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Statement by
Nancy H. Teeters
Board of Governors of the Federal Reserve System
before the
Subcommittee on Consumer Affairs
of the
Committee on Banking, Finance and Urban Affairs
U. S. House of Representatives

February 5, 1981

I am pleased to appear before you this morning to present the views
of the Board of Governors on the proposed "Cash Discount Act."

Unlike the

current law, the proposal provides that a discount — in whatever amount —
which is offered by a seller to a customer to induce payment by cash, check
or other means other than an open-end credit plan or credit card is not a
disciosable finance charge under the Truth in Lending Act.

The bill would

also extend the current ban on the imposition of a credit card surcharge for
another two years.
The Board has testified previously in favor of omitting these
discounts from the finance charge as a way of encouraging them, and I do so
again this morning.

Also, as I have done previously, I must express the

Board's uncertainty about the wisdom of prohibiting surcharges in view of
their economic similarity to discounts.

Their permissibility might in fact

help assure that cash customers are not forced to subsidize credit card
In our view, it is time to take a fresh look at the cash discount

During the six years since the Truth in Lending Act was first amended

to encourage the offering of cash discounts, the Congress has repeatedly
considered the discount/surcharge issue.

Testimony has been delivered at

The Federal Reserve, meanwhile, has carefully constructed regulations

to carry out the statutory provisions regarding availability and notice to
consumers of discounts.

Despite these Congressional and regulatory efforts,

what we haven't seen is merchants offering discounts -- at least not to any
appreciable degree.

If we believe that encouraging merchants to reward cash

buyers is a goal worthy of diligent pursuit, then we nust try to identify
the impediments which have, in fact, discouraged the concept.


Our guess is that the current 5 percent limit on the size of the
discount is not the culprit.

Rather, it seems to us that this may, once

again, be a case of government regulation creating part of the problem -regulation which is grounded on a set of well-intentioned arguments, but
which introduces such friction into otherwise simple transactions, that
compliance is simply not worth the merchant's risk or effort.
If this analysis is correct, there are two features in the current
regulation that are probably most important in discouraging the development
of cash-paying incentive plans.

First is the obvious difficulty in drawing

a clear economic distinction between a permitted discount and a prohibited

It is true that discounts and surcharges may not be as identical

in practice as, say, a half empty glass of water is to a half full one.
Nevertheless, it is difficult to quarrel with the fact that the distinction
is, at best, uncertain.
Second, the well-intentioned protections in the statute to insure
equitable treatment of consumers have, once again, led to the seemingly
complicated regulatory provisions attached to my statement.

The current

statute and the proposed bill specify that any discount must be offered to
"all prospective buyers." Its availability must be disclosed to all of them
"clearly and conspicuously in accordance with regulations of the Board." But
who are "all prospective buyers"? Those who present credit cards, or all
those who enter the merchant's door? What signs meet the test of "clear and
conspicuous" disclosure when there are several store entrances, and numerous
independent cash registers?

How do you disclose to customers who purchase

by phone? May the discount be limited to certain types of property?


about to certain branches of stores? We have sought to provide answers to
these questions in our regulations.


Unfortunately, by issuing rules beyond the basic provision we have
again probably made simple things so complicated that the public throws up
its hands in frustration.

Although in our current proposals to simplify

Regulation Z we have proposed trimming back these regulations, the obvious
way for any merchant to avoid regulatory burden is simply not to offer

And that, apparently, is what has happened.
I therefore would recommend for Subcommittee consideration a very

simple rule:

that one time discounts or surcharges offered by the seller

for the purpose of inducing payment by cash, checks or means other than use
of an open-end credit plan or a credit card shall not constitute a finance
charge, and that the availability of the discount or surcharge be disclosed
to customers.

This would leave out the specific requirement that "all"

customers be notified and that any disclosure be "clear and conspicuous" —
not, of course, because we favor hidden plans but because of the uncertain­
ties this standard produces with the inevitable need for clarification.
Of course, it is possible that authorizing discounts and surcharges
without calling them finance charges opens up a potential loophole in the
blanket embrace of Truth in Lending.

Not only are discounts essentially

equivalent to surcharges, but both are essentially equivalent to finance

They do represent a cost of using credit.
Therefore, if we are right that the 5 percent limit has not itself

been the impediment to merchants offering discounts, this limit might be
retained to insure that the exclusion of discounts and surcharges does not
become a vehicle which could be used to defeat the basic Truth in Lending

In our view, the best chance of accomplishing the goals Congress

began pursuing six years ago would be to retain this limit, but allow discounts
and surcharges to be used with minimal further governmental interference.