Under pressure from business and consumer groups, the Federal Reserve Board is backing away from its plan to tamper with the federal truth-in-lending law and is discussing other major changes in its recently announced controls on consumer credit.
To placate consumers, the board is considering prohibiting lenders from raising the monthly payments on current charge account balances, Federal Reserve Governor Nancy Teeters told a congressional hearing yesterday.
Also under study, Teeters revealed, is a plan to seasonally adjust the ceiling on growth of consumer credit. That would answer a complaint by retailers that holding consumer credit to March 14 levels, as the Fed first requested, would mean consumers could not charge gifts next Christmas.
The Federal Reserve has already granted one major exemption to the consumer credit curbs announced less than two weeks ago.
Borrowing to finance fuel purchases is not covered by the controls, the Federal Reserve disclosed during questions and answers about the limits. The board did not intend to restrict credit for fuel oil, officials said, but apparently forgot to exclude it from the original rules.
The Federal Reserve's original plan attempts to hold the total amount of consumer credit to what it was on March 14, when the plan was announced. Any lender who increases the amount of credit outstanding above March 14 levels must put 15 percent of the increase into a non-interest bearing account in a federal reserve bank.
The Federal Reserve did not tell lenders how to hold credit to the target, but Sears, Roebuck and Co., Bank of America and others have announced they plan to raise the minimum monthly payment on charge accounts and credit cards.
That will not be possible if the Federal Reserve adopts the proposal that Teeters said is now being discussed.
"We are considering the policy of protecting outstanding balances" on credit accounts, Teeters said. Under that plan, consumers would not have to pay higher monthly bills on their charge accounts if they do not increase their use of credit.
But if consumers keep on charging, adding to an outstanding balance, they could be forced to make higher monthly payments or pay additional interest charges on both their old and new purchases, Teeters said.
She stressed that the board has taken no action on that proposal, but will do so as soon as possible.
If the board takes that action, lenders who have announced plans to raise minimum balances "will have to do something else" to hold down borrowings, another Federal Reserve spokesman said.
The Federal Reserve's crackdown on consumer credit was bitterly criticized at a hearing called by a House consumer affairs subcommittee chaired by Rep. Frank Annunzio (D-Ill.), who accused the board of "embarking on a program to put the American people in the poorhouse."
Annunzio criticized the board for not including business use of credit cards in its controls.
"A businessman can use his credit card to charge a three-martini lunch," Annunzio charged, "while a housewife could not use hers to order medicine for her children."
Teeters said the board has other ways to limit business borrowing and she assured the committee the Federal Reserve will not set aside consumer protection laws in its effort to control borrowing.
Lenders had asked the board to suspend state usury laws that limit the interest they can charge on credit cards and to suspend parts of the federal and state truth-in-lending laws that require advance notice to consumers on changes in terms of their accounts.
"We have no intention of preempting state usury laws," said Teeters. She said the federal truth-in-lending provisions will also be observed.
But she said the Federal Reserve may seek to suspend laws in some states which require that consumers be notified three months, six months or a year in advance of any changes in credit card account terms.
Teeters said the base on which consumer credit limits are established may be changed to answer complaints from lenders.
The amount of consumer credit outstanding on March 14, the original ceiling date, is about 40 percent less than consumers usually borrow during the Christmas season. Oil companies have a similar peak in credit during the summer.
Teeters said the Federal Reserve is considering adjusting the credit ceiling on a monthly basis. Lenders then would have to contribute to the non-interest bearing account only if their credit total increased above the level for that month.
The monthly ceilings would be based on the previous year's balance, plus some growth factor yet to be determined by the Federal Reserve Board.