November 2, 2023

Fed Proposes Lowering Debit Card Fee Cap

The Federal Reserve voted 6-1 to significantly lower the cap on debit card interchange fees earned by banks and institute a new review process by which the cap would be revised every two years. Under the notice of proposed rulemaking, the Fed would revise Regulation II to lower the cap from its current rate of 21 cents and .05% of the transaction, plus a 1 cent fraud adjustment, to 14.4 cents and .04% per transaction and a 1.3 cents fraud prevention adjustment, effective June 30, 2025. It also proposed to update the cap every other year going forward by linking it to data from the board’s biennial survey of large debit card issuers.

“This proposal is shortsighted, flawed and dangerous for consumers,” said MBA President and CEO Jackson Hataway. He added the board memo accompanying the proposal even stated “lower-income consumers may be negatively affected by higher costs of banking services (e.g., if issuers increase fees associated with debit cards).”

“The board was incredibly selective in the data used to develop this proposal and did not provide any advanced opportunity for banking industry input. In contrast, language used in lobbying materials from merchants and retailers is found throughout the proposal,” Hataway said.

In a statement accompanying her dissenting vote, Governor Michelle Bowman pointed out, “Under the proposed rule, nearly one-third of bank issuers would not be able to recover even the subset of costs that factor into the interchange fee cap, let alone those debit card program costs that are disregarded in the cap. Because debit card programs are important to the functioning of the payments system, any increase in price or reduction in availability of debit cards could be harmful for bank customers, particularly low-income customers who may not qualify for credit card products or other alternatives.”

The Federal Reserve Board emphasized this proposal only applies to banks over $10 billion in assets. However, Hataway said the board appears to be completely disregarding the dramatic reduction in interchange income experienced by all banks following the original implementation of Regulation II from the Dodd-Frank Act.

“We believe this proposal will have similar impacts on all banks, and the offset will be to increase fees or reduce access to debit products,” he said. “It is imperative that our industry be vocal during the comment period.”

The comment period ends 90 days after publication in the Federal Register. MBA urges bankers to contact the Federal Reserve with this form or to prepare their own comment letter responding to the proposal.

“Our collective voice is critical in preventing a massive misstep by the Federal Reserve board,” Hataway said.

MBA also is gathering data from its members on historic reduction in interchange income and current fraud trends. An email was sent to bank leaders earlier this week with a link to a brief survey. Submitted data will be kept anonymous and used in the aggregate to highlight what MBA believes are significant flaws in the Federal Reserve’s data.

Meanwhile, Congressman Blaine Luetkemeyer called on the Fed to postpone its meeting and delay any proposals on debit card fees because of a lack of adequate data to support policymaking and the potential negative effects on customers with checking accounts. He and Rep. Andy Barr, R-Ky., said the Fed recently mandated additional debit card routing requirements whose effects on financial institutions and competition are only now emerging.

“Some of these impacts relate to issuer fraud mitigation and cost, but these are not accurately measured by current data collections, severely distorting and degrading their usefulness,” they said. “The Federal Reserve should gather that cost data on dual routing to obtain an accurate representation of issuer costs before proposing any changes to Regulation II.”

Texas Court Expands 1071 Injunction To Cover All Banks

A Texas court expanded a preliminary injunction on enforcement of the Consumer Financial Protection Bureau’s Section 1071 small business data collection rule to include all financial institutions covered by the rule. The U.S. District Court for the Southern District of Texas in July granted the injunction to the American Bankers Association and Texas Bankers Association members in a lawsuit over the rule brought by the associations and the McAllen, Texas-based Rio Bank. ABA and TBA asked at the time for the injunction to apply to all institutions insured by the Federal Deposit Insurance Corporation, but the judge sided with a CPFB request to limit the order to association members.

The expanded injunction, sought by credit unions and banks not covered by the original order, has no such limitations. The relief applies while the U.S. Supreme Court hears a constitutional challenge to the CFPB’s funding structure in a separate case, CFPB v. Community Financial Services Association of America, with a decision possibly coming before the end of June 2024. ABA and TBA in August asked CFPB Director Rohit Chopra to voluntarily delay the implementation of Section 1071 for all banks not covered by the original injunction.

“Since we launched our legal challenge over the CFPB’s 1071 final rule back in April, TBA and ABA have argued for every bank in the country to get relief from this over-reaching rule, which we firmly believe violates the law and will harm the very small businesses it is intended to help,” ABA and TBA said in response to the most recent court order. The groups added that they welcomed the expansion, “which ensures that every FDIC-insured institution will receive the benefits of this injunction regardless of affiliation.”

Banking Regulators Release CRA Final Rule

The Federal Reserve, Federal Deposit Insurance Corporation and Office of the Comptroller of the Currency released the final rule to modernize how they assess compliance with the Community Reinvestment Act. Along with the final rule, the agencies released a fact sheet and overview of key objectives.

According to a Fed overview of the nearly 1,500-page document, the final rule leaves in place several aspects of the proposed rule unveiled last year, including flexibility in retail lending evaluations for banks with less than $600 million in assets and new data collection and reporting requirements for banks over $2 billion. 

Among its provisions, the final rule would implement a new retail lending evaluation for banks with between $600 million and $2 billion in total assets and provide them the option of evaluation under a new test for community development financing. Banks over $2 billion would be evaluated under four tests: a retail lending test, a retail services and products test, a community development financing test and a community development services test. In addition, retail services and product evaluations for banks over $10 billion would include digital delivery systems. Banks with limited retail products and services, or “limited purpose banks,” will be evaluated exclusively on community development financing activities. In addition, the final rule retains the strategic plan option.

The final rule also creates new “retail lending assessment areas” for banks with more than $2 billion in assets where the bank makes more than 150 closed-end home mortgage loans or 400 small-business loans in each of the two prior calendar years. In a departure from the proposal, banks that conduct 80% or more of specified retail lending activity inside of their facility-based assessment areas are exempt from the retail lending assessment area requirements.

The final rule makes other modifications to the proposal, including giving equal weight to retail and community development activities and maintaining the current standard for CRA downgrades for “discriminatory and other illegal credit practices” rather than adopting the proposed rule’s incorporation of illegal credit and noncredit practices. In addition, banks would be given more time to come into compliance compared to the 12 months proposed in the original version of the rule, with reporting requirements taking effect in 2027.

Biden Directs Federal Agencies To Consider New Regulation Of AI

President Biden issued a sweeping executive order directing federal agencies to review and possibly draft new rules governing the use of artificial intelligence across multiple sectors of the economy, including financial services. Among other things, the order encourages agencies to use their authority to address financial stability risks posed by AI. It directs the Treasury Department to submit a report within 150 days on best practices for financial institutions to manage cybersecurity risks posed by AI. It also urges the Consumer Financial Protection Bureau and federal housing regulators to ensure AI isn’t used to discriminate in appraisals and lending.

The 100-plus page order will require the developers of many AI systems to share their safety test results and other critical information with the U.S. government, set standards and best practices for detecting AI-generated content as a tool for fighting consumer fraud and establish an “advanced” cybersecurity program to develop AI tools to find and fix vulnerabilities in critical software. It also directs the Federal Communications Commission to review how AI may improve telecom network resiliency and spectrum efficiency, as well as aid the federal government’s fight against unwanted robocalls and robotexts.

The order calls on Congress to pass legislation to protect people’s privacy, including guidance for federal agencies to account for AI risks to privacy. In addition, it directs agencies to establish principles and best practices to mitigate the harms to workers displaced by AI.

As for AI in financial services, the order directs CFPB and the Federal Housing Finance Agency to “consider using their authorities” to ensure that AI systems comply with existing federal laws protecting against bias underwriting and appraisals. The order also urges the CFPB and Department of Housing and Urban Development to issue guidance within 180 days “to combat unlawful discrimination” resulting from AI used in decisions about housing access and other real estate transactions.

MBA Celebrates 15 Years With Segs4Vets

This year marks MBA’s 15-year partnership with Segs4Vets, a volunteer program that provides Segway mobile transporters and ALLY chairs for permanently disabled veterans and first responders. Since 2009, MBA has partnered with Segs4Vets as the association’s designated charity. Through the years, Missouri banks, their employees and communities have donated more than $970,980 to support Segs4Vets. This year, MBA hopes to surpass more than $1 million in cumulative donations in this final year of collaboration.

Friday, Nov. 10, has been designated as MBA Segs4Vets Day. Materials are available at mobankers.com to promote your bank’s participation in this year’s campaign. Donations can be made online, and donations made by check should be made payable to Segs4Vets. Donations are tax deductible. Banks making pledges or donations by Friday, Nov. 17, will be recognized at this year’s celebration in December during the 2023 Executive Management Conference.

For more information or to make a pledge or donation, contact MBA at 573-636-8151.