors, and assigned to the Federal Reserve the responsibility for preparing an appropriate regulation to govern enforcement. Credit users and credit issuers will soon be affected by these new rules, which were published last month as part of the Fed's Regulation Z. In general, all credit cards and other open-ended lines of consum er credit are subject to the new regulation. Merchant credit and bank credit, credit cards and charge accounts are all covered. The regulation spells out the steps to be followed by a credit user in initiating a complaint and it estab lishes rules to ensure an approp riate response by the creditor. Creditors are required, on the first billing date after the end of this month, to send their customers a description of their rights and of the procedures to follow in making complaints. Correction of errors Under the new regulation, a customer must notify the creditor in writing of any billing error within 60 days of billing, giving enough information to allow the creditor to identify the account Digitized for FRA SER concerned and the details of the complaint. The legislation was designed to correct for such errors as the unauthorized use of a customer's credit card, incorrect charges, incorrect finance charges, and failure to credit payments already made. The customer is permitted to withhold payment (with certain exceptions and/or limitations) when he is unsuccess ful in resolving a dispute with a merchant over defective merchan dise, or is billed for goods or services wrongly delivered or not accepted. Once proper written notice has been received, a creditor must acknowledge the customer's letter within 30 days and then take steps to resolve the dispute within 90 days. During this period, a custom er need not pay any amount in dispute nor be liable for interest on the items described in his written notice. (The customer would still be liable for interest charges on items not in dispute.) A creditor cannot close an account because the customer is not repaying an amount in question, and he cannot make an adverse credit rating before complying with all proce dures specified in the regulation. The regulation is designed to make creditors more responsive to customers' complaints of errors, and to ensure that customers are not subject to penalties in the form of service charges or adverse credit ratings whenever complaints are being investigated. On the other hand, a complaining customer (continued on page 2) Opinions expressed in this newsletter do not necessarily reflect the views of the management of the Federal Reserve Bank of San Francisco, nor of the Board of Governors of the Federal Reserve System. must give the creditor sufficient information about any disputed item to allow the problem to be identified and resolved. Billing requirements The FCBA regulation also covers business billing procedures. When descriptive billing is used—that is, when no copy of the bill is returned—the statement must show the date and type of transaction. In bank and other third-party credit-card statements, the name and address of the merchant in volved must be shown. When a grace period is allowed, during which payment in full avoids inter est charges, the statement must be mailed 14 days before the end of that period. Bank credit-card issuers cannot collect payments from a custom er's deposit account as long as a dispute is unresolved. This prohi bition applies even when the customer has agreed to automat ic collection of payments. Banks can use a customer's deposit balance to offset debt only through court order or other proce dures legally open to creditors. Discounts for cash? The Fair Credit Billing Act contains an interesting new feature, which would prohibit credit-card issuers from trying to keep merchants from offering cash discounts. Consumer DigitiZed for FRA SER organizations had favored this on grounds of discrimination against cash customers, who were not utilizing the credit service but were bearing some of the costs of credit. The law specifies a 5-percent limit on such cash discounts, but the law does n o t require that they be given. The impact of this section of the Act may be much smaller than consumerists hope, or merchants fear. In practice, banks issuing credit cards have found the provi sion against cash discounts in existing contracts difficult to enforce. The average merchant dis count on bank cards runs about 3 percent, so that there is not much for the customer to bargain about. Furthermore, the regula tion requires that any merchant offering a cash discount must post signs conspicuously announcing such discounts. A similar notice is required in advertisements. Thus, the merchant must offer cash discounts to all customers, and cannot bargain with customers individually. Since an across-theboard price reduction of this type would entail a significant revenue loss, retailers are discouraged from offering such inducements. Certainly, merchants operating their own credit systems are unlikely to give discounts, if they do not offer them now. To some degree, the cash-discount provision reflects a suspicion that bank credit cards significantly raise selling costs. This suspicion is not well founded. Credit-card transac tions largely originate in busi nesses where credit has been traditionally available, so that much of the recent growth of bank credit cards simply represents a displacement of merchant credit by bank credit. Moreover, to the degree that bank systems are more efficient, they actually may reduce costs for many businesses. Bank cards even offer merchants some advantages over non-credit purchases. When a merchant accepts checks he absorbs badcheck losses, but when banks issue credit cards, the banks (not the merchants) absorb any fraud and bad-debt losses. Indeed, with merchant discounts near 3 per cent, the cost impact of credit cards is small, and at the current interest-rate levels, many busi nesses would find it difficult to offer equally priced credit to their customers. In addition, the claim of discrimi nation against cash customers does not support any argument that cash discounts s h o u ld be given. Businesses regularly attach “ free" services to their merchandise to attract customers, but all custom ers do not use “ free parking/' or “ free delivery," or “ free gift wrapping"—let alone “ free cred it." These free services are not costless. However, the costs of specific services can only be judged against the overall pattern of a business, and there is no inherent reason why discounts should be given to those refusing one service as for those refusing any other service. The relevant principle is that the choice for making specific charges on services should prop erly be left to the merchant, whether it is “ free" parking or “ free" credit. This is all the regula tion does; it leaves the choice to the merchant, subject to the requirement that all customers be offered the same option. * * * The Fair Credit Billing Act, in summary, sets forth certain con sumer rights to help cope with some of the problems of an increasing ly automated world. The credit customer is given important rights, such as the right to force creditors to respond to inquiries about possible errors, and the right to do so without the threat of either a closed account or an adverse credit rating. The regulation em bodies consumer-relation prac tices which most creditors follow as a matter of course. There are also indirect benefits. To the extent consumers feel more secure in a world of computer billing systems, further technical innovation leading to automated billing and payments systems may well be encouraged. Robert Johnston Digitized for FRA SER uojSinqseM •M^lfl • uoSaJO •BpBA8N •oi|epi jlB M B H . B |U J 0 > !|B 3 . E U O Z jjy . *}j|B3 'o isp u c jj UBS ZSL ON JLIWlHd a iv a a o v is o d s n HVW SSV13 lSUId BANKING DATA—TWELFTH FEDERAL RESERVE DISTRICT (Dollar amounts in millions) Selected Assets and Liabilities Large Commercial Banks Amount Outstanding 10/01/75 Change from 9/24/75 + + + + Loans (gross, adjusted) and investments* Loans (gross, adjusted)—total Security loans Commercial and industrial Real estate Consumer instalment U.S. Treasury securities O ther securities Deposits (less cash items)—total* Demand deposits (adjusted) U.S. Government deposits Time deposits—total* States and political subdivisions Savings deposits O ther time deposits! Large negotiable C D ’s 86,428 64,767 1,023 23,127 19,564 10,055 9,022 12,639 86,674 24,025 227 60,782 5,753 20,978 30,192 16,409 Weekly Averages of Daily Figures W eek ended 10/01/75 Member Bank Reserve Position Excess Reserves Borrowings Net free (+) / Net borrowed (-) Federal Funds—Seven Large Banks Interbank Federal fund transactions Net purchases (+) / Net sales (-) Transactions of U.S. security dealers Net loans (+) / Net borrowings (-) - + + + + + - + - + + + - 129 135 6 + + 869 605 7 400 1 16 211 53 597 246 88 164 52 202 39 12 Change from year ago Dollar Percent + 2,883 2,147 285 1,006 337 + 317 + 4,935 + 95 + 5,665 + 1,603 486 + 4,425 407 + 3,071 + 1,356 + 980 + - - W eek ended 9/24/75 - + + + + + - + - + + + 3.45 3.21 21.79 4.17 1.69 3.26 120.75 0.76 6.99 7.15 68.16 7.85 6.61 17.15 4.70 6.35 Comparable year-ago period + + 35 19 16 + 163 132 31 128 + 981 + 240 438 + 668 + 937 in c lu d e s items not shown separately. ^Individuals, partnerships and corporations. Information on this and other publications can be obtained by calling or writing the Public Information Section, Federal Reserve Bank of San Francisco, P.O. Box 7702, San Francisco 94120. Phone (415) 397-1137. Digitized for FRA SER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis B>jSB| V
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