Fed’s Final Rule on Interchange Is Better, But Concerns Still Exist Over Small Issuer Exemption (Misc News: June 30, 2011)
The Federal Reserve’s final rule on debit interchange is a huge improvement over the initial proposal, according to MCUL & Affiliates CEO David Adams, but now attention must turn to making sure the exemption for small issuers, such as credit unions, actually works.
“The Fed implemented some good language for monitoring and reporting on the viability of the two-tiered system,” Adams said. “We will continue to work hard in our advocacy efforts to assure that small issuers' exemption is enforced in the marketplace.”
On Wednesday, the Federal Reserve adopted a revamped proposed rule that will put the Durbin amendment to the Dodd-Frank Wall Street Reform and Consumer Protection Act into practice. It sets the interchange fee at 21 cents to cover certain identified costs and provides an additional ad valorem component of 5 basis points to reflect a portion of fraud losses. Also, the Fed delayed implementation of the rule to Oct. 1. Congress had stipulated that the rule go into effect on July 21, but regulators were unable to meet the deadline because they had to sift through 11,000 comments on its proposed rule, many of which were highly technical.
While the financial services industry lost a major battle when the Senate failed to muster the 60 votes needed to pass a delay of the law, CUNA President/CEO Bill Cheney said the hard work in lobbying Congress and the Fed paid off.
“Credit unions spoke out loudly and forcefully about the law and their concerns about the Fed’s proposed rule,” Cheney said. “With regard to the 11,000 comments that the Fed received, more than half – about 5,600 – came from credit unions. With regard to recent efforts in the Congress to mandate a study about the impact of the interchange law before it went into effect, more than half a million contacts were made by credit unions with the Congress in support of that study.”
The Federal Reserve governors also expressed reservations about the law, with some calling it ambiguous and subject to interpretation. There were questions about whether cost savings will actually be passed onto consumers and how payment technology innovators will be impacted.
“It is challenging to craft regulations that improve social welfare,” said Fed Gov. Janet Yellin, Fed vice chairwoman.
“This has not been an easy law to implement,” said Gov. Elizabeth Duke. In fact, Duke voted not to accept the staff recommendation because, even though she agrees with most of the rule written, she is not convinced the small issuer exemption will work.
“Given my conviction that the exemption will not work in practice,” Duke said, “I cannot support the increased regulatory burden on small issuers.”
She added that she expects the law to result in less availability of low-cost checking accounts.
But Gov. Daniel Tarullo said the board did not have the luxury of simply rejecting the rule. He said that in determining whether or not he would support the rule, he said he had to vote in favor of it unless he could come up with a better solution.
Tarullo also made an informal amendment – which his fellow governors supported – to direct the Fed staff to study the small issuer exemption after 6 months and again after 18 months to see if it is working.
The governors shared the concern of the credit union industry about fraud losses and costs for fraud prevention, and, in fact issued one part of the rule on fraud prevention as an interim final rule that would allow a “fraud-prevention adjustment” of 1 cent per transaction conditioned upon the issuer adopting effective fraud prevention policies and procedures. The Fed invited additional comment on this provision.
Adams said that while he is still disappointed over Congress’ unwillingness to delay the Durbin Amendment so it could be studied before implementation, he thinks the smaller spread between the new 21-cent cap and current interchange levels, would result in less lost revenue for credit unions.
“The ultimate risk of lost income for credit unions has been greatly reduced,” Adams said. “We appreciate the Federal Reserve's efforts to stretch as far as possible to protect financial institutions' interests within the limitations of the statute.”
Now the MCUL and CUNA will turn to helping credit unions to implement the new rule and surveying the landscape for what promises to be a major shift in the financial services marketplace.
“The MCUL and CUNA will look for opportunities to assist credit unions with the implementation of this new regulation, the monitoring of the small issuer exemption and other issues such as anticipated changes in financial services pricing by competitors,” Adams said.
Click here to read CUNA’s summary of the rule (password protected).
Click here to read the Fed’s press release.