You’re Going to Need a Bigger Boat

For some reason, I cannot shake this classic line from Jaws (uttered by Chief Brody to Quint upon first seeing the shark) when I read the daily comings and goings of the Consumer Financial Protection Bureau. The question is not who or what the Bureau is attempting to regulate. But, who or what aren’t they wanting to regulate. Or, so it appears.

Like it or not, the Bureau is around to stay. It’s still in its infancy, but growing bigger and more powerful by the day. The Bureau hit a major growth spurt when President Obama recess appointed Richard Cordray to be its first director (controversially I might add). Since January, the Bureau has been one active federal agency. And, it’s not even fully staffed yet.

Here’s a quick, non-exhaustive run-down on the Bureau’s recent activities:

·       Request for Information on overdraft practices

·       Examination of overdraft programs at the largest nine financial institutions

·       Advance Notice of Proposed Rulemaking on General-Purpose Reloadable Prepaid Cards

·       Proposed Rule for Supervision of Nonbanks that Pose Risks to Consumers

·       Proposed Rule on express statutory protections of confidential information in bank examinations

·       Notice for Comment on updating and streamlining regulations

·       Proposed Rule to supervise debt collectors and consumer reporting agencies

Ready to cry “uncle” yet? One can certainly make the case the Bureau is so active because it is so young. But, is haste making waste? Case in point may be the Bureau’s final rule on international remittance transfers issued late last year. The Bureau assumed responsibility for the final rule from the Federal Reserve Board (who had issued the proposed rule). Without going into a detailed analysis of the final rule, many banks providing remittance services are stating the 2013 compliance date for new consumer disclosures and error resolution cannot be achieved. The message appears to be getting through to the Bureau. It may revisit the issue in some fashion.

We ought to be somewhat sympathetic to the Bureau and other federal banking agencies under strain to implement the more than 400 rules and studies required by Dodd-Frank. The Bureau must also find its way in working with the Fed, the OCC, FTC etc on bank examinations and enforcement actions. The Bureau must balance its requirements and obligations under Dodd-Frank against being spread too thin and possibly hurting the financial services industry’s ability to help the economy recover.

Does the Bureau go for the “bigger boat” option or focus on issues beneficial to consumers and the recovering economy? Time will tell.

Never a Dull Moment in Durbinville

Last month I wrote about the recent comings and goings with the Durbin Amendment and interchange. I obviously did not consult with the Federal Reserve Board about timing. On May 2, the Fed did a little Durbin data dump from the fourth quarter of 2011 regarding the effects of the Durbin amendment on exempt and non-exempt issuers.

I have been working Google over-time reading through the various news reports and analyses of the Fed’s numbers. The most prominent concern with the Durbin Amendment was its possible impact on exempt issuers (those lower than $10 billion in asset size). Would merchants incentivize their customers to pay with debit cards from non-exempt issuers thus realizing the lower interchange rate? Could they? The Fed did not answer these questions. The Fed was quite clear that exempt issuers averaged 43 cents in interchange fees (the same number as reported in 2009). The general chorus of those opining about the Fed report was “…it’s too early to tell.” True. We may not even have good trend data for a year or so since the non-exclusivity provision of Durbin took effect at the start of the second quarter this year.

The Fed will continue to collect and publish this data annually. We can also expect a similar report from the Federal Trade Commission by year’s end on the impact to exempt issuers thanks to provision Senator Durbin added in last year’s Omnibus appropriations bill. It’s certainly not a bad thing that the Fed is building trend data on this issue.

The other Durbinville news of the week came from Visa’s quarterly earning call. Visa disclosed a “civil investigative demand” from the Department of Justice regarding its new fixed fee it is now charging merchant banks. We’ll have to see how this one plays out.

I certainly will pass along any more Durbin musings on interchange as they come along.

Redundant ATM Signage: Summarizing the Issues

In a five-minute interview, Kurt Helwig, president and CEO of the Electronic Funds Transfer Association, analyzes the issues involved in the recent spate of lawsuits involving fee notification signage on ATMs. For a background on the issue, scroll back to previous posts "ATM Fee Signage (Continued)," posted January 2012 and "ATM Fee Disclosure: Updating Regulations to Limit Jackpot Justice," posted December 2012.

Last week Representatives Blaine Leutkemeyer (R-MO) and David Scott (D-GA) introduced a bi-partisan measure that would eliminate the requirement for redundant physical signage on ATM terminals. Last week Reps. Leutkemeyer and Scott sent a letter to their colleagues inviting co-sponsors on the bill. Read that letter here.) For analysis of the Leutkemeyer-Scott bill see our post below of April 20, "H.R. 4367: Beauty in Simplicity."

In this short interview, Mr. Helwig lays out the issues and history of the problem and looks at the chances of success for legislative or regulatory relief.

Regulating Bad Behavior

More than 100 people attended this week's EFTA webinar on complying with the new federal law that requires states to restrict access to TANF benefits in specific locations. The Middle Class Tax Relief and Jobs Creation Act of 2012, signed by Pres. Obama in February includes a section, number 4004, that requires states to prohibit TANF beneficiaries from accessing their benefits in liquor stores, gaming locations and adult-entertainment venues.

States are required by 2014 to submit a report to the Department of Health and Human Services on how they have complied with the law. States that fail to adequate comply face the loss of up to five percent of their TANF block grant.

DHHS is the federal agency that oversees the TANF program. Since the new law provides for monetary penalties, DHHS must conduct a formal rules-making process to establish regulations for complying with the intent of Congress, according to the agency.

The webinar was hosted by the Electronic Funds Transfer Association and CO-OP Financial Services. It was divided into four sections:

1. The legislative background of the law
2. The regulatory process that is now underway
3. How states are complying with similar blocking state-level blocking laws
4. Alternatives to "systemic" blocking solutions

A veteran panel discussed these four issues at length. Dennis Ambach, the senior director of government relations for EFTA, explained the origin of the bill and similar state-level movements to restrict the use of TANF. Mark Greenberg, the deputy assistant secretary for policy in the Administration for Children and Families, explained in detail the regulatory process that will produce the rules that will guide states in their compliance with the law. ACH is the branch of DHHS that administers TANF.

The EBT director for the State of Colorado, Scott Barnette, presented his state's experience in restricting access to TANF and benefits from a host of other government programs. Finally, John Simeone, executive director for JP Morgan Public Sector Prepaid Cards talked about the issues involved with trying to block access to TANF by "throwing a switch" on ATM machines. (Hint: The switch doesn't exist.)

There have been just a few seminal milestones that have marked the path of EBT. The first was creation of the first set of operating regulations in 1992. Another was Congress' willingness in the late 1990s to appropriate money so that EBT transactions could be interoperable across the country. How the Section 4004 regulations are writen will be one of those milestones.

The regulators at DHHS face a thankless task in trying to control access to TANF. Most Americans share Congress' disgust with knowing that money that was appropriated to clothe poor children and keep a roof over their heads is going instead to pay for liquor and lap dances. But implementing the law will be tricky. Compliance costs may in the end exceed the amount of money that is currently being diverted to spirits, slots and strippers.

So DHHS will have to balance such factors as cost and benefit, access and fees, and the carrot and stick of enforcement.

Here are just three of the issues that regulators will have to consider over the next several months:

Whether systemic solutions are cost effective. Results in two states have shown that the amount of TANF benefits flowing through proscribed categories of merchant is in each case less than one-half of one percent of the total amount of benefits distributed. Human services agencies have no regulatory authority over alcohol retailers, gaming or adult entertainment. In at least one state, staff time was devoted to scanning Yellow Pages to make lists of liquor stores and strip clubs to contact directly. The manpower required to implement the law could be staggering.

Whether regulations may end up reducing access for all beneficiaries. Even when a state is able to locate and contact business owners who agree to block acceptance of EBT cards at ATMs in those locations, it's not the end of the story. ATMs are mobile assets. An ATM may be replaced by one whose terminal ID has not been blocked. Or a terminal with a blocked ID may end up in a lawful location where beneficiaries may be blocked from using it.

And in remote areas of the country, for example, western states in the lower 48 and Alaska, there are places where a prohibited location may be the only location within 50 or 100 miles of where a beneficiary lives. Prohibiting that location may place an undue hardship on the beneficiary.

And what about Indian casinos? Recognized Indian nations and tribal authorities under the Indian Gaming Regulatory Act of 1988 control gaming within their territory. So the requirements of Section 4004 of the new law might not be enforceable in Indian casinos. This could cause the regulations to be applied in a discriminatory manner. One beneficiary may face a 25-mile drive to an ATM because a casino is now off limits for benefit access, while another beneficiary may hop on the Interstate, get off at the next exit and pull into an Indian casino with her EBT card.

Regulators are concerned about access costs. But we know that cost and access are code words for supply and demand. ATM owners in some areas may find that blocking these transactions may make it economically unfeasible to keep their machines in those locations. They may redeploy their machines to more profitable locations. As the supply of ATMs diminishes, will the owners of remaining machines raise their surcharges? If so, compliance with the law will result in less access and higher cost for all beneficiaries. As the supply of access points decreases, the cost of remaining access points increases.

Fairness of sanctions. States that fail to comply with the law could be sanctioned with the loss of up to five percent of their TANF block grant. But whom does this affect? Not the liquor store owner who sold a pint of bar whiskey to someone who paid with TANF funds. Not the casino owner who knowingly allowed access to TANF funds so that in three hands of blackjack the beneficiary's family support money was in his till. Not the stripper who steps off the bar with TANF cash in the waistband of her G-string.

Section 4004 sactions could end up harming the vast majority of program beneficiaries who play by the rules. A sanctioned state will be forced to make up the five percent reduction in its TANF grant by cutting other programs to use that money to meet its TANF obligation. Which programs? Maybe reduce the hours for school nurses. Maybe buy fewer assisted living devices for the disabled. Or maybe layoff the interpreters at the blind commission. Who knows?

Sanctions should not end up indirectly harming beneficiaries who play by the rules. States should comply with the new federal law by passing their own legislation that will allow them to better enforce how and where these benefits are accessed and spent. Gaming commissions should be responsible for making sure that the casinos, bingo-halls and poker clubs they oversee don't allow TANF funds to be accessed in those locations. If these businesses circumvent the gaming commission's regulations the businesses could face loss of their licenses. The same for liquor stores.

Congress did the right thing by trying to turn the focus on TANF benefits back to children and families. But regulators will have to have the leadership of Moses, the wisdom of Solomon and the patience of Job to get this one right.

DHHS will have to absorb a great deal of information in a very short period of time in order to craft regulations that don't negative impact anyone but the bad actors. And states, in their compliance plans, will have to show that they can apply the proper pressure to those bad actors in order to regulate access to and use of TANF in the manner Congress intended when it created the program.

H.R. 4367: Beauty in Simplicity

All too often the public only hears about 2,500 plus page laws (monstrosities if you will) coming from our Congress. Let’s round up the usual suspects: Obamacare, Dodd-Frank and year-ending omnibus spending bills. Bigger is not better when it comes to law making.

Blaine Luetkemeyer (R-MO)
Google Images

I am more pleased then to offer thoughts on a bill recently introduced by Rep. Blaine Luetkemeyer of Missouri. Responding to a real need in the ATM industry, Rep. Luetkemeyer sponsored H.R. 4367 along with Rep. David Scott of Georgia. Weighing in at a sleek and sturdy one and half pages, H.R. 4367 proposes to streamline and update the Electronic Funds Transfer Act’s requirement that an ATM operator provide a consumer two fee notices (one on the screen and one on the physical ATM) before a balance inquiry or cash withdrawal.



David Scott (D-GA)
Google Images



Years ago, the dual fee notification requirement was an important consumer protection measure because some screens on older ATMs could not deliver a robust notice. Current ATM screens now offer the consumer a very robust fee notice (thank you Triple Des, ADA audio requirements and good, old investments by the ATM industry). Unfortunately for the industry, some unscrupulous characters have started a national trend of defacing the ATM’s physical fee notice placard, hiring trial lawyers to accuse ATM operators of non-compliance with the EFTA and demanding cash settlements.

The Electronic Funds Transfer Association and the ATM Industry Association last year began to reach out to Capitol Hill on the problems with these lawsuits and the need to update the EFTA’s dual fee notification requirement. The Consumer Financial Protection Bureau is also involved. The Bureau asked for public comment on whether the dual fee notification requirement ought to be changed. Of the more than 100 comments letters filed, a strong majority supported the dual fee notification elimination. The American Bankers Association, American Gaming Association, Credit Union National Association, Independent Community Bankers Association, National Association of Federal Credit Unions and the National Association of Convenience Stores are also working hard to eliminate the dual fee notification requirement.

Reps. Luetkemeyer and Scott deserve much credit for offering a simple solution to an important problem. H.R. 4367 fully protects consumers and it’s in the spirit of updating and streamlining an old regulation. It deserves broad support.

 

Giving Credit Where Credit Is Due

Kevin Warsh, former member of the
Federal Reserve System Board of
Governors. Future Treasury
Secretary?

Former Fed Governor Kevin Warsh published an op-ed in last week’s Wall Street Journal titled “Who Deserves Credit for the Improving Economy?”  In it, he challenges the notion that has seemingly taking hold in some inside the beltway circles that politicians and government largess are responsible for the modest economic recovery currently underway.  He opines that the strength of our economy lies in the citizenry not the government.  The citizen that cleaned up their personal balance sheets during the worst of the financial crisis and continues to do so.  The citizen who continues to delay consumption and make tough spending choices. 

The government has done just the opposite.  The Senate, in a clear abdication of responsibility has not passed a budget since April 29, 2009.  President Obama’s unserious 2013 $3.6 trillion budget was rejected by the House 414 to 0.  The recommendations of the President’s own bipartisan Bowles/Simpson Commission were rejected by both the House and the White House. 

The government continues to spend money it doesn’t have, while American’s tighten their belts and make prioritize their spending.  Mr. Warsh’s best point is as follows:  “We should not allow the failings of the US banking system to serve as a generalized indictment of the market economy.  The failures in the banking system owe at least as much to public policy failures (Fannie Mae, Freddie Mac) as to deficient private practices (poor risk management). The marketplace is still the best allocator of capital and labor.”

Where is this kind of thinking in Washington?  Mr. Warsh is currently a lecturer at Stanford’s business school and a distinguished visiting fellow at the Hoover Institution.  Should the upcoming elections result in a change of administrations, Mr. Warsh should be on a short list for Treasury Secretary.

A Warning Against Durbin “Fatigue”

We hear it all the time at financial services meetings and conferences these days. “This is a Durbin-free meeting.” Or, “…We are all suffering from Durbin fatigue.” I have invoked these words from time to time.

It is true the financial services sector has been quite topsy-turvy since the debit card interchange amendment (aka The Durbin Amendment) was adopted during the Senate’s consideration of financial reform in 2010. The following is a brief timeline of events:

·       July 2010 – President Obama signed into law Dodd-Frank which included the Durbin interchange amendment

·       December 2010 – The Federal Reserve issued a proposed rule to implement the Durbin Amendment and sets the cap on interchange at 12 cents for issuers at $10 billion in assets or above

·       June 2011 – The Senate defeated an amendment by Sen. Jon Tester (D-MT) which sought to delay implementation of the Durbin Amendment

·       July 2011 – The Fed issued the final rule essentially doubling the interchange cap to 24 cents with an October 1 effective date

·       November 2011 – Merchants sued the Fed to overturn the final rule alleging a disregard of Congressional intent

On April 1, part two the Durbin Amendment took effect. Debit card issuers are required to offer routing across two unaffiliated networks, regardless of the authentication method. Financial institutions will also start shortly reporting first quarter financial results, so we’ll get a better snap shot of lost revenues associated with the Durbin Amendment. Banks have already reported fourth quarter results from 2011 and some estimates are a combined loss of interchange revenue of about $2.2 billion for those with more than $10 billion in assets.

Meantime, reports and press releases are flying around asking merchants where the savings are for consumers. I probably shouldn’t even start a discussion of Bank of America’s plan to charge its customers a $5 monthly fee for debit card usage.

Adding more fuel to the fire, the National Association of Convenience Stores (NACS) issued a report this week detailing how credit card interchange fees are hurting consumers at the gas pump. So, let’s get this straight. The retailers rallied Senate support to pass the Durbin Amendment. The retailers turn around and sue the Fed to overturn the Durbin Amendment. Now, the retailers are using high gas prices to rally support for limiting credit card interchange rates. What does it all mean?

I’m here to say that no one in the financial services industry can afford to suffer Durbin fatigue. The NACS study demonstrates the retail community’s unrelenting desire to end interchange as the industry knows it. And, if you sit around believing Congress will never touch credit card interchange, you do so at your peril.