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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 CEILINGS RATE CREDITORS, THEREBY Ih e B o a r d 3£ l i e v e s Ac t OF 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
@FedFRASER