Fed Adopts Improved Debit Interchange Rule: Increases Base Rate to 21 Cents, Allows for Recovery of Additional Fraud Costs

Federal ReserveOn Wednesday, June 29th, the Federal Reserve Board approved a final debit-card interchange rule that would cap an issuer's base fee at 21 cents per transaction and allow an additional 5-basis-point charge per transaction to help cover fraud losses. The Fed also issued an interim final rule that allows a fraud-prevention adjustment of 1 cent per transaction conditioned upon an issuer's adopting effective fraud prevention policies and procedures. The Fed also adopted requirements that issuers include two unaffiliated networks for routing debit transactions – one signature-based, one PIN-based. The effective date for the final and interim final rules on the pricing and routing restrictions is October 1st.

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Washington, D.C. News

Fed Adopts Improved Debit Interchange Rule: Increases Base Rate to 21 Cents, Allows for Recovery of Additional Fraud Costs
Credit Union Perspective at Housing Finance Reform Hearing
Credit Unions Support Patent System Reforms
No Rest for the Weary or for Washington: Hearings Follow July 4 Break

Industry News

NCUA Corporate Prepayment Plan

State News

Different Perspective on State Taxes

Public Influence News

Statewide Public Messaging Update
Social Media Revolution Version 3.0
CUs in the News
Consider This
Paying Attention
Statewide News Coverage

News of the Competition

BoA to Pay $8.5 Bil Settlement over Mortgage-Backed Securities
Hackers Steal $2.7 Mil from Citigroup
New Revenue Stream at Banks

News of Interest

TCF Drops Lawsuit Over Debit Fees
Looking Back at the Fight: Perspectives on the Interchange Debate
Small Business: Recession Isn't Over... Still Having Problems
Disturbing Trend: Strategic Defaults
Number of Bankruptcies Down for First Half of 2011

July 8, 2011

 
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Stay on top of what's happening with credit union advocacy by reading Creating Influence, the Georgia Credit Union Affiliates' advocacy e-newsletter! If you’d like to be added to the distribution list, email Advocacy@gcua.org or call an Advocacy Team member – Cindy Connelly, Mike Culbertson, Anita Paul or Brandee Bickle – at 800-768-4282.

 Washington, D.C. News
 

Fed Adopts Improved Debit Interchange Rule: Increases Base Rate to 21 Cents, Allows for Recovery of Additional Fraud Costs

On Wednesday, June 29th, the Federal Reserve Board approved a final debit-card interchange rule that would cap an issuer’s base fee at 21 cents per transaction and allow an additional 5-basis-point charge per transaction to help cover fraud losses. The Fed also issued an interim final rule that allows a fraud-prevention adjustment of 1 cent per transaction conditioned upon an issuer’s adopting effective fraud prevention policies and procedures. The Fed also adopted requirements that issuers include two unaffiliated networks for routing debit transactions – one signature-based, one PIN-based. The effective date for the final and interim final rules on the pricing and routing restrictions is October 1st.

For an average $40 transaction, the new combined rate of 24 cents – including the fraud-loss surcharge – enables issuers to recover twice as much as they would have been allowed under the Fed’s original 12 cent price cap proposal. Because the 5-basis-point adjustment for fraud losses will fluctuate with the size of the transaction, the interchange level will also fluctuate. The new pricing, however, is still about a 45 percent reduction from current market rates and will negatively impact revenue at all financial institutions, including credit unions. Though the Fed noted that it has limited means available to enforce the statutory exemption of issuers with under $10 billion in assets, the Fed staff recommended the board take steps to reinforce the exemption:

  • Publish annual lists of institutions that fall above and below the $10 billion threshold to help payment card networks determine which issuers are subject to the caps.
  • Produce an annual survey of the average interchange transaction fee each network provides to covered and exempt issuers. Such reports will allow issuers to compare revenue they would receive from each network and allow others to monitor the effects of the law.

For CUNA’s analysis on the final rule, please click here.

Federal Reserve BoardThe Fed’s action comes after an aggressive campaign by credit unions, Leagues and CUNA to stop the Fed’s original proposal. Though the centerpiece of that campaign – legislation introduced by Sens. Jon Tester (D-Mont.) and Bob Corker (R-Tenn.) to stop, study and fix the rule – failed to pass the Senate, the effort helped to illuminate the widespread concern about the rule from credit union supporters, community groups and policymakers alike. That outcry, and the more than 5,000 credit union comment letters, helped persuade Federal Reserve officials of both their authority to mitigate the rule’s damaging effects and the need to exercise that authority.

While the Fed’s recognition of the range of costs for which financial institutions deserve reimbursement is appreciated, there remains concern about whether the two-tiered system can actually work. Credit unions will be watching closely to determine whether market incentives created by this rule inspire retailers to drive business away from small institutions like credit unions, and whether retailers reward customers with lower prices or simply pocket the money. CUNA will continue to aggressively advocate for remedies to mitigate the rule’s effects.

Retailers were enraged by the Fed’s move. Merchant trade groups accused the regulator of buckling amid pressure from banks. The National Retail Federation believes that the Fed included inappropriate costs in its calculation and abdicated the responsibility of a government agency to follow the law. To read the Washington Post story on the Fed’s ruling click here.

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KeysCredit Union Perspective at Housing Finance Reform Hearing

Rod Staatz, president/CEO of SECU of Maryland and a member of the CUNA board of directors, testified before a Senate Banking Committee hearing on housing finance reform on June 28th. In his testimony, Staatz described the state of credit union mortgage lending and outlined key principles that should guide the nation's housing finance reform. These included:

  • the need for affordable access for credit unions and other small lenders to the secondary market for mortgage loans,
  • the importance of preserving the 30-year, fixed-rate mortgage instrument,
  • the need for a durable secondary market, one that can weather economic adversities, and
  • the need for an orderly transition to a revised system.

Staatz is also a member of CUNA's GSE Reform Task Force, and discussed another important housing topic – the definition of a qualified residential mortgage (QRM). The Dodd-Frank Wall Street Reform Act requires regulators to write a rule on credit risk retention for securitized assets, but allows QRMs to be exempted from the requirement that the lender retain 5 percent of the credit risk. CUNA supports the goals of a bipartisan group of U.S. House and Senate lawmakers that have urged regulators not to be rigid in setting the rules. The lawmakers have said a current proposal to require a 20 percent down payment for a loan to be defined as a QRM would "shut out responsible homebuyers and further cripple the housing market."

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Credit Unions Support Patent System Reforms

CUNA has joined 12 other trade associations to encourage Senate Majority Leader Harry Reid (D-Nev.) and Minority Leader Mitch McConnell (R-Ky.) to bring H.R. 1249, the "Leahy-Smith America Invents Act," to the Senate floor soon. H.R. 1249 would alter the patent application system by awarding a patent to the first inventor to file a given application. The legislation also provides greater time for the public to provide input on a patent and changes the rules under which an existing patent may be challenged.

Credit unions, through CUNA, are specifically backing section 18 of the bill, a portion of the bill that would protect credit unions and other businesses from outside claims that some specific customer service, payment and marketing practices have already been claimed under existing business method patents. These patent challenges, which are often brought by non-practicing entities, can become expensive for credit unions and others if they are heard in court.

H.R. 1249 would allow the Patent and Trademark Office (PTO) to examine patent challenges outside of the court system. The bill also increases PTO funding. The bill passed the House by a 304 to 117 vote on June 23rd, and similar legislation received nearly unanimous support in the Senate earlier this year. The joint trade association recently sent a letter, which was also sent to Senate Judiciary Committee Chairman Pat Leahy (D-Vt.) and Ranking Member Charles Grassley (R-Iowa), that said the patent reforms proposed in H.R. 1249 would spur innovation, create jobs, "and ensure that the Patent and Trademark Office (PTO) has the tools necessary to maintain our patent system as the best in the world."

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No Rest for the Weary or for Washington: Hearings Follow July 4 Break

Washington streetWith the Senate deciding to cancel its scheduled Independence Day constituent work period and remain in Washington, both bodies of Congress were in session this week. However, the majority of this week's action took place in the House, as the Senate has not added much to the schedule.

Of note for credit unions: The House Financial Services Committee's financial institutions subcommittee and its oversight and investigations subcommittee came together on July 7th to hold a joint hearing on mortgage servicing. This hearing also focused on federal regulators' role in settlement negotiations. Mortgage servicing standards were also on the agenda for that meeting. That same financial institutions subcommittee is to cover legislative approaches to bank examination practices on July 8th: H.R. 1723, the "Common Sense Economic Recovery Act," which would permit certain loans that would otherwise be treated as non-accrual loans to be designated as accrual loans, and H.R. 2056, a bill to instruct the FDIC Inspector General to study the impact on insured depository institutions' failures.

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Industry News
 

NCUA logoNCUA Corporate Prepayment Plan

NCUA on June 29th unanimously voted to move forward with a plan to allow credit unions, on a voluntary basis, to prepay their Corporate Stabilization Fund assessments, but made some changes to its original proposal. The agency has set the target size of the program at $500 million, which will result in a reduction of the 2011 regular assessment from 24.9 basis points (bp) to 18.5 bp. Of note:

  • If less than $500 million is committed, the NCUA will not implement the program.
  • If more than $500 million is committed, prepayments from credit unions will be prorated so that the $500 million target will not be exceeded. CUNA urged the agency to allow up to $1 billion in prepaid assessments.

Credit unions may commit to the fund a maximum of 48 basis points of their total insured shares as of March 31, 2011. The agency previously proposed a maximum payment of 36 basis points.

NCUA Chairman Debbie Matz during the meeting emphasized that participation in the prepayment plan is voluntary, and said that the agency is neither encouraging nor discouraging credit union participation in the program. "We are offering it as an option," she said. Agency staff said that credit unions that do elect to participate in the plan would not be publicized. The amount that they have decided to pay into the prepayment fund would also not be publicized. However, that information will be made available on NCUA call reports once they are released later in the year.

NCUA proposed the prepayment plan at its May open board meeting and accepted public comment on the proposal until June 20. The agency received a total of 184 comments on the proposal, with the majority of credit unions saying that they would participate in the plan. On July 1st, CUNA suggested that NCUA amend its corporate credit union assessment prepayment program to allow total prepayments of as much as $1 billion and apply all prepayments to a reduction in 2011 fund assessments. Nonetheless, all federally insured credit unions are encouraged to consider the extent to which the program will benefit them and whether they should participate.

NCUA is hosting a webinar on the program on July 11th. Please click here for more details.

NCUA sent a letter to credit unions regarding the program. Participating credit unions must provide completed program agreements, which the agency is providing, along with the letter and on NCUA’s website, by July 29.

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State News
 

CashDifferent Perspective on State Taxes

State tax reform was a much-debated topic in the 2011 state session, and failed to move by the end of the session. Yet tax reform continues to be one of the most-discussed topics amongst legislators, second only to redistricting. Governor Nathan Deal hinted publicly that state-level tax reform may be addressed when the special session for redistricting begins on August 15th . . . however, it appears that legislators will have little appetite for anything else other than drawing the new Congressional, Senate and House districts, leaving tax reform for 2012.

Regardless of when it is addressed, the topic of state tax reform draws much debate. On June 29th, Insider Advantage ran an article by Walter Jones on how many in the press are calling for a switch from income taxes to consumption taxes, citing that the change could bring many benefits if it could be made. While the article cites that a consumption tax would create a steady revenue stream when food and medicine are taxed, it also cites that one of the major hurdles (besides political challenges) would be that the taxes would be imposed on governments and nonprofits. Credit unions are not subject to income tax, but in a consumption-based tax environment they could be.

Another stumbling block would be the loophole of purchasing out-of-state goods and services. Summing up the challenges in reforming the state tax code, the article closes by stating, “Like many good ideas, such as perpetual-motion machines, flying cars and calorie-free nutrition, the practical application depends on overcoming one giant obstacle.” In the case of tax reform, there are multiple giant obstacles with countless legislators, press, industries, lobbyists and blue-ribbon think-tank panels weighing in on the outcome. Stay tuned.
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Public Influence News
 
Statewide Public Messaging Update

In the second quarter of 2011, Georgia Credit Union Affiliates continued its public relations efforts of spreading awareness of credit unions, introducing unique story topics to reporters and editors, and providing them with useful resources as a strategy to position credit unions as experts in the consumer financial services arena. As of June 1st, over 2.7 million media impressions have been made across Georgia to consumers through the coverage received thus far in 2011. Below are details of just some of activities that have taken place so far this year.

Consider This
This monthly e-news brief is sent directly to consumer and financial journalists to provoke their thinking on current topics affecting Georgians. Topics for 2011 have included: new approaches to financial resolutions, making the most of your tax refund, the possible end to free checking, buying versus leasing a car, family vacations in the new economy, and covering the cost of college education. Coverage from these stories has appeared in the Athens Banner-Herald, the Gwinnett Gazette, the Augusta Chronicle, The Examiner, WGXA (Macon) and other outlets. Fourteen credit union representatives have participated in news coverage of Consider This.

Paying Attention
Paying Attention …To People and Their Money is a quarterly e-news brief that is sent directly to consumer and financial journalists to present a compelling message to media about Georgia’s financial picture, including credit union product utilization, loan and savings trends, membership, consumer confidence and perceptions, purchasing and savings outlooks and general consumer spending trends. So far this year, Paying Attention has received coverage in the Athens Banner-Herald, the Atlanta Business Chronicle, the Cedartown Standard, Credit Union News Now, Credit Union Times, CreditUnions.com, the Georgia Times-Union, the Gwinnett Gazette, Insider Advantage, the Marietta Daily Journal, the Newnan Times-Herald, the Rome News-Tribune, the Savannah Morning News, The Atlanta Journal-Constitution, The Augusta Chronicle, The Polk Fish Wrap, TheStreet.com, The Weekly, Yahoo Finance Report, WABE, WGXA (Macon), and WSB (Atlanta).

Quarterly Financial Survey
Georgia credit union statistics are gathered quarterly to measure basic information such as loan and savings trends, fee income, foreclosures, auto loan originations and membership growth. The information obtained from this survey is highlighted in Paying Attention and allows timely data to be shared with the media.

In addition to the above activities, the GCUA Public Influence Team has visited with numerous reporters, editors and producers at some of the state’s news outlets. These have included the Atlanta Business Chronicle, the Augusta Chronicle, The Macon Telegraph, the Rome News-Tribune, the Savannah Morning News, The Atlanta Journal-Constitution, WABE (NPR, Atlanta) and WTVM (Columbus).

During these media visits, the GCUA Public Influence Team, along with a credit union CEO, discuss timely issues, such as the Durbin Amendment and the Credit CARD Act. The meetings are an opportunity to advise journalists on the credit union position, allowing them to experience the thought leadership demonstrated by credit union representatives.

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Social Media Revolution Version 3.0

For those who might wish to stick their head in the sand over the plethora of attention social media is receiving these days, try this video on for size. Don’t let it frighten you; instead, consider the possibilities for your credit union. Click here to view the video.

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CUs in the News

Get the latest in local CU coverage, click here.

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Consider This

View archives of this monthly e-news brief sent to journalists, click here.

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Paying Attention

View the current issue as well as archives of this quarterly report, click here.

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Statewide News Coverage

Get the latest in statewide news coverage, click here.

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News of the Competition
 

BoA to Pay $8.5 Bil Settlement over Mortgage-Backed Securities

The Washington Post reported on June 29th that Bank of America and its Countrywide unit will pay $8.5 billion to settle claims that the lenders sold poor quality mortgage-backed securities that went sour when the housing market collapsed. The agreement comes after a group of 22 investors demanded that the bank repurchase $47 billion in mortgages that were sold to them in the form of bonds. To read more, please click here.

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HackerHackers Steal $2.7 Mil from Citigroup

Last month computer hackers stole around $2.7 million from Citigroup credit card accounts. The hackers stole the money from approximately 3,400 accounts, but were able to gain access to 360,083 accounts. To read the June 27th article in the Atlanta Business Chronicle, please click here.

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New Revenue Stream at Banks

On July 6th, CNNMoney.com ran an article on a new trend at some banks: selling customer shopping data. The article stated that many of the nation’s leading banks are selling information about their customers’ shopping habits to retailers: how much they spend, where they shop and what they buy. In turn, the retailers are utilizing the data to offer targeted discounts via text, e-mail, and online bank statements. To read more, please click here.

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News of Interest
 

TCF Drops Lawsuit Over Debit Fees

One day after the Federal Reserve issued its final rule on interchange fees and the Eighth Circuit Court of Appeals denied the bank a delay in the rule's implementation, TCF National Bank voluntarily dropped its suit against the Federal Reserve. The suit challenged the legality of the debit fee interchange rule. TCF sued the Fed over the rule last October, calling it unconstitutional because it only applies to large banks.

The bank has asked that the lawsuit against the Fed be dismissed without prejudice, which means TCF could still pursue it at another time. Click here to read more.

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SwipeLooking Back at the Fight: Perspectives on the Interchange Debate

Immediately following the U.S. Senate’s decision to uphold the cap on debit card fees, Bloomberg portrayed the battle that waged on the interchange delay legislation in a June 28th article. Titled “How Wal-Mart Swiped JP Morgan in $16 Billion Debit-Card Lobbying Battle,” the article provides an outsider’s perspective on the massive amounts of resources employed from all sides of the issue, including the “quiet strategy” that was employed back in early 2010 to move the issue forward, and the different alliances and efforts for and against the regulation of interchange.

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Small Business: Recession Isn't Over... Still Having Problems

In the July 6th edition of The Wall Street Journal, there was an article that described some of the ongoing concerns of small-business owners. While many big companies are reporting strong second quarter profits, small businesses are still struggling with rising costs, tight credit and customers not ready to spend freely. The owners of many small businesses say economic uncertainty and inflationary pressures have led them to delay hiring and capital expenditures. Seventy percent have no plans to expand their staffs over the next 12 months, according to a recent U.S. Bancorp survey of 1,004 U.S. companies with annual revenue of $10 million or less. While about half projected higher revenue a year from now, 78 percent said the U.S. economy is still in a recession, and many expected it to remain there next year. In May, for the third month in a row, the optimism index of the National Federation of Independent Business declined.

Small-business owners are still waiting for the economic uptick. One issue is credit. Small businesses are still having a hard time getting bank loans. Lending to them fell 2.4 percent in the first quarter, the Small Business Administration's Office of Advocacy reported last month.

Recently, Barry Sloane, president/CEO of The Small Business Authority, appeared on Fox Business News as a part of its series “The Government Is Killing My Business” to discuss how lifting the credit union small-business lending cap could infuse billions of dollars into the nation's economy. The Small Business Authority, powered by Newtek, is a CUNA Strategic Services provider.

The Credit Union National Association (CUNA) and credit unions are pressing Congress to increase credit unions' member business lending cap to 27.5% of assets from 12.25%. Doing so would open up more opportunity to offer MBLs, inject $13 billion in loans into the economy and create as many as 140,000 new jobs, with no cost to taxpayers, CUNA said. Sloane cited the $13 billion figure and emphasized the infusion would be free of government bailout funds or taxpayer subsidies. “That would be an incredible stimulus to the economy,” Sloane said.

With pressures on profit, some small-business owners are waiting for further improvement in the economy before investing in more workers. And another problem for small-business owners is not being as adept as big business at tapping into fast-growing emerging markets.

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House underwaterDisturbing Trend: Strategic Defaults

The Atlanta Journal-Constitution reported on June 29th that the number of strategic defaults on home loans – where an owner can afford to pay but defaults to cut losses in falling home value – are down from the high of 2008, but still made up 17 percent of defaults in the first half of 2010. According to a report released by Experian, one in five defaults, or 20 percent, was strategic in 2008. Experian predicts that the number will not fall below the mid-teens unless residential housing values turn around. To read more, please click here.

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Number of Bankruptcies Down for First Half of 2011

U.S. consumer bankruptcy filings dropped 8 percent during the first six months of 2011 from the same period a year ago, according to the American Bankruptcy Institute (ABI) using data from the National Bankruptcy Research Center. From January 1 through June 30, personal bankruptcy filings totaled 709,303 nationwide, compared with the 770,117 filings for the period in 2010. The overall June consumer filing total was 119,768, which represented a 5 percent decrease from 126,270 bankruptcies filed in June 2010, but also was a 4 percent increase from May's filings of 114,803 filings.

Green arrow downThe decline in bankruptcies dovetails with the economic forecast that CUNA economists issued in March in their 2011-2012 forecast for credit unions, as well as figures collected in 2010 related to loan delinquency and charge-offs for CUNA's U.S. Credit Union Profile. Although these cannot be compared specifically with bankruptcy statistics, loan delinquencies and charge-offs are often an early sign of financial trouble.

Delinquencies and charge-offs in mortgage-related loans are even a better indication of trouble leading to a possible bankruptcy. In December of 2010, credit unions experienced mortgage delinquencies of more than 60 days at 2.3 percent of total outstanding loans for first mortgages and 1.55 percent for home equity lines of credit and second mortgages. Net charge-offs were at 0.42 percent of average outstanding loans for first mortgages and 1.40 percent for HELOCs and second mortgages.

CUNA's economic forecast indicates that “credit quality will improve in 2011 and 2012. Overall loan delinquency and charge-off rates will fall as job growth picks up. Provisions for loan losses will also decline as credit unions shift from building their allowance for loan loss accounts to maintaining the current level.” The forecast expects a delinquency rate of 0.90 percent in 2011 and 0.80 percent in 2012, and an annualized net charge-off rate of 0.90 percent and 0.80 percent, respectively.

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