CFPB Report August 2, 2013

Federal Court Vacates Fed’s Debit Interchange Rule

On Wednesday, July 31, 2013, a U.S. District Court judge struck down the Federal Reserve Board's rules on interchange fees for debit card transactions, in place since late 2011. U.S. District Judge Richard Leon ruled the Board overstepped its discretionary authority to set a 21-cent cap on debit card transactions. The rule, which has been in effect since October of 2011, was challenged in a lawsuit filed in November of 2012. The plaintiffs to the case are several retail trades and individual retailers, including the National Retail Federation; the Food Marketing Institute and NACS, formerly the National Association of Convenience Stores; Oil Miller Co.; and Boscov’s Department Store LLC. The case is NACS v. Board of Governors of the Federal Reserve System, 11-cv-02075, U.S. District Court, District of Columbia (Washington).

In its opinion, the Court concluded that the Board had “clearly disregarded Congress's statutory intent by inappropriately inflating all debit card transaction fees by billions of dollars and failing to provide merchants with multiple unaffiliated networks for each debit card transaction.” The Court wrote, “the plain text makes clear that incremental ACS cost of a particular electronic debit transaction is the only cost the Board was expressly authorized to consider in its interchange transaction fee standard.” Judge Leon also noted the Congressional record supports the clear intent of Congress to bifurcate the cost into incremental ACS costs and “other” costs. 

As for network routing, the Court agreed with the plaintiffs’ position that the statutory provisions require at least two unaffiliated network options for each debit transaction, regardless of whether the customer uses PIN or signature authorization. The Board’s final rule only requires each debit card to carry two or more unaffiliated network possibilities. The Court concluded that the plain text of the statute, which uses the statutory defined term “electronic debit transaction,” supports the intent of Congress for each transaction to be routed over at least two competing networks for each authorization method. 

What happens next remains to be seen. However, Judge Leon indicated the rule would remain in place pending new regulations or interim standards. A hearing is scheduled before the court on Thursday, August 14, 2013, to determine the next steps. 

Senator Dick Durbin (D-IL) and the retailers have already claimed victory after the ruling. Interchange fees have remained a top priority for the retailer/merchant community and we expect their lobbying efforts to increase as a result of this news. 

CBA President and CEO, Richard Hunt, made the following statement following the Court’s decision:

“This new ruling will create even more chaos for consumers and small banks. Congress ought to save families from this uncertainty by repealing this government mandated price-fixing. We certainly hope retailers return to their free-market principles as they did when opposing the proposed government ban on big gulp sodas in New York.”

CBA Submits Comment to Department of Defense on Military Lending Act

On Thursday, August 1, 2013, CBA and several other trades submitted a comment letter in response to the Department of Defense (DOD)'s Advanced Notice of Proposed Rulemaking (ANPR) concerning limitations on the terms of consumer credit extended to service members and dependents. The group expressed the belief that the Military Lending Act (MLA) is working as intended to protect members of the armed forces and their dependents. Imposing additional requirements on lending to servicemembers would have adverse consequences for members of the armed forces and military families. We also stated our support for strengthening financial education for servicemembers at all phases of their career, since financial education plays a critical role in helping servicemembers and their families use credit products wisely.

House Passes Student Loan Bill

On Wednesday, July 31, 2013, the House passed H.R. 1911, as amended by the Senate, in a vote of 392-31, sending the bill to President Obama for signature into law. The bill would modify Stafford and PLUS loan interest rates for loans made on or after Monday, July 1, 2013. The House took up the compromise bill that passed the Senate last week without change, so no further Congressional action is needed before sending the bill to the President, who is expected to sign it quickly. 

The bill sets interest rates every academic year (July 1 through June 30) using the May auction of the 10-year Treasury Note as the index with various spreads for undergraduate and graduate students as well as for Stafford and PLUS loans. The rates would reset every July 1 but would be fixed for the terms of all loans originated during that academic year. 

CBA has continued to be in touch with the CFPB about guidance on how to change the Truth in Lending Act disclosures for federal loans. The CFPB is expected to issue guidance soon after the President signs the legislation.

Regulators Issue Stress Test Guidance for Medium-Sized Banks

On Tuesday, July 30, 2013, the Federal Reserve Board, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation issued a joint proposed guidance for medium-sized banks required by Dodd-Frank to conduct annual stress tests beginning this fall. The guidance aims to provide additional details for banks with total consolidated assets between $10 billion and $50 billion to “help them scale the tests to their size, complexity, risk profile, business mix and market footprint.” Particularly, when conducting the forward-looking tests, which subject banks' balance sheets and capital to a variety of economic scenarios, the forty-plus banks will be able to use all or some of the variables provided by regulators based on their individual business profile. Comments are due by Wednesday, September 25, 2013.

Fed Issues Annual Report on Government-Issued Prepaid Card Programs

Earlier this week, the Federal Reserve issued its annual report on government-administered general-use prepaid card programs. Section 1075 of the Dodd-Frank Act, which added section 920 to the Electronic Fund Transfer Act (EFTA), requires the Fed to report to congress annually on the prevalence of use of these cards in federal, state, and local government-administered payment programs. It also requires reports on the interchange fees and cardholder fees charged with respect to the use of such prepaid cards. 

The Fed made the follow findings:

  • For calendar year 2012, 94 government offices administering 186 programs reported disbursing $1.017 trillion to recipients, of which $136 billion, or 13.4 percent, was disbursed through prepaid cards.
  • Issuers receive revenue from at least two sources: interchange fees and cardholder fees. In 2012, issuers reported collecting $314 million in interchange fees and $190 million in cardholder fees from 552 programs.
  • Issuers pay fees to third-parties when a cardholder withdraws cash from an out-of-network ATM or bank. In 2012, issuers reported paying approximately $133 million in fees to third-parties for ATM withdrawals and approximately $31 million in fees to third-parties for OTC cash withdrawals.

CBA Urges Senate to Support Cybersecurity Bill

On Monday, July 29, 2013, CBA and other trade associations sent a letter to the Chair and Ranking Member of the Senate Committee on Commerce Science and Transportation supporting of S. 1353, the Cybersecurity Act of 2013. Among other things, S.1353 would encourage the private and public sectors to collaborate on standards, guidelines, and best practices. It also increases research and development for the design and testing of software, upgrades education for workforce and students to better prepare them to stimulate and support innovation in cybersecurity, and promotes a national cybersecurity awareness campaign. The bill would also help develop initiatives for encouraging higher level cybersecurity education and a public awareness campaign. 

The trades wrote, “Our nation’s cybersecurity requires the active participation of the government, business and every consumer. We believe this bill takes a significant step towards encouraging the participation of all, while providing the tools to defend against cyber threats. The financial services industry is committed to this effort and will remain a willing partner with Congress and the Administration to secure our nation’s cyber infrastructure.”

D.C. District Court Dismisses State National Bank of Big Spring Case

 On Thursday, August 1, 2013, D.C. District Court Judge Huvelle granted the CFPB’s motion to dismissthe lawsuit brought by State National Bank of Big Spring challenging the constitutionality of Titles I (FSOC), II (Orderly Liquidation Authority) and X (CFPB) of the Dodd-Frank Act; this lawsuit was joined by the Attorneys General of Oklahoma, Michigan, South Carolina, Montana, Nebraska, Ohio, Oklahoma, Texas, and West Virginia, but only with regard to the Title II challenge. In the court’s opinion, Judge Huvelle dismissed the lawsuit based on a lack of legal standing, finding that the plaintiffs failed to make a “concrete showing” of injury. In addition, the court ruled that the claims alleged in the lawsuit were not ripe for adjudication as the plaintiffs’ assertions of harm were based on speculation and conjecture about future events which may never even come to pass.