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Statement by Jeffrey M. Bucher M em ber, Board of Governors of the F ed era l R eserve System before tho Subcommittee on Consumer A ffa irs of the Committee on Banking, Housing and Urban A ffa irs United Slate _ Senate October 9, 1975 M r . Chairman and m em b ers of the subcommittee: I am pleased to be h ere today to discuss the difficu lties that the Board has encountered in implementing § 167 of the F a ir C red it Billing A c t which re la tes to the issue of discounts for payments in cash. A s you are aware, § 167 provides that a discount of up to 5% o ffe re d by a merchant to induce customers to pay in cash rather than by cred it card does not constitute a finance charge under the Truth in Lending A ct. P revio u s ly, the Truth in Lending A c t required that any such discount be disclosed at the point of sale as a finance charge. Another provision of § 167 prohibits card is s u e rs fro m con tractually preventing merchants fro m offerin g these discounts fo r cash. Section 167 is based on the p r e m is e that cash customers are cu rren tly being fo rced to subsidize the costs of cred it card plans. Proponents of this provision argued that merchants have in creased their p rices fo r all buyers to compensate fo r the rate at which they discount their cred it card invoices to card issu ers. The theory behind the section is that merchants should be able to o ffe r a p r ic e differen tial to cash buyers to re fle c t the savings re a liz e d by not having to pay the card is s u e r a percentage of the sales p rice to s e r v ic e the credit transaction. While nothing in § 167 requ ires m erchants to o ffe r a discount fo r cash, the section encourages them to do so by rem oving the le g a l and contractual b a r r ie r s which have in the past made it difficult to o ffe r a discount. -2 - The difficulty the Board has encountered in connection with § 167 has arisen over the interpretation which is to be given to the te rm "discount11. On the one hand, it has been argued that the te rm envisions only those pricing systems under which a percentage of the tagged price is deducted to a r r iv e at the cash p ric e . F o r exam ple, if the tagged price is $100, a merchant m ay o ffe r a discount of 4% and charge the cash purchaser $96. Under this interpretation, only deductions from a tagged p r ic e a re exempted fr o m the point of sale finance charge disclosu re required by the Truth in Lending A c t. On the other hand, it has been urged that the term "discount" envisions any type of tw o -tie r pricing system which results in a lo w e r p rice to cash purchasers, re g a rd le s s of the fo rm of the pricing mechanism that results in the lo w e r p rice. Under this view , the exemption fr o m finance charge disclosu re would extend to surcharge and two-tag pricing systems in addition to strict discount systems. A surcharge system is one in which the tagged p rice is the cash p rice and a prem ium or surcharge is added to the tagged p rice if the customer chooses to use a credit card. A two-tag system, as the name im p lie s, is one in which a ll m erchandise is tagged with two p rices, one fo r cash and one fo r credit. The argument is that in each of these system s, the cash customer pays less and is th erefore re ceivin g a discount. -3- Thus, in writing the regulations to im plem ent § 167, the Board was faced with a decision as to how broadly the section should be interpreted. Neither the A ct nor its leg isla tive history provides any clear indication of the Congressional intent. Relying upon a lite r a l reading of the section, our proposed regulations interpreted the term "discount" in its narrow est sense and provided fo r different treatment of discounts and surcharges. The proposal provided that strict discounts of up to 5% fo r cash payment did not have to be disclosed as a finance charge, but that any surcharge on the use of a credit card did have to be disclosed. C ritics of this proposal argued that Congress did not intend to exclude surcharges from the scope of § 167. They pointed out that discounts and surcharges are m ir ro r im ages of each other and there is no economic difference between them. Additionally, they argued that the goal of § 167 was to elim inate the subsidy being paid by cash purchasers and that allowing merchants the fle x ib ility of instituting whichever type of tw o-tier pricing system that best fits their merchandising methods would make it m ore lik ely that some form of discount would be offered to cash buyers. Another criticism of the proposal was that Congress, in passing § 167, desired to eliminate what was considered to be an anticompetitive practice. Most card is suer-m erchant contracts prohibit the merchant from passing on to cardholders the fee imposed - 4- on the merchant fo r servicin g each cred it sale, and the Senate Report on S. 2101 indicates a concern that these r e s t r ic t iv e clauses m ay violate the antitrust laws. The argument is that i f a prohibition on the offerin g of a discount is anticom petitive, so is a prohibition on the im position of a surcharge, and Congress could not have intended to prohibit; the use of one anticom petitive clause while allowing the continued use of the other. Taking into account the inform ation re c e iv e d on its initial proposal, the Board, on July 30, issued a r e v is e d proposed regulation providing that surcharges of up to 5% on the use of cred it cards should be a ccorded the same treatment with re sp ect to finance charge disclosu res as discounts. The comments on this new proposal raised s e v e ra l important objections. F ir s t , it was argued that the A c t does not authorize the Board to give this special treatment to surcharges inasmuch as the language of § 167 speaks only in term s of "discou nts11. In this connection, it was maintained that Congress had carved out a narrow exception to the n orm a l finance charge disclosu res requ ired by the Truth in Lending A c t and that the Board would be overstepping its authority by extending that exception to surcharges. C r itic s argued that a surcharge c a r r ie s the connotation of a penalty on cred it card users while a discount is viewred as a bonus to cash custom ers. They contended that this d ifferen ce in - 5- psych ological im pact makes it m o re lik e ly that surcharge systems w ill discourage customers fro m using credit cards, with a resulting adverse e ffe c t on the economy. C r itic s also felt that the allowance of surcharges would have the effect of harming credit card purchasers without any corresponding benefit to cash purchasers. The argument is that notwithstanding the impact of com petitive m arket influences, surcharges w ill have an inflationary impact on prices and w ill not r e fle c t the actual costs of cred it because merchants w ill sim ply add on an extra charge to cardholders. C r itic s of the proposal also suggested that the allowance of surcharges w ill make it m o re difficu lt to com parison shop since the unsophisticated consumer w ill be faced with many d ifferen t prices and p ricin g systems fro m one store to the next. The fact that a 5 per cent surcharge on a $100 item results in a c red it p ric e of $105, while a 5 p er cent discount on a $105 item does not give a cash p ric e of $100 further com plicates the consu m er’ s choice. Taking into account the balance of arguments cited above, the Board, in promulgating the final regulations, decided to exclude surcharges fr o m the scope of the exemption fr o m finance charge disclosu re. In reaching its decision, the Board reasoned in part that since the Truth in Lending A c t is a d isclosu re statute, any exceptions fr o m its disclosure provisions should be read as n a rro w ly - 6- as possible in absence of any evidence of Congressional intent to the contrary. Since the effect of § 167 is to exempt certain costs from disclosure as finance charges, the regulations view the term "discount" in its narrow est sense and exclude surcharge pricing systems from their scope. A t the same tim e, the Board sought the assistance of Congress to obtain express leg isla tive action to c la rify the intended application of § 167. I would now like to discuss the problem concerning the interplay between § 167 and State usury laws. A s discussed e a rlie r, discounts, however the term is interpreted, of up to 5% to induce payment in cash do not constitute a finance charge fo r purposes of the Truth in Lending disclosure requirem ents. How ever, despite the fact that these discounts do not constitute a finance charge for Truth in Lending purposes, they may still constitute a finance charge, time p rice differential, or interest, under the usury laws of many States. Thus, as the law in many States now stands, i f a se lle r gives a discount fo r cash, card issuers who are already charging interest at the State usury ceiling m ay be placed in violation of the usury laws. Compounding the problem is the fact that card issuers may not n ecessa rily know whether a merchant is giving discounts and therefore may have no way of determining whether a specific transaction violates the law or not. - 7- The Board has indications that there are a number of States for which discounts or surcharges under § 167 w ill violate their usury laws. The possible violations of State usury laws threaten to frustrate the intent behind § 167. Merchants probably w ill not offer discounts for cash, and where they do, it is lik ely to result in inadvertent violations of the usury laws by card issu ers. It appears that some form of rem edial legislation either at the State or F ed era l le v e l is necessary to make § 167 a viable provision. This concludes my testimony on § 167 of the F a ir C redit B illing A ct. C learly, the section raises difficu lt problem s and any guidance the Congress can give the Board in resolving these problems w ill be welcom ed. I appreciate the opportunity extended to me to appear before you today.
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