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CUNA reviews House interchange alternative urges CU opposition

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WASHINGTON (6/22/10)--After an initial review of alternative interchange language offered yesterday by the House as a substitute to a Senate provision in the financial regulatory reform bill, the Credit Union National Association (CUNA) urged credit unions to continue working for improvements to interchange provisions. “We will continue working for improvements in the interchange provisions, and we urge you to continue your efforts to oppose the inclusion of the interchange bill in the financial reform legislation,” said CUNA Senior Vice President of Legislative Affairs John Magill. CUNA also provided a brief summary of some key provisions of the new interchange amendment. They include the following:
* The Federal Reserve would write regulations on interchange fees and whether they are reasonable and proportional to the marginal costs incurred by issuers relating to a transaction. The Fed board would issue rules within nine months of enactment (probably around March/April 2011). The rules would take effect within a year. The costs would be limited to incremental costs of authorization, clearance and settlement plus costs related to preventing fraud; * Credit unions and banks with assets of less than $10 billion would be exempt from the rate-setting rules directly. However, the extent to which this exemption would work in practice is unclear and subject to much debate; * There is no enforcement mechanism to ensure merchants would accept lower interchange fees from bank debit cards and higher interchange fees from credit union debit cards; * The amendment would prohibit issuers and networks from inhibiting the ability of merchants to direct the routing of transactions; * Federal and state government benefits and reloadable prepaid cards would be exempt from the rate settings; * The Fed would be authorized to require any issuer (including credit unions of all sizes) to provide information to the board regarding the regulation of interchange fees and must disclose aggregate information on costs and fees by issuers or payment card networks in connection with debit transactions. (This is a new provision about which CUNA is concerned. However, CUNA notes that if the Fed has to set interchange fees based on costs, it will be useful for them to include credit union data); * In its rules, the Fed would have to consider the similarity between debit transactions and checks that clear the Federal Reserve System at par and to distinguish between the incremental costs incurred by an issuer for its role in settlement, clearance or authorization for a particular transaction; * In writing the rule, the Fed board would have to consult with the National Credit Union Administration (NCUA) and other federal regulators; * The Fed would also be directed to write rules on network fees to ensure network fees are not used to compensate an issuer or to evade the board’s rules; * The amendment does provide that merchant discounts for the form of payment (cash versus debit card, for example) may not differentiate on the basis of the issuer or network. Incentives for the use of credit cards may not differentiate on the basis of issuer or payment network and such incentives must be offered to all buyers and disclosed; * Payment networks may not limit the ability of merchants to set minimum dollar values up to $10 for the acceptance of credit cards; and * Merchants would not be able to discriminate between debit cards or credit cards within a payment network on the basis of the issuer.
CUNA will provide detailed analysis of any final interchange bill.

New interchange language same concerns says CUNA

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WASHINGTON (6/22/10)— The Credit Union National Association (CUNA) said Monday that credit unions "would almost certainly" have to oppose a final financial regulatory reform bill unless lawmakers remove or significantly change even the modified debit interchange provisions put forward yesterday by House conferees. CUNA is studying changes offered Monday by House lawmakers to interchange language, which could be included in a final financial regulatory reform package currently being worked out by a House-Senate conference committee. In a letter to the top members of the House Financial Services Committee and the Senate Banking Committee, CUNA President/CEO Dan Mica wrote that CUNA continues to have “grave concerns regarding the affect that these provisions would have on credit unions and their members.” The letter was also sent to each conference committee member. Both House and Senate versions of the interchange language would require the Federal Reserve to set interchange fees, considering only certain factors in the price-setting formula. In its letter, CUNA continued to encourage the conferees to remove the interchange language from the base text of the reform bill, or to adopt a “more realistic and fair delineation of costs” to be considered and to add enforcement provisions to the prohibition of merchant discrimination against credit unions’ cards. The CUNA letter noted that in lieu of the language’s removal or significant improvement, CUNA and credit unions would “almost certainly” oppose the enactment of the larger reform package. CUNA and credit unions have waged an exhaustive effort against the interchange provision, arguing that it would save merchants money on their costs of doing business while taxing consumers with new fees. CUNA and the leagues organized a national Hike the Hill effort on the interchange issues earlier this month, drawing hundreds of credit union activists to Capitol Hill to meet with legislators. Those in-person visits have been backed by more than 600,000 email and phone contacts on the subject. Both House and Senate versions of the interchange provision offer a carve-out for issuers with less than $10 billion in assets. Critics—including CUNA—have argued that the carve out would not work and could cause additional problems for smaller issuers, who could be pushed aside by favorable deals between merchants and big issuers. “The House offer fails to address the most significant concern of credit unions; specifically that the carve-out envisioned by the provisions is unworkable and not meaningful,” CUNA’s Mica wrote. “Nothing in the House offer directs the payment card networks to operate the two-rate system that would be necessary for the carve-out to work; nothing in the House offer includes enforcement provisions to require merchants to accept credit union cards were a two-rate system to exist; further, the legislation provides significant disincentives for payment networks to honor the carve-out,” Mica pointed out. The CUNA letter also reiterated serious concerns that the interchange provision will result in an “articificially low debit interchange rate” that would force small issuers to recoup losses “through other means.” While the Federal Reserve is directed by the House language to consider fraud prevention costs when fixing the debit interchange rate, it is specifically prohibited from considering other operational costs. “While we oppose the government price-fixing proposed by this legislation, if the government is going to set a price, we believe that all costs should be taken into consideration,” the letter said.

Inside Washington (06/21/2010)

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* WASHINGTON (6/22/10)--Card industry representatives have criticized a Washington hearing about interchange fees because they said it gave their side little opportunity to move forward with its position. On June 15, the Senate Appropriations Committee hearing featured payment industry witness Bruce Sullivan, Visa Inc.’s vice president and head of government services. Sullivan, the lone witness, seemed “ill-prepared” to answer Sen. Dick Durbin (D-Ill.)’s questions about consumer interchange and declined comment on several points, said American Banker (June 21). The Electronic Payments Coalition also said the forum was an inappropriate substitute for an official Senate hearing. Durbin proposed the interchange amendment. The Credit Union National Association and credit unions oppose the amendment because they said it would hinder credit unions’ ability to offer card products and services. The House has submitted a substitute proposal on interchange to be considered for the final regulatory reform bill (SEE RELATED: New interchange language, same concerns, says CUNA) ... * WASHINGTON (6/22/10)--Conferees spent last week making some significant changes to the regulatory reform bill--including scaling back a capital provision and overhauling the deposit insurance system--but more lies ahead, said American Banker (June 21). There is just one week left for conferees to work on key parts of the legislation, including risk retention, consumer protection, derivatives oversight and interchange fees. Some of the tougher subjects are slated to be taken up today, including interchange--which the Credit Union National Association (CUNA) and many credit unions oppose. CUNA has said the legislation would hinder credit unions’ ability to offer card products and services. Also this week, conferees are scheduled to tackle a derivatives provision, which would require banks to spin off their derivatives operations. Sen. Blanche Lincoln (R-Ark.), a conferee and the provision’s author, appears to determined to keep the provision a part of the final bill ... * WASHINGTON (6/22/10)--Federal Deposit Insurance Corp. (FDIC) Chairman Sheila Bair said Friday that policymakers should address the government’s role with Fannie Mae and Freddie Mac after the regulatory reform bill is complete. Bair said government involvement in mortgage finance is justified, but said there must be clarification regarding the enterprises’ governmental functions and which functions are subject to “discipline of the marketplace” (American Banker June 21). Fannie and Freddie were placed into conservatorship by the government in September 2008 ...

CUNA releases FTC Fed final rule analyses

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WASHINGTON (6/22/10)--The Credit Union National Association (CUNA) addressed the Federal Trade Commission’s (FTC) final rule that requires disclosures for financial institutions that do not have federal deposit or share insurance in a recently published final rule analysis. The FTC’s final rule, which will become effective on July 6, requires institutions to inform their members or customers that the institution is not federally backed and that the federal government does not guarantee the depositor will receive money if the institution fails. While a proposal released in 2005 would have required financial institutions to provide this notice to each member or customer in writing, financial institutions may now comply with the rule by posting a disclosure of their insurance situation, in some instances. Those publicly placed disclosures must be visible at each station or window place where deposits are received, at each principal place of business, in all branches where the institution accepts deposits or opens accounts. The disclosures must also be visible on the financial institutions home page. The final rule does not apply to financial institutions that do not receive deposits in amounts less than the maximum insurance level of $250,000. CUNA also addressed recent Federal Reserve Board clarifications to Regulation E, the Electronic Fund Transfer Act, and Regulation DD, the Truth in Savings Act (TISA) in a separate final rule analysis. One item noted by the Fed changes, which were released late last month, was a clarification that institutions may not assess fees for the payment of ATM and one-time debit card overdrafts if consumers do not opt-in to their overdraft programs. The Fed at that time also clarified that Reg DD does not require financial institutions "to exclude from the consumer's balance funds that may be transferred from another account" under retail sweep programs. To read the final rule analyses, use the resource links.

Fed posts new rules for same-day ACH service

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WASHINGTON (6/22/10)--The Federal Reserve Board, beginning on Aug. 2, will offer “an opt-in, same-day settlement service” for Automated Clearing House (ACH) debit payments. The new federal reserve service will apply to all depository institutions. The Fed said that FedACH customers may opt-in to the service, which will “be limited to transactions arising from consumer checks converted to ACH and consumer debit transfers initiated over the Internet and phone.” The debit transfers will post to institutions' Federal Reserve accounts at 5:00 p.m. ET and same-day return debit transfers will post at 5:30 p.m. ET, the release added. For the full release, use the resource link.

NCUA to CUs Assessment decision was not taken lightly

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ALEXANDRIA, Va. (6/22/10)--The National Credit Union Administration (NCUA) on Monday communicated directly with credit unions, telling them that the recent decision to repay corporate credit union stabilization costs by assessing a 13 basis point per insured share fee on natural person credit unions “was not taken lightly.” The NCUA is currently required to repay the U.S. Treasury a total of $1.5 billion for funds that were borrowed to prop up the corporate credit union system. The assessment, which will be invoiced in July or August and will come due in mid-August, will cover $1 billion of that total, with the NCUA covering the remaining $500 million by reducing “the liquidity assistance provided to corporate credit unions in September.” The letter to credit unions provides that federally insured credit unions should calculate the assessment based on insured shares and deposits as of March 31. Credit unions can record the expense on the line National Credit Union Share Insurance Fund stabilization expense (account code 311) on the June call report. While several credit union officials have asked the NCUA if it could “ease the burden of assessments” for credit unions that have prudently managed their risks, the NCUA’s letter to credit unions said that the Federal Credit Union Act requires the regulator to share the burden of any premium or assessment among all in the credit union system. The NCUA letter also covered some of the decisions looming on the horizon, including decisions that natural person credit unions will have to make regarding whether or not corporate credit unions should be recapitalized, if they should switch to another corporate credit union, or if they should seek out a non-CU source for the services that the corporates once provided. The NCUA said that it “plans to do its part to resolve the issues within the corporate credit union system,” adding that it will soon “propose a plan to remove the toxic assets that have depleted capital from investors in corporate credit unions” and will also “finalize a new corporate credit union regulation that will prevent the concentration of high-risk assets and build a stronger buffer to protect capital.” That asset plan “will ensure that new corporates begin with clean balance sheets,” and will ensure that those clean balance sheets are maintained, the agency added. For the full NCUA letter, use the resource link.