Adjustments Urged in Debit Interchange Rules
One of the more contentious issues to emerge during implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act is a requirement that the Federal Reserve issue rules regarding debit card interchange fees, debit card payment network exclusivity requirements and the routing of debit transactions. Among other things, the proposed rules would implement the “fair and proportional” pricing requirement by capping interchange fees at seven to twelve cents per transaction.
In late February, CFA submitted comments to the Federal Reserve in which it strongly endorsed the intent of the legislation as well as the Fed’s proposed rule – “to restructure an uncompetitive and opaque payment card market that has significant harmful effects on consumers by using both competitive forces and pricing standards to bring interchange charges into line with the incremental costs to provide debit cards” – but urged the Fed “to ensure that financial institutions are reimbursed for legitimate, incremental costs associated with the provision of debit cards.” In particular, CFA urged the Fed to consider broadening its pricing standard to include such charges as network processing fees for each transaction processed, charge-backs involving billing errors, and fraud losses the Federal Reserve determines issuers have no ability to prevent as well as a separate adjustment for effective fraud prevention measures.
“The current interchange system is unjust because it requires lower income Americans who do not have debit cards to pay for excessive, hidden fees that are passed through by merchants to the cost of goods and services,” said CFA Legislative Director Travis Plunkett. However, Plunkett warned that if the Fed does not allow financial institutions to recoup their actual, incremental costs for providing debit cards, “institutions could increase debit card and other related banking charges on their least desirable and most financially vulnerable consumers: low- to moderate-income accountholders.” In addition, CFA urged the Federal Reserve to pay close attention to “how this rule would affect the financial viability of small depository institutions, especially credit unions, which often provide safe, lower-cost financial products to millions of Americans.”
Consumers Show Limited Knowledge of Credit Scores
Most consumers are not aware of recent changes in the credit score marketplace and do not know who makes credit scores available, what a strong score is, or the financial cost of a poor score, according to a nationwide survey released last week by CFA and VantageScore. “The good news is that a large majority of consumers know the key factors used to calculate scores and the creditors who use these scores,” said CFA Executive Director Stephen Brobeck. “The bad news is that consumer knowledge has lagged behind recent changes in the credit score marketplace.”
To help address the problem, CFA and VantageScore have launched a new interactive web quiz to help educate consumers about credit scores. The quiz is geared towards the individual consumer and will be introduced to financial educators in nonprofit, government, and industry sectors over the course of the next year.
CFA Applauds FTC Internet Privacy Proposal
CFA praised the proposed privacy framework outlined in a recent FTC staff report, especially the staff’s support for a universal “Do Not Track” mechanism, in comments submitted to the agency last month. However, CFA cautioned that voluntary guidelines for privacy principles such as “Do Not Track” are unlikely to be effective without legislation that establishes clear lines of conduct and an enforcement mechanism for consumers.
“While we disagree with the FTC on some issues, such as whether consumers should have any say over first party collection and use of their personal information, we believe that the FTC has outlined a strong, consumer-focused approach for privacy protection,” said Susan Grant, CFA’s Director of Consumer Protection.
CFA also signed onto comments to the FTC expressing a need for special protections for adolescents given the vulnerability of teens to wholesale data collection and profiling practices. In particular, the groups called on the FTC to include a “Do Not Track” feature for adolescents and stated that companies should not use data to behaviorally profile teens. A news release is available here.
Report Issues Epilogue for the Refund Anticipation Loan
As a result of regulatory changes, the end it in sight for tax refund anticipation loans, according to the annual CFA-National Consumer Law Center report on the industry released last week. “We are pleased that the IRS and bank regulators may have effectively put an end to loans that siphon off hundreds of millions in taxpayers’ hard-earned money and federal benefits meant to lift hard-working Americans out of poverty,” said CFA Director of Financial Services Jean Ann Fox in a press statement on the report.
Citing important regulatory actions, such as the IRS decision to eliminate the Debt Indicator and regulatory directives made by the OCC, OTS, and the FDIC, the report found reason to hope that there may not be many banks making RALs next year. In the meantime, however, approximately 7.2 million American taxpayers took out RALs in 2009, at a cost of approximately $606 million in loan fees plus over $58 million in other fees, according to the report.
CFTC Proposes Strong Business Conduct Standards for Swap Dealers
One goal of the Dodd-Frank Act was to strengthen protections against a wide range of abusive practices in the over-the-counter derivatives market, from the sale of interest rate swaps to local governments throughout the country that left them exposed to risks far greater than the interest rate risks they sought to protect against to the design and sale of mortgage-based derivatives that allowed the Wall Street firms that designed them to gamble that the subprime housing market was headed for a fall even as they encouraged their customers to expand their exposure to that market. Last month, CFA filed comments jointly with Americans for Financial Reform (AFR) in which they praised the proposed business conduct rules issued by the CFTC to address these types of abuses.
“While there are a number of areas where we believe the proposed rules should be strengthened,” the groups wrote in a comment letter authored by CFA Director of Investor Protection Barbara Roper, “overall the Commission has done an excellent job of outlining a strong and comprehensive set of business conduct rules.” In particular, the groups praised the agency for proposing rules “that allow for and apply to a range of relationships,” “that impose the greatest protections where the reliance is greatest and the counterparties are least able to look out for their own interests,” and for “recognizing the benefits that would flow from applying a broad institutional suitability obligation to recommendations of swaps and swap trading strategies and from applying execution standards” to trades where the swap is available for trading on a designated clearing market or swap execution facility.
If strengthened along as suggested and implemented effectively, “these rules would significantly enhance the integrity of the over-the-counter swaps market and better ensure that this market benefits rather than exploits the many commercial end users, government entities, endowments, and pension funds that rely on swaps to hedge risks,” the groups wrote.