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For release on delivery
Expected at 9:30 a.m. (EDT)
July 27, 1983

Statement by
Nancy H. Teeters
Member, Board of Governors of the Federal Reserve System
before the
Subcommittee on Consumer Affairs and Coinage
Committee on Banking, Finance and Urban Affairs
United States House of Representatives
July 27, 1983


appreciate the opportunity to express the views of the Federal

Reserve Board on the efforts to deal more effectively with credit card fraud
through enactment of H.R. 3622, the "Credit Card Protection Act."

Credit card

fraud losses have grown at a disturbing rate in the last several years.


example, total fraud losses for Visa and Mastercard have doubled in only three
years — from around $57 million in 1979 to close to $115 million in 1982 —
with attendant costs to banks and other financial institutions, retail busi­
nesses, and, to the extent these costs are passed on indirectly, to consumers.
These hearings, therefore, are important and timely.

should note at the outset, however, that although the Board shares

the general concern about this increase in fraud, we do not have any special
expertise in the area of credit card fraud legislation.

Although both the

Truth in Lending Act and the Electronic Fund Transfer.Act contain criminal
penalties for credit and debit card fraud, the Board does not issue implementing
regulations for those provisions, nor does it have a role in enforcing them.
The Board is, nonetheless, glad to assist the subcommittee in any way we can,
but my testimony will be brief.
The increase in credit and debit card fraud imposes considerable
costs on banks and other card issuing financial institutions.

Moreover, al­

though account holders are to some degree protected by the Truth in Lending
and Electronic Fund Transfer Acts from liability for unauthorized account
access, they may bear some direct liability, and indirectly they may ultimately
bear the costs through higher prices or reduced services.

According to some

industry figures, the cost of fraud per transaction has increased from less
than 1 cent per transaction in 1973 to around 8 cents today.

- 2 -

We are particularly concerned about this type of fraud because of its
potential effect on the payments system. The trend in recent years toward use of
electronic fund transfers and credit cards in place of checks and cash has pre­
sented the possibility of significantly reducing costs and increasing efficiency.
However, if financial institutions are forced to increase prices in order to
cover fraud losses, consumers and businesses may have less incentive to use
these more efficient means.

In addition, continued widespread acceptance of

these methods may depend in part on the public's confidence in their security
and reliability. To the extent this confidence may be impaired by the increasing
threat of fraud, this may diminish our ability to improve the payments mechanism.
Thus, the Board believes that credit and debit card fraud has implications
beyond the losses to individual businesses and consumers.
Because of the dramatic growth of fraud losses, and because there may
be gaps in the coverage of the existing prohibitions on card fraud, the Board
generally supports legislation designed to strengthen the prohibitions and
close loopholes.

H.R. 3622 appears to be designed to accomplish a good deal

in that direction.
One technical

point we suggest the subcommittee consider is the

proper placement of any new legislation in the structure of existing law.
H.R. 3622 would amend the credit card provisions of the Truth in Lending Act.
Since some portions of the bill are intended to affect debit cards, ATM cards,
or other means of access to deposit or asset accounts, it may be appropriate to
consider incorporating parallel provisions in the Electronic Fund Transfer

The EFT Act already contains provisions on fraudulent access to deposit

accounts, and placing any new prohibitions in the same location would reduce

- 3 possible confusion and duplication.

The Board would be pleased to draft statu­

tory language or offer technical assistance to implement this suggestion.
Another possible approach would be to consolidate and enact new prohibitions
on credit and debit card fraud as part of the United States criminal code.
The Board appreciates this opportunity to present its views.
be happy to answer any questions that you may have.

I would