FTC Staff Comment to the Hon. Greg Zito and the Hon. Monroe T. Finn Concerning Various Illinois Bills to Enact Interest Rate Ceilings and Other Regulations on Credit Cards and Revolving Credit Transactions

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FEDERAL TRADE COM1vUSSION
Chicago Regional Office
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The 	Honorable 	Greg 	Zito
State 	Senate
State 	Capitol
Springfield, 	IIL~nois 	62706
Th~ 	Honorable 	Monroe 	L. 	Flinn
House 	of 	Representatives
Room 	2089 	Stratton 	Building
Springfield, 	Illinois 	62706
Dear 	Messrs. 	Zito 	and 	Flinn:
\ "'.
The 	Federal 	Trade 	Commission 	staff 	is 	pleased 	to 	have 	this
opportunity 	to 	respond 	to 	your 	recent 	letters 	requesting 	our
comments 	on 	Senate 	Bills 	186, 	188, 	217, 	and 	895, 	and 	House 	Bills
4, 	19, 	and 	413, 	all 	of 	which 	would 	impose 	interest 	rate 	ceilinQs
in 	Illinois 	on 	credit 	cards 	and 	revolving 	credit 	transaction9.~
sa 	895 	would 	further 	establish 	a 	minimum 	grace 	period, 	limit
annual 	fees 	to 	a 	maximum 	of 	$20, 	and 	impose 	increased 	disclosure
requirements 	on 	credit 	transactions.
We 	oppose 	all 	of 	the 	above 	bills 	and 	any 	other 	bill 	that
would 	set 	maximum 	credit 	card 	interest 	rates. 	Any 	effort 	to
restrict 	interest 	rates, 	even 	if 	well 	intended, 	is 	likely 	to
cause 	substantial 	harm 	to 	many 	consumers. 	Such 	legislation
~ould,_for example, 	result 	in 	credit 	being 	denied 	to 	young 	people
:with 	l~ttle credit 	history 	and 	people 	with 	low 	income 	-- 	groups
in 	which 	the 	use 	of 	credit 	is 	particularly 	important. 	We 	further
oppose 	efforts 	to 	regulate 	the 	grace 	period 	and 	annual 	fee 	that 	a
lender 	may 	allow 	or 	collect. 	Competition 	among 	lenders 	will
1 	These 	comments 	represent 	the 	views 	of 	the 	Chicago 	Region~l.
Office 	and 	the 	Bureaus 	of 	Consumer 	Protection, 	Competition,
and 	Economics 	of 	the 	Federal 	Trade 	Commission, 	and 	do 	not
necessarily 	represent 	the 	views 	of 	the 	Commission 	itself.
The 	Commission 	has, 	however, 	voted 	to 	authorize 	us 	to 	submit
these 	comments 	to 	you.

- '
'..
The 	Honorable 	Greg 	Zito
The 	Honorable 	Monroe 	L. 	Plinn
P~g~ 2- .".
result 	in 	a 	variety 	of 	credit 	offerings 	that 	should 	fulfill 	the
di~ergent credit 	requirements 	of 	consumers. 	Finally, 	we 	believe
that 	requiring 	disclosures 	in 	credit 	card 	solicitations 	may 	be
unnecessary 	because 	those 	who 	solicit 	credit 	~ard 	applicants
already 	have 	ample 	incentives 	to 	provide 	consumers 	with
information 	distinguishing 	their 	products 	from 	those 	of 	others.
Our 	interest 	in 	this 	legislation 	sterns 	from 	the 	Commission's
mandate 	to 	enforce 	the 	antitrust 	and 	consumer 	protection 	laws 	of
the 	United 	States. 	Section 	5 	of 	the 	Federal 	Trade 	Commission 	Act
pr0ibits 	unf~ir m~thods of 	competition, 	aner-unfair 	or 	deceptive
acts 	or 	practlces. 	In 	enforcing 	thi~ 	statute 	the 	Commission
staff 	has 	gained 	significant 	experience 	in 	analyzing 	the 	impact
of 	various 	restraints 	on 	competition, 	and 	the 	costs 	and 	benefits
to 	consumers 	of 	such 	restsaints. 	More 	specifically, 	by 	enf05cing
the 	Truth 	in 	Lending 	Act, 	the 	Equal 	Credit 	Opportunity 	Act,q 	and
the 	Fair 	Credit 	Reporting 	Act,S 	the 	Commission 	staff 	has 	gained
substantial 	experience 	in 	the 	area 	of 	consumer 	credit.
Interest 	Rate 	Ceilings 	Injure 	Consumers
under 	current 	Illinois 	law, 	virtually 	all 	lenders 	may 	charge
interest 	at 	any 	ratg 	that 	is 	agreed 	upon 	by 	the 	parties 	to 	the
credit 	arrangement. 	Senate 	Bills 	186, 	188, 	217, 	and 	895, 	and
House 	Bills 	4, 	19, 	and 	413 	propose 	to 	impose 	maximum 	interest
rates 	on 	credit 	cards 	and 	revolving 	credit 	transactions .
..A
2
3
4
5
6
r
r
.. ;.
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15 	U.S.C. 	gg 	45 	et 	seq.
'.
15 	U.S.C. 	55 	1601-1677e 	(1982 	& 	Supp. 	III 	1985) .
15 	U.S.C. 	§§ 	169l-1991f 	(1982 	& 	Supp. 	III 	1985) .
15 	U.S.C. 	§§ 	1681-1861t 	(1982 	& 	Supp. 	III 	1985) .
Ill. 	Rev. 	Stat. 	ch. 	17, 	§ 	4.2 	(1985) 	permits 	any 	state 	or
national 	banI< 	with 	its 	main 	office 	in 	Illinois, 	a 	st.::lteor
federal 	9a~ings and 	loan 	association 	with 	its 	main 	office 	in
Illinois, 	or 	a 	lender 	licensed 	under 	the 	Consumer 	Finance
Act 	or 	the 	Sales 	Finance 	Agency 	Act 	to 	charge 	any 	rate 	that
15 	agreed 	upon 	by 	the 	parties 	to 	the 	revolving 	credit
transaction •

The 	Honorable 	Greg 	Zito
The 	Honorable 	Monroe 	L. 	Flinn
Pa~_ 3--
However, 	our 	experience 	in 	enforcing 	the 	l~ws pertaining 	to
consumer 	credit, 	as 	~ell as 	the 	economic 	literature 	on 	m~ximum
pricing 	regulations, 	indicates 	that 	restrictions 	on 	interest
rates 	will 	usually 	cause 	creditors 	to 	alter 	other 	credit 	terms,
such 	as 	those 	relating 	to 	maximum 	monthly 	payments, 	administra-
tive 	or 	user 	fees, 	grace 	periods, 	and 	criteria 	for 	creditworthi-
ness. 	To 	the 	e~~ent 	that 	creditors 	cannot 	maintain 	their 	profit
margins 	by 	alterfng 	these 	terms, 	they 	will 	simply 	reduce 	the
total 	amount 	of 	credit 	extended, 	thus 	denying 	credit 	to 	consumers
who 	would 	otherwise 	have 	been 	able 	to 	obtain 	it.
-- The 	reason 	for 	this 	reduction 	is 	clear. 	Lenders 	themselves
have 	costs 	of 	borrowing 	money 	from 	investors 	as 	well 	as 	costs 	of
administering 	their 	loans. 	If 	the 	legislation 	forces 	their
~rices 	(i.e., 	the 	interest 	rates 	they 	can 	charge) 	below 	the 	level
of 	costs, 	lenders 	will 	either 	go 	out 	of 	business 	or 	will 	stop
making 	those 	lo~ns 	that 	do 	not 	provide 	at 	least 	a 	competitive
rate 	of 	return. 	Alternatively, 	some 	Illinois-based 	creditors
7
--
8
For 	a 	comprehensive 	historical 	and 	economic 	analysis 	of
credit 	card 	interest 	rate 	regulation 	in 	the 	United 	States,
se~ 	DeMuth, 	The 	C3S~ 	Against 	Credit 	Card 	Interest 	Rate
Regulation, 	3 	Yu12 	J. 	at 	Reg. 	201 	(1986). 	This 	article
concludes 	that 	the 	supply 	of 	credit 	is 	highly 	competitive
and 	that 	interest 	rate 	controls 	cause 	artificial
contractions 	in 	the 	supply 	of 	credit. 	See 	also 	Canner 	&
Fergus, 	The 	Economic 	Effects 	of 	Proposed 	CeilInos 	on 	Credit
Curd 	Interest 	~tes, 	Fed. 	Reserve 	Dull., 	Jan. 	1987, 	~t 	li
Natnan, 	Economic 	Analysis 	of 	Usury 	Laws, 	10 	J. 	of 	Bank
Research 	200 	(1980); 	OstCl3, 	Effects 	of 	Usurv 	Ceilinqs 	in 	the
t--tortgage 	~-1arket, 	31 	J. 	of 	Fin. 	821 	(1976). 	See 	illso 	Barth,
The 	Effect 	at 	Gov~rnment R~13tions on 	PersonCll 	LOun
Markets: 	A Tobit 	Estimation 	at 	a 	Microeconomic 	Model, 	37 	J.
of 	Fin. 	1233 	(1982).
Villegas, 	The 	Impact 	of 	Usury 	Ceilings 	on 	Revolving 	Credit
(1986) (unpublished 	manuscript 	available 	from 	Arizona 	State
University 	Economics 	Department); 	Villegas, 	An 	Analysis 	of
the 	Impact 	of 	Interest 	Rate 	Ceilings, 	37 	J. 	of 	Fin. 	941
(1982) •

The 	Honorable 	Greg 	Zito
The 	HonoLable 	Monroe 	L. 	Flinn
P~q;;-· 4
may 	choose 	to 	transfer 	their 	credit 	card 	operations 	to 	related
firms 	in 	states 	with 	higher 	or 	no 	interest 	rate 	ceilings,
enabling 	them 	to 	evade 	the 	interest 	rate 	ceiling 	in 	I11inois. 9
Because 	the 	ultimate 	return 	from 	extending 	credit 	is 	a
function 	of 	the 	losses 	from 	credit 	defaults 	as 	well 	as 	the 	income
from 	interest 	pay~ents and 	administrative 	fees, 	interest 	rates
may 	vary 	with 	the 	borrower. 	A borrower 	with 	a 	long 	history 	of
timely 	repayments 	and 	a 	large 	pool 	of 	assets 	to 	guarantee
repqyment 	can 	usually 	obtain 	lower 	rates 	beoause 	the 	expected
costs 	of 	extending 	credit 	to 	such 	a 	borrower 	are 	lower. 	For
example, 	American 	Express 	recently 	has 	announced 	a 	new 	credit
card, 	the 	"Optima," 	with 	an 	initial 	interest 	rate 	of 	13.5
percent. 10 	The 	card 	will 	be 	marketed 	only 	to 	current 	American
Express 	card 	holders 	with 	good 	repayment 	records. 	Not 	all
borrowers 	have 	such 	att:active 	characteristics, 	yet 	creditcr3
usually 	are 	willing 	to 	extend 	credit 	to 	a 	general 	pool 	that
inCludes 	higher 	risk 	borrowers 	if 	they 	are 	able 	to 	charge 	a
higher 	interest 	rate.
9
.1;0	--;
Under 	the 	National 	Bank 	Act, 	a 	national 	bank 	may 	charge 	its
out-af-state 	customers 	an 	interest 	rate 	allowed 	by 	its 	own
home 	state, 	even 	when 	that 	rate 	is 	greater 	than 	the 	interest
rate 	permitted 	by 	the 	state 	of 	the 	bank's 	nonresident
customers. 	12 	U.S.C. 	S 	85 	(1982 	and 	Supp. 	III 	1985). 	See
also 	Marquette 	Nat'l 	Bank 	of 	Minneapolis 	v. 	First 	of 	Omaha
serv., 	439 	U.S. 	299, 	313-18 	(1978) 	which 	invalidated 	a 	state
interest 	rate 	ceiling 	that 	purported 	to 	apply 	to 	out-oE-
state 	national 	banks. 	We 	note 	that 	Section 	4.2 	of 	SB 	895
proposes 	to 	impose 	all 	oE 	the 	credit 	restrictions 	and
disclosure 	requirements 	contained 	in 	the 	bill 	on 	out-oE-
state 	lenders 	who 	solicit 	Illinois 	customers 	through 	the
mail. 	We 	take 	no 	position, 	however, 	on 	whether 	or 	not 	such
a 	provision 	is 	consistent 	with 	the 	National 	Bank 	Act .
Charge 	of 	the 	Plastic 	Brigade, 	Time, 	Mar. 	23, 	1987, 	at 	52.
-.-._ 	"'-" 	' ••'oo;.U' - - __ "-" u< 	_ 	_ ....... • ~ __ ~ __ ,.. ~',,, ",

The 	Honorable 	Greg 	Zito
The 	Honorable 	Monroe 	L. 	Flinn
Page-: 5
If 	government 	forces 	a 	reduction 	in 	allowable 	interest
rates, 	however, 	creditors 	may 	no 	longer 	be 	able 	to 	offer 	credit
to 	highri 	risk 	borrowers 	with 	the 	same 	freedom 	they 	did
before. 	One 	probable 	result 	will 	be 	to 	cut 	off 	credit 	to 	less
well 	established 	borrowers, 	including 	young 	people 	with 	little
credit 	history, 	people 	with 	low 	income, 	or 	people 	who 	have 	had
trouble 	repaying 	a 	loan 	in 	the 	past. 	In 	fact, 	empirical 	studies
in 	states 	that 	have 	imposl~ credit 	card 	interest 	rate 	ceilings
show 	exactly 	this 	effect. : ~.
, 	In 	addition, 	even 	the 	credit 	available 	to 	the 	most 	qualified
borrowers 	may 	be 	extended 	on 	less 	attractive 	terms, 	inclUding
higher 	annual 	fees, 	lower 	credit 	limits, 	higher 	monthly 	payments,
shorter 	or 	no 	grace 	periods, 	or 	more 	time-consuming 	and 	costly
creditworthiness 	checks. 	To 	increase 	earnings, 	bank 	card 	issuers
may 	attempt 	to 	increase 	the 	merchant 	discount 	fee 	-- 	the 	fee
11
12
..,
Of 	course, 	out-of-state 	national 	bank 	creditors 	sti_l 	will
be 	free 	to 	charge 	rates 	higher 	than 	the 	ceiling 	rate 	(see
suora 	note 	9) 	and 	thus 	could 	offer 	credit 	to 	these 	higher
risk 	borrowers. 	In 	practice, 	however, 	the 	out-of-state
creditors 	tend 	to 	solicit 	business 	through 	mailings 	and
rarely 	accept 	unsolicited 	applications. 	This 	may 	explain
wh~ 	as 	discussed 	infra 	at 	note 	12, 	lower 	income 	families 	in
states 	with 	relatively 	low 	interest 	rate 	ceilings 	generally
hold 	fewer 	credit 	cards.
One 	study 	found 	that 	the 	proportion 	of 	consumers 	holding
credit 	cards 	in 	Arkansas, 	a 	state 	with 	an 	unusually 	low
statutor:y 	fate 	limi.t, 	w~s 	3ubstantially 	smaller 	thun 	that 	in
other 	states 	with 	higher 	interest 	rate 	ceilings. 	Canner 	&
Fergus, 	3upro 	note 	7, 	at 	10 	table 	5. 	A multivariate
analysis 	at 	the 	study 	data 	(i.~. / 	one 	tho.t 	attempted 	to 	hold'
other 	factors 	constant) 	disclosed 	tho.t 	"tight 	ceilings 	on
credit 	card 	interest 	rates 	are 	more 	likely 	to 	result 	in
reduced 	availability 	of 	bank 	credit 	card 	accounts 	for 	lower-
and 	lower-middle 	income 	families 	than 	for 	higher 	income
families." 	Td. 	<Jt 	10. 	The 	tendency 	of 	interest 	rate
ceilings 	to 	harm 	lower 	income 	groups 	more 	than 	other 	groups
was 	also 	found 	in 	a 	New 	York 	State 	study 	reported 	in 	1975.
ld. 	at 	10-11 	and 	table 	6 .

The 	Honorable 	Greg 	Zito
The 	Honorable 	Monroe 	L. 	Flinn
PB~. 6 .
,.~
charged 	merchants 	for 	processing 	credit 	card 	sales. 13 	Merchants
may 	in 	turn 	pass 	these 	costs 	on 	to 	cash 	customers 	as 	well 	as
credit 	card 	customers 	by 	increasing 	the 	cost 	of 	their 	products.
Similarly, 	retail 	store 	credit 	card 	issuers 	are 	likely 	to
increase 	merchandise 	price~ 	in 	an 	attempt 	to 	offset 	the 	reduction
in 	finance 	charge 	revenue. 14 	Such 	merchandise 	price 	increases
would 	harm 	not 	o~ly credit 	card 	users 	but 	also 	low-income
consumers 	who 	typically 	pay 	cash 	for 	merchandise.
Finally, 	any 	benefits 	of 	lower 	intere8~.rates will 	not 	flow
equ~lly to 	all 	consumers. 	Rather, 	only 	the 	estimated 	53 	percent
of 	20nsumers 	who 	sometimes 	or 	usually 	do 	not 	payoff 	their
account 	balances 	in 	full 	every 	month 	-- 	the 	"borrowers" 	-- 	will
enjoy 	the 	benefits' of 	lower 	finance 	charges 	on 	their 	outstanding
balances. 1S 	"Convenience 	users" 	-- 	the 	estimated 	47 	percent 	of
all 	credit 	card 	users 	and 	76 	percent 	of 	all 	elderly 	users 	who 	pay
off 	their 	accou~~ balances 	in 	full 	every 	month 	and 	thereby 	avoid
finance 	charges 	0 	-- 	will 	gain 	no 	benefit. 	In 	fact, 	the
convenience 	users 	are 	likely 	to 	be 	worse 	off 	because 	of 	the
changes 	in 	other 	credit 	terms 	discussed 	above. 	Moreover, 	because
of 	recent 	tax 	law 	changes 	that 	make 	credit 	card 	interest 	charges
no 	longer 	deductible, 	it 	is 	likely 	that 	the 	number 	of 	convenience
users 	soon 	will 	increase 	to 	more 	than 	half'of 	all 	consumers.
Thus, 	the 	proposed 	laws 	may 	produce 	fewer 	Hwinners H than
"losers."
In 	addition 	to 	placing 	a 	ceiling 	on 	interest 	rates, 	SB 	895
also 	contains 	two 	provisions 	that 	regulate 	the 	terms 	of 	the
credit 	contract. 	The 	bill 	would 	mandate 	a 	minimum 	"gri1ce 	period H
during 	which 	an 	interest 	charge 	may 	not 	be 	imposed 	on 	new
13
15
16-
_-\
One 	study 	concluded 	thi1t 	banK 	credit 	card 	issuers' 	retailer
merchant 	discount 	fees 	were 	higher 	in 	Arkansas, 	which 	has 	a
low 	interest 	rate 	ceiling, 	than 	in 	neighboring 	states 	with
higher 	interest 	rate 	ceilings. 	Canner 	& Fergus, 	supra 	note
7, 	at 	11-12.
That 	study 	also 	found 	that 	retail 	prices 	for 	major
appliances 	were 	nn 	average 	of 	S 	percent 	higher 	in 	Arkansas
than 	in 	neighboring 	states 	with 	higher 	interest 	rate
ceilings. 	Canner 	& Fergus, 	supra 	note 	7, 	at 	11.
Id. 	at 	6 	table 	3.
Id.

The 	Honorable 	Greg 	Zito
The 	Honorable 	Monroe 	L. 	Flinn
p~~ 7 	_
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purchases. 	The 	grace 	period 	proposed 	by 	SB 	895 	is 	longer 	than 	is
currently 	provided 	by 	most 	lenders. 	Most 	card 	issuers 	continue
to 	of fe r 	a 	gr ace 	pe r iod 	to 	"conven i ence 	use r s," 	those 	'.... ho 	pay
their 	entire 	balance 	at 	once, 	but 	include 	current 	purchases 	in
the 	average 	daily 	balance 	if 	the 	consumer 	chooses 	not 	to 	pay 	the
full 	amount 	of 	the 	previous 	balance. 	In 	contrast, 	SB 	895 	would
require 	th~t 	everyone 	receive 	a 	grace 	period 	-- 	i.e., 	no 	finance
charge 	-- 	for 	th~ billing 	period 	in 	which 	they 	make 	additional
purchases. 	Thus, 	the 	grace 	period 	proposed 	by 	this 	bill 	appears
to 	arbitrarily 	permit 	non-convenience 	users 	to 	impose 	costs 	on• 	'l.
conyen~ ence 	use r s. 	~
SB 	895 	would 	also 	limit 	any 	annual 	fee 	to 	$20. 	The 	likely
effect 	of 	a 	ceiling 	on 	annual 	fees 	is 	the 	same 	as 	that 	of 	a
ceiling 	on 	interest 	rates. 	Creditors 	can 	be 	expected 	to 	tra:1s:~r
their 	credit 	card 	operations 	to 	other 	states, 	cut 	off 	credit 	to
higher 	risk 	borrowers, 	increase 	the 	fees 	charged 	to 	retailers,
and 	take 	other 	steps 	to 	maintain 	their 	profits. 	We 	oppose 	these
proposed 	requirements 	because 	we 	believe 	that 	consumers 	are
generally 	better 	off 	in 	unrestricted 	credit 	markets 	in 	which
competition 	among 	lenders 	provides 	the 	desired 	mix 	of 	credit
offerings 	and 	terms 	that 	consumers 	pr~fer.
Free 	Markets 	Efficientlv 	Allocate 	Credit
-~nterest rate 	ceilings 	and 	other 	restrictions 	on 	credit
terms 	are 	usually 	unnecessary 	as 	well 	as 	counterproductive. 	In
the 	absence 	of 	governmental 	restriction, 	competition 	among
lenders 	will 	result 	in 	a 	variety 	of 	credit 	offerings 	that 	fulfill
the 	credit 	requirements 	of 	different 	consumers. 	For 	example, 	a
COnSumer 	who 	frequently 	defers 	payment 	may 	select 	a 	credit 	plan
h:Oving 	relatively 	substw.ntial 	initial 	costs 	b.ut 	lower, interest
charges. 	In 	contrast, 	a 	consumer 	who 	enjoys 	the 	convenience 	of
credit 	purchasing 	but 	seldom 	defers 	payment 	may 	opt 	Eor 	a 	plan
having 	lower 	initial 	costs 	but 	higher 	interest 	charges.
Unrestricted 	credit 	markets, 	unlike 	regulated 	credit 	markets, 	can
efficiently 	serve 	such 	divergent 	consumer 	interests.
A free 	market 	will 	provide 	these 	services 	without 	excc3sive
costs. 	Competition 	among 	lenders 	results 	in 	total 	costs 	to
con3umers 	that 	generally 	reflect 	no 	more 	than 	creditors' 	costs 	--
includin1710sses 	attributable 	to 	bad 	debt 	-- 	and 	normal
profits. 	Firms 	that 	seek 	to 	earn 	supranormal 	profits 	will 	lose
business 	to 	other 	creditors.
?
11 	Canner 	& Fergus, 	supra 	note 	7, 	at 	1-2.

The 	Honorable 	Greg 	zito
~ 	The 	Honorable 	Monroe 	L. 	Flinn
~g~. 8 	: 	_.
Studies 	provide 	evidence 	that 	over 	time 	creditors 	have
earned 	nQ 	more 	than 	a 	competitive 	return 	on 	their 	invested
capital. i8 	The 	annual 	net 	earnings 	(before 	taxes) 	of 	bank 	card
plans 	averaged 	1.9 	percent 	of 	balances 	outstanding 	from 	1972
through 	1985. 	Over 	the 	same 	perio~, 	average 	net 	returns 	on 	other
major 	types 	of 	commercial 	bank 	lending 	were 	significantly
higher: 	2.3 	per~ent on 	real 	estate 	mortgages, 	2.4 	percent 	on
consumer 	insrgllment 	debt, 	and 	2.8 	percent 	on 	commercial 	and
other 	loans. 	Retail 	store 	credit 	card 	plans 	stan~ on 	a
somewhat 	different 	footingi 	studies 	show 	that 	those 	have, 	on
avel~ge, consistently 	operated 	at 	a 	loss, 	2Bart 	from
conSideration 	of 	profit 	on 	the 	good3301d.
Interest 	on 	credit 	card 	transactions 	may 	be 	higher 	than
interest 	on 	other 	credit 	transactions 	because 	of 	certain 	features
for 	which 	consumer3 	are 	app~rently willing 	to 	pay. 	These
features 	include 	the 	availability 	of 	a 	pre-approved 	line 	of
credit, 	the 	lack 	of 	collateral 	requirements, 	the 	acceptance 	of 	a
credit 	card 	by 	large 	numbers 	of 	merchants 	in 	various 	locations,
the 	ability 	to 	payoff 	the 	amount 	owed 	within 	the 	grace 	period 	in
order 	to 	avoid 	incurring 	any 	finance 	charges, 	and 	the 	record 	of
purchases 	created 	by 	using 	the 	card. 	All 	these 	features 	are
costly 	for 	an 	issuing 	creditor 	to 	provide,' which 	explains 	why 	the
relatively 	high 	interest 	rate 	does 	not 	necessarily 	imply 	the
existence 	of 	"excessive" 	profits 	to 	the 	creditor.
Although 	general 	intere3t 	rates 	have 	fallen 	substantially 	in
recent 	years, 	it 	is 	not 	surprising 	that 	credit 	card 	interest
rates 	have 	not 	fallen 	as 	fast 	as 	general 	interest 	rates. 	The
cost 	of 	money, 	for 	exwmple, 	of 	which 	interest 	is 	one 	component,
constit~es a 	lower 	proportion 	of 	total 	costs 	for 	cred 21 card
ooerations 	than 	for 	other 	major 	types 	of 	banK 	lending~ 	Thus,
18
19
20
2l_.··i
In 	other 	words, 	total 	costs 	to 	consumers 	have 	equalled
creditors' 	costs 	-- 	including 	losses 	attributable 	to 	bad
debt 	-- 	and 	normal 	profits.
Canner 	& Fergus, 	supra 	note 	7, 	at 	1-2 	(citing 	Federal
Rese rve 	B~ nk 	da ta) .
Id. 	at 	2 	(citing 	two 	national 	surveys 	of 	retailers 	conducted
on 	behalf 	of 	the 	National 	Retail 	Merchants 	Association 	in
1968 	and 	1985 	and 	a 	1973 	study 	of 	retailers 	in 	New 	York).
Canner 	& Fergu3, 	supra 	note 	6, 	at 	1-2.
--_._._-._-------. - ..----

The 	Honorable 	Greg 	Zito
T.h~ Honorable 	Monroe 	L. 	Flinn
&ig"e 	9-
one 	would 	not 	necessarily 	expect 	credit 	card 	interest 	rates 	to 	go
down 	or 	up 	as 	fast 	as 	general 	interest 	rates. 	Furthermore,
bec~use other 	costs 	of 	consumer 	credit, 	such 	a$ 	operating 	C06tS,
overhead, 	and 	bad 	debt 	have 	continued 	to 	rise,22 	some 	of 	the
benefits 	to 	be 	realized 	from 	the 	falling 	interest 	rates 	have 	been
offset 	by 	these 	other 	trends.
Moreover, 	competitive 	pressures 	appear 	now 	to 	have 	forced
credit 	card 	issuers 	to 	offer 	a 	variety of 	attractive 	credit 	card
plaps. 	In 	recent 	months, 	at 	least 	10 	banks.;n 	Illinois 	have
be~dn 	to 	adver~~se interest 	charges 	ranging 	from 	about 	12 	percent
to 	20 	percent. 	In 	addition, 	new 	sources 	of 	revolving 	credit
are 	rapidly 	developing, 	such 	as 	overdraft 	credit 	lines 	on
checking 	accounts 'and 	so-called 	":naIl 	cards," 	which 	provide
c~edit a~ 	all 	retail 	ou:l~ts 	in 	a 	given 	shopping 	center. 	These
newer 	credit 	offerings, 	in 	turn, 	increase 	the 	pressure 	on
conventional 	credit 	card 	issuers 	to 	compete 	for 	consumer
allegiance 	on 	the 	basis 	of 	price 	and 	other 	terms. 	In 	short,
consumer 	cridit 	markets 	currently 	seem 	to 	be 	operating
competitively, 	and 	there 	appears 	to 	be 	no 	need 	for 	interest 	rate
regulation.
Disclosure 	Requirements 	Mav 	Be 	Unnecessarv-
-If 	consumers 	actually 	value 	early 	receipt 	of 	c:edit 	ter~s,
we 	would 	expect 	credit 	card 	issuers 	to 	compete 	in 	the 	provision
of 	such 	information. 	In 	fact, 	some 	credit 	card 	issuers 	now
proviae 	Truth-in-Lending 	Act 	disclosures 	not 	only 	in 	consumer
22
23
.....
D. 	Vite, 	Consumer 	Credit 	Issues 	(19137) 	(unpUblished
manuscript 	available 	from 	the 	Illinois 	Retail 	Merchants
Associ.::ttion) .
Dannen, 	Cr~dit Clrd 	C,~il£n(1s DdU 	For 	Economv, 	COnSU1-:1 C2rS,
Chi. 	DJ.ily 	L. 	8ull., 	Apr. 	29, 	1987, 	at 	2. 	Moreover, 	a
nationwide 	survey 	of 	sixteen 	Ein~ncial institutions 	found
th~t 	b~nk credit 	card 	plans 	had 	fixed 	and 	variable 	interest
rates 	between 	10.51 	and 	lS~. 	The 	survey 	also 	disclosed 	th,)t
the 	lower-rate 	credit 	card 	plans 	offer 	variety 	in 	other
important 	terms, 	such 	as 	annual 	fees 	and 	grace 	periods.
Annual 	fees 	ranged 	from 	no 	charge 	to 	$22.50, 	and 	grace
periods 	of 	differing 	lengths 	were 	offered 	by 	ten 	of 	the
sixteen 	institutions. 	Consumer 	Action's 	National 	C:edit
Card 	Survey 	(1987).

The 	Honorable 	Greg 	Zito
The 	Honorable 	Monroe 	L. 	Flinn
pjge- 10',
credit 	contracts 	but 	in 	applications 	and 	solicitations 	as 	well.
Hence, 	the 	market 	already 	may 	be 	responding 	efficiently 	to
consumers' 	information 	needs.
Although 	we 	lack 	direct 	evidence, 	it 	may 	be 	possible 	that
the 	benefits 	of 	a 	state 	requirement 	Eor 	disclosure 	of 	key 	terms
in 	solicitations_to 	potential 	credit 	card 	applicants 	would
outweigh 	the 	costs 	of 	such 	regulation. 	Mandating 	disclosure 	of
certain 	terms 	in 	credit 	card 	applications 	(as 	distinguished 	from
the 	Truth 	in 	Lending 	Act 	requirement 	of 	disolosure 	prior 	to 	the
fir~t 	transaction) 	may 	facilitate 	comparison 	shopping 	by 	credit
card 	customers. 	The 	Commission 	staff 	believes, 	however, 	that
concerns 	about 	the 	adequacy 	of 	present- credit 	card 	disclosures
can 	be 	sufficiently 	addressed 	by 	limiting 	disclosures 	to 	a 	few
key 	terms 	in 	credit 	card 	SOlicitations.
Specifically, 	in 	order 	to 	be 	most 	effective, 	a 	disclosure
requirement 	should 	be 	restricted 	to 	essential 	terms, 	such 	as 	the
annual 	fee,the 	annual 	percentage 	rate 	of 	interest, 	and 	whether
there 	is 	a 	grace 	period. 	This 	limitation 	would 	avoid 	over-
whelming 	consumers 	with 	details 	that 	may 	detract 	from 	the 	more
significant 	features 	or 	that 	may 	crowd 	out 	other 	useful
information 	creditors 	might 	otherHise 	provide 	to 	consumers. 	We
would 	also 	suggest 	that 	any 	disclosure 	requirements 	apply 	only 	to
solicitations 	that 	contains 	an 	application 	and 	not 	to 	general
advertisements. 	Increased 	disclosure 	requirements 	could 	well
raise 	the 	cost 	of, 	and 	hence 	discourage, 	advertising 	that
provides 	useful 	information 	to 	consumers 	and 	increases
competition.
SB-895, 	however, 	appears 	to 	go 	Ear 	beyond 	requiring
efi s c los u reo f 	a 	few 	Key 	t e r msin 	c red i t 	car d . sol i cita t ion s . 	T his
bill 	would 	require 	advertisements, 	applications, 	and
solicitations 	to 	explain 	the 	method 	of 	determining 	the 	unpaid
balance 	on 	which 	the 	credit 	service 	charge 	will 	be 	computed, 	the
method 	of 	determining 	the 	amount 	of 	the 	credit 	service 	charge,
and 	the 	conditions 	unuer 	which 	a 	security 	interest 	may 	be
retained 	or 	acquired, 	in 	addition 	to 	disclosing 	key 	terms 	such 	as
the 	annual 	fee, 	the 	annual 	percentage 	rate, 	and 	·,.,:hcther 	there 	is
.~
."

The 	Honorable 	Greg 	Zito
The 	Honorable 	Monroe 	L. 	Flinn
pa~.ll··
a 	grace 	period. 24 	These 	additional 	requirements 	appear 	to 	be
quite 	burdensome 	and 	may 	discourage 	advertising 	that 	would
otherwise 	provide 	useful 	information 	to 	consumers. 	Requiring
that 	credit 	terms 	appear 	on 	unsolicited 	application 	forms 	would
also 	appear 	to 	present 	a 	logistical 	problem 	for 	card 	issuers 	who
provide 	merchant 	displays 	with 	application 	forms. 	Such 	card
issuers 	would 	have 	to 	recall 	their 	application 	forms 	every 	time
they 	changed 	the ··terms 	of 	the ir 	accounts, 	or 	r i8k 	mi slead ing
consumers 	as 	to 	their"current 	terms. 	To 	avoid 	the 	costs 	that
would 	be 	associated 	with 	recalling 	the 	application 	forms, 	some
is~ers may 	simply 	choose 	to 	discontinue 	their 	practice 	of 	havi~g
these 	forms 	readily 	available.
Conclusion
Interest 	rates 	should 	be 	determined 	by 	the 	market 	forces
that 	result 	from 	competition 	among 	lenders 	to 	obtain 	credit
customers. 	Setting 	an 	interest 	rate 	ceiling 	lower 	than 	the
market 	rate 	is 	likely 	to 	result 	in 	countervailing 	restrictions 	on
the 	terms 	of 	credit, 	a 	reduction 	in 	the 	number 	of 	Illinois
consumers 	who 	do 	qualify 	for 	credit, 	and 	a 	reduction 	in 	the
aggregate 	amount 	of 	credit 	that 	is 	available 	to 	Illinois
consumers 	who 	qualify 	for 	credit. 	In 	part~cular, many 	low-income
consumers 	who 	are 	most 	in 	need 	of 	credit 	to 	buy 	clothing 	and
other 	necessities 	will 	be 	less 	able 	to 	do 	so 	if 	interest 	rate
ceilings 	are 	imposed. 	Among 	consumers 	who 	continue 	to 	be 	able 	to
obtain 	credit, 	many 	will 	find 	that 	the 	advantages 	of 	lower
interest 	rates 	will 	be 	offset 	by 	larger 	minimum 	monthly 	payments,
reduced 	amounts 	of 	available 	credit, 	and 	higher 	annual 	fees.
Res...u 1a t ion 	0 E grace 	pe r i ods 	and 	annua 1 	fees 	in 	connect ion
with 	credit 	card 	transactions 	also 	appears 	to 	be 	contrary 	to 	the
interests 	of 	consumers. 	As 	previously 	discussed, 	the 	Commission
staff 	believes 	that 	consumers 	are 	generally 	better 	off 	when 	the
market 	is 	allowed 	to 	offer 	the 	mix 	of 	goods 	and 	services 	that
consumers 	prefer. 	We 	further 	believe 	that 	additional 	disclosure
2d 	We 	further 	note 	that 	Section 	4.2(g) 	of 	S8 	895, 	by 	providing
that 	compliance 	with 	the 	Truth 	in 	Lending 	Act 	meets 	the
disclosure 	requirements 	under 	the 	bill, 	appears 	to 	be
inconsistent 	with 	the 	intent 	of 	the 	new 	disclosure 	require-
ments 	ot 	Section 	4.2(a) (2) (ii). 	Under 	the 	Truth 	in 	Lending
Act, 	disclosures 	are 	required 	in 	advertising 	only 	if 	certain
triggering 	terms 	are 	used.

The 	Honorable 	Greg 	Zito
The 	Honorable 	Monroe 	L. 	Flinn
Page_ 	l~
requirements 	m~y 	be 	unnecessary. 	We 	would 	expect 	credit 	card
issuers 	to 	compete 	in 	the 	early 	provision 	of 	credit 	terms 	if
consumers 	actually 	value 	such 	information.
For 	all 	of 	the 	above 	reasons, 	we 	respectfully 	recommend 	that
these 	bills 	not 	be 	enacted. 	We 	have 	referred 	to 	a 	number 	of
studies 	and 	other 	materials, 	and 	would 	be 	happy 	to 	supply 	copies
of 	them 	if 	you 	so 	desire. 	Please 	let 	us 	know 	if 	we 	may 	be 	of 	any
further 	aS8istance.
,: "
-. I ~.
Office
...
TOTPL P.13