Credit unions and other opponents of the Federal Reserve’s proposed rule capping debit interchange fees received good news last week when bills to delay the rule’s implementation were introduced in the Senate and House.
Sen. Jon Tester (D-Mont.) introduced legislation calling for a two-year delay while the bill introduced by Rep. Shelley Moore Capito (R-W.Va.) delays implementation by one year. Tester and Capito introduced their bills on March 15.
Both bills mandate a study on the effects of the Fed’s proposed rule, including an examination of the debit interchange payment system and the costs and benefits involved. In addition, the study would look at whether savings from lower interchange fees would be passed on to consumers and what the impact of changes in the system might have on small and large merchants.
The study would be conducted by the Fed, the NCUA, the FDIC and the Comptroller of the Currency.
Tester told reporters on a conference call that it would help small financial institutions who are the lifeblood of many rural communities in places like his home state of Montana.
In response to a question from Credit Union Times about the difficulties of passing the bill, Tester said he had heard from several senators who had supported the interchange cap and are now having second thoughts. He declined to state the likelihood of getting the 60 votes needed to break a likely filibuster.
CUNA Senior Vice President John Magill said the dual introductions meant that the issue "is very much in play, but it is still an uphill fight. We are cautiously optimistic."
Because the issue has already been debated in the Senate, Tester’s bill could be added as an amendment to an existing bill without additional hearings. However, in the House, a hearing in Capito’s Subcommittee on Financial Institutions and Consumer Credit is likely.
NAFCU Vice President Brad Thaler agreed that it is an uphill battle but said he thought credit unions and allies have a strong case to make.
"It's hard to make the argument against making sure that if you are going to do something as important as this that it be done in the right way," he said.
The co-sponsors of Tester’s bill are: Sens. Tom Carper (D-Del.), Bob Corker (R-Tenn.), Chris Coons (D-Del.), Jon Kyl (R-Ariz.), Mike Lee (R-Utah), Ben Nelson (D-Neb.), Pat Roberts (R-Kan.), and Pat Toomey (R-Pa.).
Capito’s bill has 27 co-sponsors. The lead Democrat on the measure is Rep. Debbie Wasserman Schultz (D-Fla.). She circulated a letter last year urging conferees to remove the interchange amendment during negotiations.
Sen. Nelson is the only co-sponsor who had voted for the amendment when the Senate passed it 64-33 as part of the Dodd-Frank financial overhaul bill last May. However, Coons, Lee and Toomey weren’t in the Senate at the time.
The amendment, sponsored by Senate Majority Whip Richard Durbin (D-Ill.) gave the Fed the power to regulate debit interchange fees.
Durbin said in a statement following the introduction of Tester’s bill that "Every month we delay limiting the amount banks and credit card companies charge merchants means another $1.3 billion bailout for Visa, MasterCard and their big bank allies. The $13 trillion banking industry doesn’t need another handout–especially one paid for by small business and American consumers."
A key provision of the Durbin amendment stated that any rule issued by the Fed should protect small debit card issuers, such as credit unions and community banks.
However, several key regulators including Federal Reserve Chairman Ben Bernanke, FDIC Chairman Sheila Bair and NCUA Chairman Debbie Matz have expressed concern about the ability of the Fed to protect those issuers.
"It may not be the case in practice that they (small issuers) will be exempt," Bernanke told the Senate Banking Committee last month in response to a question from Tester.
"[T]here are, I think, legitimate questions regarding how in fact small issuers are going to in essence have this exemption work in their favor because there is indeed no statutory authority provided in the law that would permit the networks to in fact engage in two tiered pricing," Federal Reserve Governor Sarah Bloom Raskin told the House Financial Services Committee earlier this month.
According to the proposed rule, the allowable costs for interchange would be limited to no more than the issuer's allowable costs divided by the number of electronic debit transactions on which the issuer received or charged an interchange transaction fee in the calendar year. Or the issuer could receive debit interchange capped at 12 cents per transaction.
According to the provisions of the financial overhaul bill passed by Congress last year, the final rule must be approved by April 21 and in effect by July 21.
CUNA and NAFCU are also fighting the issue in court. The proposed rule is unconstitutional and would do "irreparable harm to issuers and consumers," a coalition of credit union and bank groups stated in a friend-of-the-court brief filed on behalf of Minnesota-based TCF National Bank’s lawsuit against Federal Reserve.
The brief states that previous court cases have concluded that "government price controls that preclude the recovery of costs plus a reasonable return are unconstitutionally confiscatory." It further argues that the government’s contention that the proposed rule doesn’t harm the property interests of card issuers is "startling, and fortunately wrong under settled precedent of both the Supreme Court and the Eighth Circuit."