WASHINGTON (2/23/11)—The U.S. Congress intended that small debit card issuers be protected from the rate regulations in the interchange law yet the Federal Reserve Board’s implementation proposal fails to accomplish that goal, the Credit Union National Association (CUNA) said in its comment letter to the Fed filed yesterday. CUNA was commenting on the board’s proposal to implement the interchange provisions of the Dodd-Frank Act. CUNA also said that given the number and nature of the issues unresolved by the proposal, the Fed should work with Congress to delay interchange regulation implementation by up to 24 months to allow more time for discussion and consideration of how the interchange regulations would impact credit unions. CUNA noted that interchange fee regulation is the most significant regulatory issue facing credit unions that offer debit cards, and said that credit unions are concerned about the impact that the interchange proposal could have on their members, debit card programs, and day-to-day operations. The Fed's interchange provisions, which were released for public comment late last year, would cap debit card interchange fees that are paid by merchants to large debit card issuers at no more than twelve cents per transaction. By law, issuers with under $10 billion in assets are entitled to be exempted from the interchange fee rate setting provisions. The deadline for public comment on the interchange changes passed yesterday, and the Fed received comments from more than 4,000 stakeholders, including credit unions. Dodd-Frank directs the Fed to issue a final rule by April 21. If approved, the rule would become effective in July, without the delay that has been urged by CUNA and others. Although CUNA strongly backs an implementation delay, in its absence CUNA urged the board to made substantial changes in the proposal, which CUNA said would not withstand judicial review as issued for comments. Among those changes, CUNA recommended the Fed include provisions to implement the statutory small issuer exemption. CUNA also advocated that the Fed replace its proposed interchange fee rate caps, which were not required by Congress. They should be replaced with standards for assessing the “reasonableness and proportionality of interchange fees, which Congress require. CUNA also suggested amending routing provisions and ensuring that debit card issuers would not have to belong to more than two independent payment card networks. CUNA also joined its many Electronic Payments Coalition (EPC) colleagues in a joint comment letter that urged the Fed to fundamentally revise its proposed rule on debit card interchange fees. The EPC comment letter noted that the new interchange fees, which would be determined by the Fed’s rule and imposed on financial institutions, would be 80% below current interchange fees. Frank Michael, who appeared before the House Financial Services Committee last week on behalf of CUNA and his $18 million-asset credit union, Stockton, Calif.-based Allied CU, said that the interchange changes could mean increasing members' existing debit card fees or introducing new fees and lowering deposit rates. Michael added that the interchange regulations could harm low-income consumers by restricting their access to free checking accounts. Fed Chairman Ben Bernanke, during last week’s Senate Banking Committee hearing, said that the interchange fee regulation exemption included in the Dodd-Frank Act for credit unions and small institutions with under $10 billion in assets may not be effective in the marketplace, and admitted that there may be no way to ensure that small issuers are exempt from new interchange fee rules. Federal Deposit Insurance Corporation Chairman Sheila Bair speculated that the interchange changes could harm small financial institutions far more than they would help merchants. Sens. Charles Grassley (R-Iowa) and Tom Harkin (D-Iowa) in a Tuesday letter to the Fed urged the regulator to ensure that the small institution exemption works as intended. Several lawmakers also have questioned whether the Fed had taken the time needed to consider the impact that the interchange changes could have on credit unions and other small issuers. Fed Governor Sarah Bloom Raskin in House testimony last Thursday said that the Fed would delay its rulemaking process if directed to do so by Congress. For the CUNA and EPC comment letters, use the resource links.