Iowa Banking Law Blog

See Who Is Meeting with the Fed About Dodd-Frank

The Federal Reserve’s website has a section for Dodd-Frank implementation matters.  On this part of the site, the Federal Reserve posts summaries of its meetings with banks, trade associations, consumer groups, and other members of the public.  This is a great way to see what is brewing in regulatory reform and what may soon come to a boil.  New posts are generally made on Mondays.   

For more information, please contact Allyn Dixon at adixon@dickinsonlaw.com / 515-246-4520 or any member of Dickinson's Banking Law Group.

Senate Fails to Delay Implementation of Interchange Fee Caps

- Posted by L. Allyn Dixon, Jr.

In a closely watched vote, legislation in the Senate that would have delayed the Federal Reserve’s implementation of the interchange (card swipe) fee caps of 12 cents per transaction beginning July 21 failed to muster the required 60 vote to force a delay.  The final vote was 54-45 in favor of the legislation, just six votes shy of the number needed.

Current estimates show that the average swipe fee is 44 cents per transaction, and estimates of the cost to banks of the new caps are between $10 and $15 billion.  Banks large and small worked hard to see the interchange fee provisions of Dodd-Frank changed.  Although banks with less than $10 billion in assets are exempt from the caps, from a competitive standpoint, most small banks believe they will have to reduce fees to be in a position to compete with bigger banks for customers.

The Fed indicated it is set to introduce the new rules in a matter of days and has given no indication yet that it is inclined to set the fee cap higher than the earlier-proposed 12 cents per transaction.

For questions about the interchange fees, please contact Allyn Dixon at adixon@dickinsonlaw.com.

First Post Dodd-Frank Preemption Ruling

Yesterday the 11^th Circuit ruled that JP Morgan Chase Bank does not have to comply with Florida consumer protection statutes limiting bank fees.  This is the first preemption case to cite to Dodd-Frank.  There has been much speculation about how Dodd-Frank changed the federal preemption landscape, with national bank advocates claiming very little change and state bank advocates claiming it would be more difficult for national banks to preempt state consumer laws. 

In Baptista v. JP Morgan Chase Bank, Baptista filed a class action against Chase because Chase charges check cashing fees, which are prohibited under Florida law.  In ruling that Florida’s check cashing fee law is preempted by federal law, the court pointed to OCC laws allowing national banks to charge customers non-interest charges and fees.  In response to Baptista’s claim that she was not a customer of Chase, the court cited the OCC’s interpretation of “customers” as “any person who presents a check for payment.”  The court adopted the Barnett conflict preemption standard. 

Baptista is not a groundbreaking case, but it is an indication of how courts will interpret Dodd-Frank’s preemption standard in the future.  There will almost certainly be numerous preemption cases in the next few years that will further define the federal preemption landscape for national banks.  It will be interesting to see how much weight courts will give to the OCC’s interpretations.  In Baptista, the OCC’s interpretation of “customers” was deemed “reasonable” and was integral to finding preemption.  Generally, in matters of interpretation, one case cannot draw a line, however.  Future preemption cases will begin to sketch a line as to deference given to the OCC.  Whether that line will be straight or jagged remains to be seen. 

For more information, please contact allyn Dixon at adixon@dickinsonlaw.com / 515-246-4520 or any member of Dickinson's Banking Law Group.

Federal Reserve Issues Proposed Rule on Interchange Fees and Network Routing

On December 16, 2010, the Federal Reserve issued proposed rules implementing the Durbin Amendment to Dodd-Frank.  The Durbin Amendment sought to cap debit interchange fees and prohibit exclusivity in network routing rules. 

The Durbin Amendment requires that debit interchange fees be “reasonable and proportional to the cost incurred by the issuer with respect to the electronic debit transaction.  The proposed rule gives two proposed alternatives for compliance with this language.  The first alternative is a simple cap restricting interchange fees to no more than 12 cents per transaction.  The second alternative, dubbed the Issuer-Specific Standard with Safe Harbor and Cap, limits fees to either the safe harbor of less than 7 cents per transaction or to the average allowable costs for all debit transactions involving an interchange fee, but in no event exceeding 12 cents.  Allowable costs include certain variable costs and incremental costs; it does not include the issuer’s fixed costs, network processing fees, and costs relating to customer service.  Under the second alternative issuers would have to report the maximum interchange fee it can charge if it exceeds 7 cents per transaction. 

There are exemptions to the interchange fee caps for small issuers (issuers with less than $10 billion in assets), general use reloadable prepaid cards, and cards issued pursuant to government programs.  It is not clear, however, if these exemptions will have any teeth.  First, with regard to the small issuer exemption, market forces may force small issuers to restrict interchange fees to stay competitive.  Second, it is not clear if payment networks will establish higher interchange fees for exempt issuers.  The proposed rule has no such requirement for payment networks.

The proposed rule on network routing restrictions contains two options.  Under the first, issuers and networks could no longer restrict processing of any card transaction to less than two unaffiliated networks.  Under the second option, issuers and networks would be required to offer at least two unaffiliated networks for each possible method of authorization available to the cardholder. 

Finally, the Federal Reserve requested comment on whether ATM transactions and networks should be covered under the Durbin Amendment.  The possible inclusion of ATM networks could have a big impact on the banking industry.

Comments on the proposed rule will be open until February 22, 2011.

For more information, please contact Allyn Dixon at adixon@dickinsonlaw.com / 515-246-4520. 

Lawsuit Filed Challenging Dodd-Frank’s Debit Card Interchange Fees Provisions

- Posted by L. Allyn Dixon, Jr.

Minnesota based TCF National Bank announced yesterday that it has filed suit challenging the provisions in the recently enacted financial reform legislation, the Dodd-Frank Act, governing debit card interchange rates. 

TCF’s lawsuit targets the so-called “Durbin Amendment,” which was a last minute amendment to the bill introduced by Senator Richard Durbin of Illinois.  The Amendment, which applies only to banks with $10 billion or more in assets (around 1% of all banks in the nation), requires the Federal Reserve to adopt regulations setting debit card interchange rates based solely on the processing costs of authorizing, clearing, and settling debit card transactions. 

TCF claims the Amendment explicitly mandates that the Fed ignore other costs associated with the creation, administration and improvement of debit card systems.  By not allowing the rates to reflect other costs, TCF asserts that providing the service will cause it to lose money.  TCF also claims that, by subjecting only the biggest banks to the regulations (which are yet to be written), smaller banks are given an unfair competitive advantage.

From a legal standpoint, TCF bases its claim on three separate grounds.  TCF argues that the law constitutes the taking of property without just compensation, constitutes the taking of property without due process, and violates the equal protection clause of the constitution.

For further information, please contact Allyn Dixon at adixon@dickinsonlaw.com or at 515-246-4520.

Especially for Community Banks: A Timeline of Important Dates in the Dodd-Frank Act

If you flip through the approximately 2300 pages of the the Dodd-Frank Act you will find hundreds of effective dates and rulemaking dates.  It is not easy to parse through this substantial piece of legislation and find the provisions and dates that could affect your bank.  We know, because we did it.  To help our clients, we created a timeline of the effective dates of provisions in the Dodd-Frank Act that could apply to Iowa's community banks.  The dates in the timeline are, of course, subject to change.

 

For more information, please contact Allyn Dixon at 515-246-4520 or adixon@dickinsonlaw.com.

Seven Take-away Thoughts on Dodd-Frank's Impact on Community Banks

- Posted by Howard O. Hagen

 

In a recent speech to community bankers in Iowa a couple of weeks ago, I reviewed the current state of the banking economy and the implications of the Dodd-Frank legislation on community bank operations. While the precise impact of this legislation on community banks will only emerge directly and indirectly over the next three or four years, some basic consequences seem inevitable.

 

Here are seven possible key long-term impacts on the future of community banking in this new regulatory environment:

1. Greater capital funding and liquidity requirements will emerge due to increasing and interrelated worldwide instability and regulation;
2. Costs of operation will rise (e.g., new regulations) and income will be challenged (e.g., reduced interchange fees);
3. The separation of product regulation (e.g., Consumer Protection Bureau) from safety and soundness regulation may lead to fewer products for customers and higher fees;
4. There will be more need for specialized employees or consortium bank subsidiaries to deal with more complex rules and world (e.g., compliance);
5. The new definition of community banks as those under $10 billion may relieve Iowa banks of some future regulation as this should become the demarcation;
6. Anticipate redefinitions of valuation terms and risk criteria by governing bodies that may create challenges (e.g., loan loss reserves and FASB); and
7. Expect the unexpected and plan for it with contingency resolution processes (e.g., pensions and counterparties).

Whether these predictions come to fruition is anyone’s guess, but the rules of engagement are about to change for better or worse. Generally, it is better to be engaged in dealing with and planning for the anticipated changes than not.

 

For more information, please contact Howard O. Hagen at 515-246-4543 or hhagen@dickinsonlaw.com.

The Advantage of Being Seen as "Too Big to Fail"

Kansas City Federal Reserve President Thomas Hoenig provided interesting testimony concerning the “too big to fail” phenomenon at a House Subcommittee on Oversight and Investigations hearing held yesterday in Overland Park, Kansas.  Hoenig pointed out that the expectation that the largest banks will be protected from failure gives them a significant competitive advantage.  The basis for that advantage has been a lower cost of capital and the ability to use greater leverage.  Hoenig’s testimony included an emphasis on the economic importance of community banks.  He noted that the “community bank model has held up well when compared with the megabank model that had to be propped up with taxpayer funding.”   

 

The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Act”) contains some provisions that address the issue, but the Act may do little in the immediate future to reduce the competitive advantage enjoyed by the largest banks.  As Hoenig’s testimony points out, these advantages may persist until investors are convinced that things really have changed.  

 

But what will it take to change those investor expectations?  Such a change in investor perceptions may not take place for several years, if at all.  Many provisions of the Act will take a long time to fully implement, and some provisions are subject to a considerable degree of regulatory discretion. It seems probable that the memory of the shock to the financial system associated with the 2008 failure of Lehman Brothers Holdings Inc. will make regulators reluctant to risk a repetition of such an event.  Many investors may conclude that provisions of the Act that would create a more level playing field between large banks and community banks will have “more bark than bite” in reality.  It may be difficult to convince investors that risk must be taken more seriously and that investors cannot count on some form of government rescue package when things go wrong.  In the meantime, community banks can expect to continue to face a challenging competitive environment.      

 

If you have questions, please contact Howard O. Hagen at 515-246-4543 or hhagen@dickinsonlaw.com.