e-Weekly

July 6, 2011

Fed final interchange rule reflects credit union input, Cheney says
Credit Union National Association (CUNA) President/CEO Bill Cheney said that the Federal Reserve (Fed) "listened to the real concerns of credit unions" as it developed its final debit interchange fee cap rule, which was approved by a 4 to 1 vote by the Fed on June 29.

The final rule would cap large issuer debit interchange fees at 21 cents, to cover network connectivity, hardware, software, and labor costs, as well as costs related to network processing and transaction monitoring. An additional five basis points per transaction may be charged to cover fraud losses. Debit card issuers with less than $10 billion in assets are exempt from the direct impact of the cap provisions. Prepaid cards and government-issued cards are also exempted.

A separate interim final rule proposed would allow an additional penny to be charged if financial institutions are in compliance with Fed established fraud prevention standards. Comments on this interim final rule, which is effective October 1, 2011, will be accepted until September 30.

The Fed's initial proposal would have set a cap of 12 cents per transaction. Cheney said that these changes are "certainly an improvement" from the initial proposal, and said that CUNA's focus would turn to ensuring that the small issuer exemption provided in the final rule would work as planned.

Cheney said that many credit unions may be forced to adopt new member fees or take other measures if the two-tiered system does not work as planned. Following a resolution offer by Governor Daniel Tarullo in the form of an instruction to staff, the agency's staff will report by April 2012 on whether there is a two tiered system and the impact of the rule on small issuers' interchange fee income. Staff will also bring a more comprehensive report to the Board by April 2013 including whether there is a change in income for smaller issuers, whether merchants are discriminating against small issuers, and on the impact of the exclusivity provisions.

The final rule requires issuers to provide a debit card that can be processed on at least two unaffiliated card networks, such as one signature network and one unaffiliated PIN network. Under a second alternative, issuers may also provide a debit card that can be processed on two or more unaffiliated signature networks, but not on any PIN networks, or that can be processed on two or more unaffiliated PIN networks, but not on any signature networks.

The final rule also prohibits issuers and payment card networks from limiting merchants' ability to choose the network on which a transaction is routed, limited to those networks on which the debit card is enabled to be used.

Legislation that would have delayed interchange cap implementation to allow greater time to study the issue failed in the Senate earlier this month, falling on a 54 to 45 vote margin. The measure needed 60 votes to pass. However, CUNA said that the Senate vote may have impacted the Fed's decision on where to set the final debit interchange fee cap.

The network exclusivity restrictions would become effective on April 1, 2012. The fee limitations are set to take effect on October 1. The final rule will not impact benefit-related cards or prepaid cards until April 1, 2013, or later in some cases. To see the rule, click here.

NCUA corporate prepayment plan takes next step
Last week, the National Credit Union Administration (NCUA) Board voted unanimously to move forward with a plan to allow credit unions, on a voluntary basis, to prepay their Corporate Stabilization Fund assessment, but made some changes to its original proposal.

The plan, adopted on June 29, would allow credit unions, if they choose to do so, to prepay some their Corporate Stabilization Fund assessment. 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. 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. The Credit Union National Association (CUNA) urged the agency to allow up to $1 billion in prepaid assessments.

Credit unions may commit a maximum of 48 basis points of their total insured shares as of March 31, 2011 to the fund. 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.

In a letter to the agency, CUNA CEO Bill Cheney noted that credit unions have said that they are disappointed by the NCUA's decision to limit the Temporary Corporate Credit Union Share Insurance Fund (TCCUSF) plan to only $500 million in prepayments. Doing so would reduce the 2011 TCCUSF assessment by 6.4 basis points (bp), and member credit unions have told CUNA that "at that level, it's just not worth it," Cheney said.

Cheney suggested that 2011's assessment could be further reduced if the agency made better use of the TCCUSF's $6 billion line of credit from the U.S. Treasury.

"If the agency would be willing to allow the balance at Treasury to remain as high as $5.5 billion through 2013, the prepayment plan could be allowed to rise to $1 billion, and this year's assessment could be reduced by as much as 13 bp," Cheney said. The CUNA CEO added that Treasury officials have been "supportive" of using the borrowing authority "to even out assessment expenses for credit unions."

CUNA also said the program could have been of greater benefit to credit unions if interest were paid on the prepaid amounts and if the size of the program was expanded to at least $1 billion.

Nonetheless, CUNA encourages all federally insured credit unions to consider the extent to which the program will benefit them and whether they should participate. The NCUA sent a letter to credit unions regarding the program and participating credit unions were to provide completed program agreements, which the agency provided with the letter and on its website, by July 2.

The NCUA will cover additional details of the plan at a July 11 webinar. (See following story: NCUA announces July 11 corporate prepayment plan webinar)

NCUA announces July 11 corporate prepayment plan webinar
The National Credit Union Administration (NCUA) has officially announced that it will host a free webinar on its voluntary Corporate Stabilization Fund assessment prepayment plan on July 11 at 2:00 p.m. ET.

The webinar will be moderated by NCUA Chairman Debbie Matz, and will also feature input from NCUA Deputy Executive Director Larry Fazio, Examination and Insurance Director Melinda Love, Chief Economist John Worth, and staff attorney Lisa Henderson.

The agency in a release said the webinar will give credit union industry insiders and public stakeholders the chance to improve their understanding of the prepayment program.

The NCUA recently unanimously voted to move forward with a plan to allow credit unions, on a voluntary basis, to prepay their Corporate Stabilization Fund assessment. 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.
The NCUA will not move forward with the plan if less than $500 million is pledged by credit unions.

Matz 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. The Credit Union National Association has encouraged credit unions to consider the extent to which the program will benefit them and whether they should participate.

Credit unions that wish to take part in the prepayment plan must submit a completed program agreement to the NCUA by July 29. The agency will tally the total amount of credit union commitments on August 9, and, if it moves forward with the plan, will debit the amounts that have been pledged from credit union accounts on August 18.

A resource page about this program is available at http://go.usa.gov/ZKX. Individuals may register for the webinar at http://bit.ly/mesZFQ. This webinar will be archived on the NCUA website approximately two weeks after the event for those who cannot participate in the live session.