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For release on delivery
10:00 a.m. EDT
October 9, 1991

Statement by
John P. LaWare
Member, Board of Governors of the Federal Reserve System
before the
Subcommittee on Consumer Affairs and Coinage
of the
Committee on Banking, Finance and Urban Affairs
United States House of Representatives
Washington, DC
October 9, 1991

I appreciate the opportunity to appear before this subcommittee on behalf of
the Board of Governors of the Federal Reserve System to comment on the credit and
charge card legislation being considered in H.R. 2440 as well as other issues
concerning credit cards.
H.R. 2440
H.R. 2440 would amend the Truth in Lending Act to provide for additional
disclosures to accompany credit and charge card applications and pre-approved
solicitations mailed to consumers. The bill would also expand the Truth in Lending
Act disclosure requirements for credit and charge card advertisements. Finally, the
bill would require additional disclosures, and provide substantive rights to consumers,
in connection with certain changes in the terms of card accounts.
The Board believes that existing law generally provides adequate disclosure to
consumers of the key costs associated with credit and charge card accounts.
Furthermore, there is a wealth of public information available to consumers about
credit card rates and non-rate terms. For example, the Federal Reserve Board collects
information and then publishes a semi-annual report of the terms of credit card plans
offered by the largest card issuers in the country. The Board's September 1991 report,
which is attached to this statement, includes 28 card issuers that offer a rate below 16
percent. Seventeen issuers impose no annual membership fee. Lists of rates and other
fees offered by card issuers also are available from groups such as Bankcard Holders
of America and from commercial sources. In addition, the media report on credit card
rates. In short, it is not apparent to the Board that the current disclosure rules and

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public information on credit card charges need to be supplemented by further
Disclosures on card applications and solicitations
In March 1989, the Fair Credit and Charge Card Disclosure Act amendments
to the Truth in Lending law went into effect. Prior to these amendments, consumers
sometimes did not receive full disclosure of the credit terms on their card accounts
until after they received a credit card accessing the account.
The Fair Credit and Charge Card Disclosure Act requires card issuers to
provide early disclosure of rate and other cost information to potential cardholders.
The disclosures generally must be provided in direct mail or telephone applications and
pre-approved solicitations and in applications made available to the general public.
Most of the required disclosures must be provided in the form of a table prescribed by
the Board, which allows easy comparison of the terms offered by different card issuers.
A sample of this table is attached.
H.R. 2440 would require that the prescribed disclosure table appear on
envelopes containing card applications or pre-approved solicitations mailed to
consumers. For card issuers that operate in several states, providing their disclosure
tables on the outside of envelopes could be difficult given the length of the disclosures.
While the Board recognizes the value of early disclosure of essential credit
information to consumers to facilitate credit shopping, it believes that this proposed
requirement would not offer any meaningful benefii to consumers. The consumer who
is intrigued by a card issuer's offer to open an account will of necessity have to open




the envelope in order to act on the offer, and therefore will encounter the current
disclosure table. The consumer who fails to open the envelope (and thereby doesn't
see the disclosure table) obviously is not taking the offer, hasn't been misled by the
card issuer's marketing, and cannot be deemed to have been harmed just because the
table isn't on the outside of the envelope. Accordingly, the Board believes that this
additional disclosure requirement is unnecessary.
Credit card advertising
The Truth in Lending Act currently provides that if creditors mention specific
costs in advertisements for any type of open-end credit product, other relevant cost
information must also be disclosed. Under this "trigger term" approach, if a card
issuer advertises its annual percentage rate, for example, it must also disclose any
minimum finance charge, transaction fee, or similar charge. The Board by regulation
also requires that any membership or participation fee be disclosed.
In general credit card advertisements, where no specific costs are stated, the law
does not mandate that any other cost information be provided. In addition, if
creditors advertise that certain fees are not charged on an account, no additional
disclosures are required. For example, a card issuer may advertise that no annual fee
is imposed on a card account without disclosing the rate. Or a card issuer may
represent in an advertisement that the annual percentage rate on its accounts is "low,
without providing additional disclosure. Consequently, while the Truth in Lending
Act, and the Board's implementing regulation, generally require uniform disclosure of
cost information in credit advertisements, they do not require full cost information



about credit and charge cards in all advertisements, only those in which the advertiser
"triggers" the need for further detail.
H.R. 2440 would expand the Truth in Lending Act advertising provisions to
specifically mandate detailed disclosure in any advertisement that promotes credit and
charge card accounts. The bill would require that the prescribed Fair Credit and
Charge Card Disclosure Act table as well as information about cash advance fees be
included, or referred to, in all advertisements of card accounts no matter how brief or
general. There would be different disclosure requirements depending upon the
medium in which the card advertisement is promoted (such as television, radio, or
The Board understands the apparent concern behind this provision of the
proposed legislation —that consumers may not be getting full disclosure of credit terms
in general advertisements. Nevertheless, the Board believes Congress should not
mandate that cost information be included in all advertisements. Mandated
disclosures in advertisements could lead to a decrease in advertising as opposed to an
increase in disclosure. The costs of compliance as well as the possible length and
complexity of the proposed disclosure requirements — inclusion of a disclosure table in
any form of advertising - could cause some card issuers to cut back on advertising.
The Board believes that the current disclosure scheme under the Truth in
Lending Act gives consumers ample opportunity to ascertain and review account terms
prior to being obligated on a card account. The advertising rules provide for the
uniform disclosure of credit terms where specific cost information is mentioned. The



Fair Credit and Charge Card Disclosure Act requires disclosure of key terms in those
situations where card issuers are aggressively marketing their card accounts, for
example, in direct mail or telephone campaigns. In addition, the Truth in Lending Act
has always required that consumers be provided with full disclosure prior to their
becoming obligated on open-end plans. Moreover, the Board by regulation has
provided that if full disclosure is not given beforehand, a consumer may reject the plan
once disclosures are received and the creditor must refund any membership fee already
If Congress, nonetheless, decides to go forward with legislation to amend the
open-end advertising rules, the Board urges Congress to retain the "trigger" concept of
advertising, perhaps adopting the approach used in the Home Equity Loan Consumer
Protection Act of 1988. That law provides that both affirmative and negative
references to "trigger" terms in advertisements would require additional Truth in
Lending disclosure. Under such a rule, advertising "no annual fee" or "no transaction
charge" would call for further disclosure. The Board believes this more limited
approach would effectively address most of the congressional concerns about credit
card advertising. In general, however, we do not believe there is a compelling enough
need to amend the law at this time.
Changes in the terms of a card account
Currently, creditors are required to provide consumers with advance notice of
changes in rates and other key cost terms initially required to be disclosed under the
Truth in Lending Act. The notice must be provided at least 15 days before a change

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takes effect. The act itself does not require this notification. The change in terms
requirement, which the Board established by regulation, has been in effect since 1969.
H.R. 2440 would provide a statutory change in terms notice requirement. The
proposed legislation would require 30-day advance notice of any adverse change in the
items that appear in the disclosure table required under the Fair Credit and Charge
Card Disclosure Act as well as any increase in a cash advance fee. The proposed
legislation would also require that the notice of change, along with the entire disclosure
table, be provided prior to the change on one or more periodic statements of account
activity sent to consumers.
The Board does not believe there is a need for this additional disclosure
requirement. We have little evidence that consumers are inadequately informed about
changes in the terms of their accounts such that additional disclosure is merited.
Rather, consumer concern is likely based on the fact of a change taking place, not the
lack of advance knowledge of the change. This is borne out somewhat by the
consumer complaints received by the Board in this area, albeit they are few in number.
Furthermore, if the legislation became law, there would be two different time periods
for change in terms notification -- 15 days and 30 days -- depending on whether or not
the open-end plan had a card associated with it. This seems unnecessarily
H.R. 2440 would also provide a substantive right to cardholders, permitting
them to cancel an account and pay off any outstanding balance under existing terms
when certain changes in terms occur (for example, an annual percentage rate increase).



Although the Truth in Lending Act includes some substantive provisions, it remains
primarily a disclosure statute. The Board continues to believe that substantive laws
should generally be left to the realm of state law. Some states have in fact legislated in
this area, although it should be noted that only about half a dozen states have seen the
need to give cardholders the right to pay off existing balances on the terms in effect at
the time of change. If Congress nonetheless decides to adopt this opt-out provision, it
should at least limit the time period for consumers to pay back the outstanding
amounts owed.
While the proposed legislation seeks to protect consumers, there may be adverse
consequences for consumers themselves. Faced with a federal law that essentially
restricts their ability to change the terms on accounts, card issuers may tighten the
availability of credit or they may adjust the pricing on card accounts, making the use
of credit cards more expensive. Issuers might, for example, stiffen the penalty for late
payments or exceeding a credit limit. Some might charge fees that typically have not
been imposed, such as application processing fees or transaction fees for purchases.
Some might eliminate or shorten grace periods. These actions could have a negative
effect on consumers generally and on less affluent borrowers in particular.
Furthermore, restricting card issuers' ability to change terms would not provide much
of an incentive for issuers to reduce credit card interest rates when conditions might
permit reductions; if rates were lowered, it would then be more difficult for card
issuers to increase them when necessary.

-8 -

In summary, the Board does not believe that new disclosure or substantive
requirements are needed in connection with credit and charge card accounts.

The Fair Credit and Charge Card Disclosure Act directs the Federal Reserve to
report to Congress annually about the profitability of credit card operations of
depository institutions. The Board has issued two reports, one in 1990 and another
last month. The 1990 report showed that in recent years credit card profitability
generally was higher than returns on other major bank product lines. The 1991 report
found that net earnings of credit card banks were higher in 1990 than in both 1989
and 1988.
Competition among card issuers is intense and has taken several forms. For
example, some card issuers are lowering or waiving fees such as annual membership
fees, raising credit limits available to customers, offering program enhancements such
as purchase protection plans and travel insurance, or offering rebate programs for
purchases or discounts on various services. These changes have effectively reduced the
costs many consumers incur, or increased the benefits many consumers enjoy, in
holding and using their credit cards.
Although some industry consolidation has occurred recently, new firms continue
to enter the market and existing firms continue to expand operations. Over the past
few years, there has been an increase in the availability of credit cards to consumers.
Several major new card issuers have entered the market. One, Greenwood Trust,



which issues the Discover Card, is now the largest card issuer in the country. A
second, Universal Bank, which issues the AT&T Universal card, has attracted some
eight million cardholders in less than one year. Further entry into the market by large
businesses is anticipated as evidenced by the announcement of major U.S. automobile
companies and at least one large regional telephone company of their intention to offer
credit cards.
At the same time, there have been recent increases in problem loans. Credit
card delinquency rates and consumer bankruptcies, which directly relate to credit card
losses, have risen substantially. In 1990, over 717,000 nonbusiness bankruptcies were
filed, compared to 616,000 in 1989, and just over 284,000 in 1984.

For bank credit

cards, in 1984, 3.3 percent of outstanding debt was 30 or more days delinquent. That
figure has increased and by the end of 1990, 4.46 percent of outstanding bank credit
card debt was delinquent. In spite of this, credit card operations continue to be a
strong performing segment of the banking industry.
Lack of change in credit card interest rates
A notable phenomenon in the card market is that interest rates on credit card
debt have remained quite stable in recent years. We, of course, are aware of the long­
standing concerns of some about the sustained high level and rigidity of credit card
interest rates.
As with other types of credit, the cost of funds for credit card operations is an
important component of average and marginal costs, although it is substantially less
important for credit card operations than it is for other major types of bank lending.

- 10-

On average, credit card rates have not responded significantly to changes in funding
costs. In analyzing the reasons for this, it is important to bear in mind that the
interest rate is only one element of credit card pricing. Other features, such as annual
fees, grace periods, late payment fees, and enhancements, are also important
components of overall pricing. Card issuers may choose to modify these elements,
rather than lending rates, when costs of funds change. Issuers may also choose to
relax credit requirements or raise credit limits, in order to broaden and maintain their
customer base. Or, of course, they may simply benefit from the public's willingness to
continue to borrow on their credit cards even when the interest rates charged do not
respond to a decline in card issuers' costs of funds.
There is a debate about why credit card interest rates seem to be so stable. One
possible explanation of price "stickiness" relates to the differences in consumer
behavior or the type of consumer that card issuers encounter as a result of rate
increases or decreases. There is a presumption under this theory that card issuers face
at least two classes of consumers whose behavior makes rate reductions unattractive
even when funding costs decline. The first class of consumers do not intend to borrow
on their accounts, but instead, maintain credit card accounts primarily for
convenience. While these convenience users may unexpectedly borrow at high rates,
their use of credit is not responsive to changes in interest rates. They are valuable
customers for the bank since they may be better credit risks and are unlikely to
respond to interest rate changes. The second class of consumers fully intend to borrow

-11 -

on their credit card accounts, and are therefore more responsive to rate changes.
These consumers may, however, be less attractive credit risks.
Since a reduction in rates will attract few of the more creditworthy consumers
but perhaps many that could cause losses from delinquency or default, this theory
proposes that issuers faced with these results will be reluctant to reduce rates in
response to reductions in funding costs. I should add that this theory is somewhat
controversial, since it assumes persistent irrational behavior on the part of a class of
An alternative explanation offered for the stickiness in rates assumes that
established credit card issuers have a solid customer base that does not change its use
of credit cards in response to changes in interest rates, due to the costs of searching for
and switching to another card provider. These costs include: (1) the time and effort to
identify a more attractive credit card and to complete a new credit card application;
(2) the potential effect of having a credit rejection added to a credit bureau report; (3)
the possibility of a reduced credit limit with the new issuer; (4) uncertainty about the
quality of service with a new card issuer; and (5) uncertainty about future rates and
fees. It may also be true that the potential savings in interest costs from switching
from a high-rate issuer to a low-rate issuer are not substantial. Since the average
balance outstanding for those who regularly borrow is approximately $1500, a
reduction in credit card rates from, for example, 20 percent to 16 percent is likely to
save the consumer about $60 a year. I suspect that for many consumers this potential

- 12 -

savings is not sufficiently great to overcome the convenience of retaining their current
accounts and the costs of changing accounts.
If credit card issuers perceive that the demand for their credit cards is not very
sensitive to interest rates, they may have little incentive to adjust them rapidly to
changing financial conditions. This is particularly true if, in addition, they must incur
some costs to change credit card rates (such as costs to advertise, change solicitation
literature, and generally inform customers of changes). The gain from changing prices
simply may not justify the cost of doing so for those card issuers.

Although these and other explanations have been offered for the marked
stickiness in credit card interest rates, little consensus exists as to which explanation
has the most merit.

In closing, I would like to emphasize that the Board believes it is important for
consumers to have adequate information to shop for credit. But more disclosure is not
necessarily better disclosure. The federal law requiring early disclosure of credit card
terms has only been in effect for about two and a half years. The full effect of this
law should be realized before additional federal legislation in the credit card area is
adopted. Moreover, compliance with ever-changing laws and regulations imposes
substantial costs on creditors. We believe these costs will ultimately be borne by
consumers through increased prices or reduced services.

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