FEDERAL GOVERNMENT RELATIONS
Fed Proposes Lowering Debit Card Fee Cap, Revisiting Figure on Biennial Basis
The Federal Reserve has proposed 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 one 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. The proposal would apply to debit card issuers with at least $10 billion in consolidated assets.
The Fed board voted 6-1 to advance the proposed rulemaking, with Gov. Michelle Bowman casting the dissenting vote. During the meeting, Fed staff said transaction processing costs declined by nearly 50% from 2009 to 2021, and issuer fraud losses also declined while fraud prevention costs increased over the same period.
Bowman questioned whether the Fed artificially limited the types of information that it gathered for the survey used to set the new cap, with staff saying that data was limited to comply with statute. Before engaging in significant regulatory proposals, it is critical to reflect on the broader context and to understand the potential consequences of the revisions, she said. “While the proposal suggests that it could result in benefits to consumers, I'm concerned that the costs for consumers through the form of increased costs for banking products and services will be real, while the benefits to consumers – such as lower prices at merchants – may not be realized.”
Lawmakers Urge Fed to Delay Debit Card Fee Proposal
The chairmen of two House Financial Services subcommittees said ahead of a Federal Reserve hearing Wednesday that the Fed should delay any proposals on debit card fees due to a lack of adequate data to support policymaking and the potential negative effects on bank and credit union customers with checking accounts. In a letter, Reps. Blaine Luetkemeyer, R-Mo., and Andy Barr, R-Ky., urged the Fed to postpone the meeting on proposed revisions to Regulation II. The Fed did not share any details about the proposal until 20 minutes before the meeting.
The two lawmakers said the Fed’s process raises significant governance issues, given the public was only allowed to see the proposal minutes before the board took a vote to issue it. They also 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.”
Johnson Elected as House Speaker
The House Wednesday elected Rep. Mike Johnson, R-La., as speaker. He most recently was a member of the Judiciary Committee and the Armed Services Committee.
Banking Regulators Release CRA Final Rule
The Federal Reserve, Federal Deposit Insurance Corp. and Office of the Comptroller of the Currency Tuesday released the final rule to modernize how they assess compliance with the Community Reinvestment Act. 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 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 maintain 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.
Read the interagency fact sheet
Read an interagency overview of key objectives
Fed, FDIC Boards Split on Support for CRA Rule
The Federal Reserve and Federal Deposit Insurance Corp. boards voted in favor of the final Community Reinvestment Act rule, although there were dissenting members on both boards who argued that the changes would do more harm than good.
The Fed board voted 6-1 to finalize the rule, with Gov. Michelle Bowman casting the only opposing vote. Fed Chairman Jerome Powell said the final rule would better achieve the CRA’s goal by encouraging banks to expand to credit, investment and banking services in low- and moderate-income communities. Bowman countered that the law was overly prescriptive and would increase the number of banks rated “needs to improve” from 1% today to nearly 10%. “This seems like regulatory overreach, and, as I have already noted, there is little evidence that banks are not currently meeting the credit needs of their communities,” she said.
The FDIC board voted 3-2 in favor, with Vice Chairman Travis Hill and board member Jonathan McKernan casting the opposing votes. Chairman Martin Gruenberg said the final rule will significantly expand the scope and rigor of the CRA “and ensure its relevance for the next generation.” However, Hill said the rule would create evaluation methodologies so complex that it would be hard for institutions to determine whether their actions would result in favorable assessments. He also said the new retail lending tests, in conjunction with the new retail assessment areas, would disincentivize banks from lending to certain communities.
Agencies Extend Comment Period on Proposed Capital Requirements
The Federal Deposit Insurance Corp., Federal Reserve and Office of the Comptroller of the Currency announced last Friday that they have extended the period for public comment on the proposed capital requirements for banks with more than $100 billion in assets to Jan. 16, 2024. At the same time, the Fed announced it has extended the comment period until the same date for a separate but related proposal to modify the capital surcharge for large banks.
Comments on the proposed capital requirements – which would implement the “Basel III endgame” – originally were due Nov. 30. In addition to pushing back the comment deadline, the Fed said it would begin collecting data to gather more information from the banks affected by the proposal. That data collection will also end on Jan. 16.
Agencies Release Guidance for Climate-Related Financial Risk Management
The Federal Deposit Insurance Corp., Federal Reserve and Office of the Comptroller of the Currency Tuesday released interagency guidance for managing climate-related risk at financial institutions with at least $100 billion in assets. The principles are meant to provide a “high-level framework” for large financial institutions as they “develop strategies, deploy resources and build capacity to identify, measure, monitor and control for climate-related financial risks,” according to the document.
During its meeting, the FDIC board voted 3-2 in favor of guidance. “Climate change-related financial risk poses a clear and significant risk to the U.S. financial system,” said FDIC Chairman Martin Gruenberg. “If improperly assessed and managed, they may pose a threat to safe and sound banking and to financial stability.”
FDIC Vice Chairman Travis Hill and board member Jonathan McKernan cast the opposing votes, with both saying there was no justification to elevate climate risk above the other risks that banks face. “We should focus on making sure our banking system is resilient on a range of risks rather than layering ever more stringent expectations around the management of every discreet risk,” Hill said.