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For release

on delivery
Expected at 10:00 a.m. (E.D.T.)
J u l y 24, 1980

Statement by
Nancy H. Teeters, Member
Board of Governors of the Federal Reserve System
before the
Subcommittee on Consumer Affairs of the
Committee on Banking, Housing and Urban Affairs
United States Senate

July 24, 1980

I am pleased to appear before the subcommittee this morning to deliver
the Board's endorsement of the Consumer Usury Study Commission Act.

A more

analytical approach to the regulation of consumer credit is highly desirable, and
the Board hopes that this study commission will make a real contribution to the
legislative process.
A study commission will be able to assess the extent to which the recom­
mendations of the National Commission on Consumer Finance have been fulfilled,
and, in addition, will be able to update the NCCF's recommendations, particularly
with respect to open-end credit, which has grown so rapidly since the NCCF report
was published in 1972.

While the Board is skeptical that much original research

can be accomplished in the time given the commission, we are hopeful that fruitful .
recommendations will result.

The Board and its staff will be pleased to assist

the commission to the extent possible.
The Board has previously testified before this subcommittee on the issue
of federal rather than state law regulating consumer credit matters.

As this

subcommittee may recall, the Board did not support the bill that prohibits use
of the Rule of 78's in certain transactions.

The Board opposed that bill, not be­

cause it believes creditors should continue to use the Rule of 78's, but because it
believes state regulation is generally preferable to federal.

This preference

is based not only on general philosophical principles, but also on the basis of
experience in attempting to impose a national, uniform disclosure standard under
the Truth in Lending Act.

While the Board does not recommend retreating from

the goal of national, uniform disclosure, it is inclined to recommend that sub­
stantive regulation be left to the states.



The Board has generally favored the abolition of artificial rate
ceilings that reduce competition among creditors, create unwarranted and un­
fair subsidies between classes of consumers, and artificially reduce credit

Some limit on the amount that can be charged may be

necessary for smaller transactions involving necessitous borrowers, but beyond
that the Board leans toward allowing competition to set the rate.
The Board would suggest that the question of consumer credit rates
not be taken up in isolation from other consumer and creditor rights and respon­

Consumer protections often affect revenues or costs and, therefore,

are an integral part of any consideration of the rate issue.

Furthermore, we

believe that a comprehensive approach is far preferable to a piecemeal approach.
While the Board supports the idea of a study c.ommission, it hopes that
this subcommittee will, nonetheless, consider the Board's recommendation to integrate
the Fair Credit Billing Act and the newly-enacted Electronic Fund Transfer Act.
A staff draft of an integration bill was recently distributed to the Board's
Consumer Advisory Council, and the Council is expected to give the draft a preliminary
review at its meeting next week.

The basic good sense of having similar, if not

identical, rules for consumers to follow in both credit and debit transactions
speaks for prompt consideration of the bill.
The Board continues to support the amendment to Truth in Lending that re­
moves the 5 percent limit on discounts for cash.

In addition to the discount bill,

you asked that the Board comment on a further amendment that permits merchants to
impose a surcharge on credit card as opposed to cash transactions.

To begin with,

from an economic standpoint, we do not perceive any difference between a discount
for cash and a surcharge for credit.

Most probably, however, a merchant can

administer a surcharge much more easily than a discount.


Pemitting cash discounts or credit surcharges makes a good deal of
economic sense, in the Board's view, because it allows greater flexibility in
allocating costs to those who should bear them.

If a credit card transaction

costs the merchant more than a cash transaction, then the merchant should have
the right to pass that cost along to the card user.

If the consumer prefers

to use a credit card rather than bear the risks of carrying cash or the incon­
venience of using a check, the legislation would not only permit the cardholder
to do so, but it would allow a merchant to pass along the cost.

The Board

supports the bill because it frees up the market, encourages competition among
payment mechanisms, and leads to a more equitable distribution of costs.