Wednesday, June 08, 2011

Tester-Corker Amendment to Dodd-Frank Interchange Fee Provisions Would Delay Implementation Pending Fed Study

An amendment offered to the Economic Development Revitalization Act, S 782, by Senators John Tester (D-MT) and Robert Corker (R-TN) would delay implementation of the Dodd-Frank interchange fee provisions in Section 1075 for up to one year while the Fed and other financial regulators study the impact of the provisions on small financial institutions. According to Senator Tester, the amendment outlines the topics the study should address, including taking a closer look at all of the actual costs associated with debit card transactions, the impact on consumers, and whether an exemption for small banks as proposed in the interchange amendment last year will actually work. June 7, S3529. The host legislation, S 782, would reauthorize the Economic Development Administration and has strong bi-partisan support.

Section 1075 of Dodd-Frank requires that the Fed issue by April 21, 2011 three final rules on interchange fees regarding a reasonable and proportional debit fee structure, fees for fraud prevention on debit transactions, and debit transaction network fees. There is a statutory exemption for small issuers under $10 billion in assets from the new debit fee rules. The draft regulations under Section 1075 propose to cap the interchange fees at the largest financial institutions at 12 cents per transaction, give or take some conditions such as the prevention of fraud, which Dodd-Frank built into the law.

The six-month study mandated by the Tester-Corker Amendment would be conducted by the Federal Reserve, the National Credit Union Administration, the FDIC and the OCC. If, after the study, if the Fed and at least one of the other agencies involved determine that the current rules do not take into account all costs, that the rules may harm consumers, or that the exemption meant to protect small banks and credit unions will not work, then the Fed has six more months to rewrite the rules considering all costs. If the agencies find that the rules consider all costs, consumers would not be harmed, and that the small issuer exemption will work, then the currently pending rules would move forward.

Senator Tester said that the Amendment puts into place a process that will address any potential impact on small issuers. His contention has long been that market forces would drive fees for small issuers to the lowest rate. Since the Senate cannot fully understand how the market will operate until interchange regulation is enacted, the Amendment also directs the Fed to report the actual impact of the market on small issuers a year after the rules are implemented. The Fed has to present a report to Congress and every other year thereafter on the impact of a regulated market on small issuers. Most importantly, the report will include recommendations for how to resolve any potential harm to small issuers and to enforce the exemption.

At the end of the entire process, he noted, there will still be a regulated market for debit interchange fees, which is what the Senate voted for in Dodd-Frank. But it will be a regulated marketplace based on a full understanding of all the costs relative to debit transactions and the impact of these rules on consumers and small issuers.

Senator Corker praised the Amendment as a good middle-of-the-road solution. The Fed is directed to consider both fixed costs and incremental costs, he noted, something any retailer or any business would want to be considered if they were being regulated. The Fed would also look back every two years and ensure smaller institutions the policies that are being put in place do not disproportionately negatively affect those institutions. If so, they recommend, not prescribe, to Congress possible legislative remedies.

In a letter to the Senate, the Credit Union National Association, urged support for the Tester-Corker Amendment. Noting that some people point to Canada as an example of proper interchange regulation, CUNA contended that the Canadian experience has been anything but beneficial to consumers. While there is significant debit interchange regulation in Canada, Canadians generally pay $.60-.65 per transaction when they have more that 10-15 debit, check or ATM transactions per month. which amounts to about $50 per year in fees for Canadian consumers. CUNA expects a similar experience for American consumers if the interchange amendment is allowed to be implemented. Credit unions and banks will be forced to raise fees to cover the cost of the regulation; said the letter, and consumers will end up bearing the brunt of debit interchange regulation.