View original document

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

For RELEASE ON DELIVERY
¿XPJECJED AT 9:30 AM, li-lM.

St a t e m e n t

by

F r e d e r i c k H. S c h u l t z

V i c e Ch a i r m a n , B o a r d




of

Go v e r n o r s

before

of

the

F e d e r a l Ke s e r v e

the

Sm a l l B u s i n e s s O v e r s i g h t S u b c o m m i t t e e

Co m m i t t e e

on

Sm a l l B u s i n e s s

IKS* H o u s e

of

kepresentatives

S e p t e m b e r 23, 1980

of

the

system

I AM PLEASED TO APPEAR BEFORE THE SMALL BUSINESS OVER­
SIGHT S u b c o m m i t t e e
Re s e r v e B o a r d
on

interest

ALL TYPES

on

rates

OF

today

to

H.R. 7735.
and

on

CONSUMER

present

Th i s

certain

CREDIT,

the

views

bill would
other

BUT

for

PERMIT

state

CREDIT

PLANS,

RESTRICTIONS ON TRANSACTION

THE
AND

HOLDERS*

AS PRESENTLY DRAFTED,

PERMIT A

STATE

OVERRIDE.

BILL

WOULD

ACCESS

FEES

limits

extensions

of

ANY

TO

STATE

REIMPOSE CEILINGS BY ENACTING OVERRIDING LEGISLATION»
FOR OPEN-END

Fe d e r a l

the

preempt

charges

WOULD

of

REMOVE

MOREOVER,
ALL

IMPOSED

STATE

ON ACCOUNT

THIS LATTER PROVISION WOULD NOT

THESE

PREEMPTIONS

WOULD

APPLY

TO

ALL CLASSES OF CREDITORS.
Th e Bo a r d

has

long

been

concerned

about

the

adverse

IMPACT THAT USURY CEILINGS CAN HAVE ON THE AVAILABILITY OF FUNDS
IN LOCAL CREDIT MARKETS.

WHEN NOMINAL MARKET INTEREST RATES ARE

HIGH, AS THEY HAVE BEEN RECENTLY, USURY CEILINGS TYPICALLY AFFECT
CREDIT FLOWS BY ENCOURAGING LENDERS TO CHANNEL FUNDS INTO OTHER
ASSETS OR TO GEOGRAPHIC AREAS PERMITTING A GREATER YIELD.

CREDIT

MAY THUS BECOME UNAVAILABLE TO ALL BUT THE MOST QUALIFIED BORROWERS,
AS NONPRICE

LENDING

TERMS

ARE

TIGHTENED

TO

COMPENSATE

FOR

RELATIVELY LOW INTEREST RATES THAT ARE LEGALLY PERMISSIBLE.

THE
FOR

THESE REASONS, THE BOARD SUPPORTS IN PRINCIPLE THE TERMINATION OF
ANY SUCH ARTIFICIAL CONSTRAINTS*

As you know, Congress has acted to alleviate pressures
IN CERTAIN

CRITICAL

NOMINAL INTEREST

AREAS

RATES

AND

AFFECTED
USURY

BY

THE

COMBINATION

CEILINGS.

THE

MOST

OF

HIGH

RECENT

MAJOR LAW IN THIS AREA, THE DEPOSITORY INSTITUTIONS DEREGULATION




2

-

and

M o n e t a r y C o n t k o l Ac t

ON CERTAIN

RESIDENTIAL

LENDEkS.

IT ALSO

-

1980,

of

MORTGAGE

preempted

LOANS

state

FOR A BROAD

TEMPORARILY PREEMPTED LIMITS

AGRICULTURAL LOANS

OF $25,000

OR

usury

MORE,

ON

ceilings

SPECTRUM

OF

BUSINESS

AUTHORIZING

AND

LENDERS

TO

CHARGE A RATE UP TO 5% ABOVE THE FEDERAL RESERVE DISCOUNT RATE»
Th e

institutions the a u t h o r i t y ,

a c t a l s o g r a n t e d to o t h e r f i n a n c i a l

PREVIOUSLY LIMITED TO NATIONAL BANKS, TO SET RATES FOR ALL TYPES
OF LOANS

UP TO

In s t i t u t i o n s

ONE

will

PERCENTAGE

benefit

from

POINT
this

ABOVE

THE

provision,

DISCOUNT
of

RATE.

course,

only

WHEN THE INDEXED RATE EXCEEDS THE STATE LIMIT THAT WOULD OTHERWISE
APPLY.
iN THIS

REGARD,

RESERVATIONS ABOUT

THE

THE

USE

BOARD

OF THE

PERMISSIBLE LOAN RATES BECAUSE,

CONTINUES
DISCOUNT

TO

RATE

HAVE
FOR

AMONG OTHER REASONS,

STRONG
INDEXING

IT IMPOSES

WHAT IS A SHORT-TERM RATE ON MARKETS THAT USUALLY INVOLVE LONG­
TERM LENDING, AND MOVEMENTS AMONG SHORT-TERM AND LONG-TERM RATES
OFTEN DIVERGE SUBSTANTIALLY.

In ADDITION, WE FEEL IT IS UNWISE

TO SINGLE OUT A TOOL OF MONETARY POLICY FOR A PURPOSE —
INDEXING —

THAT

IS NOT DIRECTLY POLICY RELATED.

AGAIN URGE

CONGRESS

TO

FIND

The De r e g u l a t i o n
CEILINGS FOR EXTENDERS
INSTITUTIONS.

iN

LIFT THE

OF

CEILINGS

RATE

CREDITORS, THEREBY

Ih e B o a r d




3£ l i e v e s

Ac t

MORE

ON

THE

little

CREDIT

PRESENT

CONSUMER

FOSTERING

APPROPRIATE

provided

CONSUMER

CONTRAST,

that

A

similarly

WE THEREFORE
FORMULATION.

relief

from

rate

OTHER THAN FINANCIAL
BILL

CREDIT

COMPETITION

SUCH AS

WOULD

COMPLETELY

FOR ALL CLASSES

IN

situated

THE

MARKET

creditors

OF

PLACE.
should

5

-

OPERATE IN

SIMILAR

VIEW, THEREFORE,

REGULATORY

EXTENDING

-

ENVIRONMENTS.

RELIEF

FROM

IN

USURY

THE

BOARD'S

CEILINGS

TO

ALL

CONSUMER CREDITORS IS APPROPRIATE.

Th e B o a r d
THE PREEMPTION

OF

has

reservations, however,

STATE USURY LAWS.

POSSIBLE, THE SUBSTANTIVE
SHOULD BE LEFT TO THE

about

WE BELIEVE THAT,

endorsing

WHENEVER

REGULATION OF CONSUMER CREDIT MATTERS

STATES.

CORRECTIVE

ACTION

AT THE

STATE

LEVEL, IT SEEMS TO US, WOULD BE THE MOST DESIRABLE WAY TO ADDRESS
ANY COUNTER-PRODUCTIVE

H.R. 7/35,

EFFECTS THAT

STATE

USURY LAWS

MAY HAVE.

AS NOTED EARLIER, WOULD ENABLE STATES TO OVERRIDE THE

PREEMPTION OF USURY CEILINGS ON CONSUMER CREDIT THROUGH PASSAGE
OF A NEW LAW
USURY LIMITS

IF CONGRESS CHOOSES TO ACT ON

OR BY REFERENDUM.
IN THE

CONSUMER

CREDIT

FIELD,

THE

BOARD

ENDORSES

RETAINING THIS STATE PREROGATIVE*
T h e OTHER MAJOR

SECTION

TRANSACTION AND ACCESS FEES

ON

OF THE

BILL

WOULD DEREGULATE

OPEN-END ACCOUNTS*

A NUMBER OF

STATES HAVE LAWS LIMITING OR PROHIBITING ANY FEES, SUCH AS ANNUAL
CREDIT CARD FEES, IMPOSED ON AN ACCOUNT HOLDER FOR THE PRIVILEGE
OF HAVING AN ACCOUNT.

In THE ABSENCE OF ACCOUNT OR TRANSACTION

FEES, CHARGES MAY NEVER ACCRUE TO THOSE CUSTOMERS WHO PAY IN FULL
BY THE

END

OF EACH

BILLING

CYCLE.

THIS MEANS,

THEN,

THAT THE

COST OF OPERATING THE CREDIT SYSTEM MUST BE BORNE BY OTHERS, SUCH
AS BY CUSTOMERS WHO EXTEND THEIR PAYMENTS OR BY USERS OF OTHER
SERVICES OF THE

INSTITUTION*

PERMITTING TRANSACTION AND ACCESS

FEES IN OPEN-END CREDIT PLANS MAKES ECONOMIC SENSE,
FEE MECHANISMS ALLOW

CREDITORS THE

OPTION

OF

COSTS AMONG ALL THOSE WHO USE SPECIFIC SERVICES*



BECAUSE THE

BETTER ALLOCATING

4

-

As

DRAFTED,

H*K* 7/35

-

DOES NOT ALLOW FOR A STATE OVER­

RIDE PROVISION ON TRANSACTION AND ACCESS FEES.

ÎF CONGRESS SHOULD

DECIDE TO REGULATE THIS AREA, THE BOARD RECOMMENDS CONSIDERATION
OF A PROVISION PERMITTING ANY STATE TO REIMPOSE ITS RESTRICTIONS
ON TRANSACTION AND ACCESS FEES BY ENACTING OVERRIDING LEGISLATION.
IN SUMMARY,

THE

BOARD

RESTRAINTS IMPOSED BY USURY

ENDORSES

CEILINGS

EFFORTS TO

REMOVE THE

IN CONSUMER CREDIT AND TO

PERMIT A MORE EQUITABLE DISTRIBUTION OF COSTS AMONG USERS OF OPENEND CREDIT

ACCOUNTS.

ÎHE

BOARD

PREFERS,

HOWEVER,

THAT

STATE

RATHER THAN FEDERAL LAW GOVERN CONSUMER CREDIT PRICING ISSUES SUCH
AS THESE

WHENEVER POSSIBLE,

THESE MATTERS

IN THE

CONTEXT

AND WE

STATES TO

ADDRESS

OF OTHER SUBSTANTIVE CONSUMER AND

CREDITOR RIGHTS AND RESPONSIBILITIES.




URGE THE