The Federal Reserve Board (FRB) announced an amendment to the fraud-prevention adjustment provisions of Regulation II’s debit card interchange fee standards. When Reg. II was initially released in July 2011, the section addressing this adjustment was issued as an interim final rule.

To be eligible for the adjustment of no more than one cent per transaction, an issuer must develop and implement policies and procedures reasonably designed to take effective steps to reduce the occurrence of, and costs to all parties from, fraudulent electronic debit transactions, including developing and implementing cost-effective fraud prevention technology.

According to the Board’s press release, the final rule simplifies the elements required to be included in the issuer’s fraud prevention policies and procedures, which now must address:

• Methods to identify and prevent fraudulent electronic debit transactions;
• Monitoring volume and value of its fraudulent electronic debit transactions;
• Appropriate responses to suspicious electronic debit transactions to limit the costs to all parties from and prevent the occurrence of future fraudulent electronic debit transactions;
• Methods to secure debit card and cardholder data; and
• Other factors as the issuer may consider appropriate.
• In addition, the issuer must review its fraud prevention policies and procedures, and their implementation, at least annually and update them as necessary in light of:
  • Their effectiveness in reducing the occurrence of, and cost to all parties from, fraudulent electronic debit transactions involving the issuer;
  • Their cost effectiveness; and
  • Changes in the types of fraud, methods used to commit fraud and available methods for detecting and preventing fraudulent electronic debit transactions that the issuer identifies from its own experience or information; information provided to the issuer by its payment card networks, law enforcement agencies, and fraud monitoring groups in which the issuer participates; and applicable supervisory guidance.

G7 Rescues the Yen

On Friday, the central banks of the United States, the United Kingdom, Canada, and the European Central Bank joined with Japan to intervene and strengthen the Yen in foreign exchange markets. The Yen’s unexpected surge on Wednesday was driven by speculation that Japanese firms would repatriate some of their huge foreign assets to help meet insurance claims and pay for reconstruction.

Temporary Government Funding Bill Passed and Signed into Law

The House and Senate passed, and President Obama signed into law, a stopgap spending measure to keep the government operating through April 8. The 87-13 Senate vote averts any threat of a shutdown Friday and delivers another $6 billion in cuts to current fiscal year spending. The temporary funding bill is the sixth such continuing resolution, or CR, for the 2011 fiscal year which began October 1. To an unprecedented degree, the entire government, including war funding, has been without permanent appropriations for almost six months.

Senate and House Bills Introduced to Delay Durbin Rule

On Wednesday, lawmakers in the House and Senate introduced bills to delay a Federal Reserve proposal that would cap debit-card “swipe” fees. The main sponsors of the bipartisan legislation were Senator Jon Tester, a Montana Democrat, and Representative Shelley Moore Capito, a West Virginia Republican. The Senate bill would put off implementation of the rule for two years while the House version would delay it for one year. Tester’s bill, which has nine co-sponsors, would require a joint study of the rule’s impact to be conducted within the first year by the Fed’s board, the chairman of the Federal Deposit Insurance Corp., the Office of the Comptroller of the Currency and the chairman of the National Credit Union Administration. The bill by Capito, the Chairman of the House Financial Services subcommittee on Financial Institutions and Consumer Credit, has twenty-seven cosponsors and would require the same agencies to conduct an impact study.

FDIC Proposes New rules for Liquidation

On Tuesday, the FDIC unanimously approved a proposed rule that regulates the repayment of creditors if the federal government seizes and breaks up a large, faltering financial firm. The proposed rule establishes criteria the FDIC would use to determine if a firm’s senior executives or directors are “substantially responsible” for the failure of the firm, and thus could be forced to repay past compensation. Under the new rules, as has been the case with banks for decades, the FDIC can take over flailing firms, pay off some creditors, fire the management and temporarily operate the entities until it closes or sells them. The draft rule also lays out the order in which unsecured creditors would get paid and how creditors would file claims. After the proposal is published in the Federal Register, it is opened to public comment for 60 days. It would then be subject to another vote before it would take effect.

More Information

If you have any questions regarding any of these issues, please contact:

Matt Jessee, Policy Advisor
matt.jessee@bryancave.com
1 314 259 2463

OCC Criticizes Durbin Amendment

Last Friday, John Walsh, the Acting Comptroller of the U.S. Currency who oversees regulation of the nation’s largest banks, sent a letter to the Federal Reserve criticizing the Fed’s proposed rule to implement the Wall Street Reform Act’s “Durbin debit card swipe fee” amendment. In the letter, Walsh said the Durbin amendment “takes an unnecessarily narrow approach to recovery of costs that would be allowable under the law and that are recognized and indisputably part of conducting a debit card business. This has long term safety and soundness consequences – for banks of all sizes – that are not compelled by the statute.”

Locke to Leave Commerce for China

On Thursday, President Obama announced that he had chosen Commerce Secretary Gary Locke to succeed Jon Huntsman as U.S. Ambassador to China. While the President has yet to announce Locke’s replacement, speculation has centered on the former Mayor of Dallas and current U.S. Trade Representative Ron Kirk.

Attorneys General Mortgage Settlement Stalled

The proposed settlement by state attorneys general with the five biggest U.S. mortgage servicers leaked out this week. The proposal, which calls for a dramatic increase in loan modifications, is intended as the basis for settling allegations of widespread wrongdoing by the big loan servicers in handling millions of foreclosures. The settlement would be with Bank of America Corp, Wells Fargo & Co, JPMorgan Chase & Co, Citigroup and GMAC/Ally Financial Inc. In a press conference earlier this week, Iowa Attorney General Tom Miller, who led an investigation on behalf of the 50 states’ attorneys general, predicted that a broad settlement could be reached within about two months. Miller said the agreement was worked out jointly with federal agencies including the Federal Deposit Insurance Corp, the newly created Consumer Financial Protection Bureau and Justice Department. On Tuesday, Brian Moynihan, chief executive of Bank of America, the largest U.S. servicer, said at a meeting with analysts and investors that he opposes widespread principal reductions for homeowners in default. On Thursday, Rep. Spencer Bachus (R-AL) and Sen. Richard Shelby (R-AL), the top Republicans on the House and Senate banking committees, also criticized the proposed settlement as a “regulatory shakedown.”

Government Shutdown Looms

On Friday, House Republicans are expected to release a two-week stop-gap funding measure that would cut $4 billion in spending from the current fiscal year’s budget. While Senate Democrats have indicated they will likely not support the proposed $4 billion in cuts, momentum has shifted towards reaching an agreement to avoid a March 5th shutdown when the current funding measure expires. The new Republican spending measure will come on the heels of the just passed House Republicans’ seven-month appropriation bill that would have slashed $61 billion from the current fiscal year spending. The yet to be released House Republican spending plan is expected to make the cuts in the two-week spending bill proportional to the levels in the measure passed last week.

However, if House Republicans and Senate Democrats are unable to reach an agreement, the federal government shutdown would be guided by the Anti-Deficiency Act, which mandates that the only government activities allowed in the absence of a funding plan are those connected to “the safety of human life or the protection of property.” Programs and agencies that would be likely exempt from the shutdown are Social Security, uniformed military personnel, the Federal Reserve, the U.S. Postal Service, the Federal Aviation Administration, the Transportation Security Administration, and border security. However, among the most likely high profile federal government activities that would be shutdown are applications for passports and visas, accepting visitors at national parks, new patients at the National Institutes of Health, disease surveillance at the Centers for Disease Control, and toxic waste clean-up by the EPA.

Federal Reserve Closes Comment Period on New Debit Card Rules

On Tuesday, the Federal Reserve closed its comment period on its proposed rules to implement new interchange regulations and other debit card provisions of the Dodd-Frank financial-reform law’s Durbin Amendment. The Fed is expected to issue its final rules in April.

Congress Passes Tax Package

On Monday, the Senate passed the $858 billion tax package sending the bill back to the House where it passed late Thursday night. The bill now heads to President Obama’s desk for his signature into law. While the package does not include a repeal of the Form 1099 health care requirement or extension of the Buy American Bond program, the bill does the following major items:

• extends through 2012 the current individual income tax brackets, capital gains and dividends rates for all taxpayers;
• increases the AMT exemption amounts for 2010 to $47,450 (individuals) and $72,450 (married filing jointly) and for 2011 to $48,450 (individuals) and $74,450 (married filing jointly);
• extends through 2011 the ability to take an itemized deduction for state and local general sales taxes in lieu of the itemized deduction permitted for state and local income taxes;
• exempts from taxation the first $10 million of a couple’s estate and the first $5 million of an individual’s estate, with the remaining portion taxed at the 35 percent rate;
• extends and temporarily increases the bonus depreciation provision for investments in new business equipment;
• reduces the payroll/self-employment tax during 2011 to 4.2 percent on wage-earners and to 10.4 percent on self-employment income up to the threshold;
• reinstates through 2011 the research and development credit;
• extends the 100 percent exclusion of the gain from the sale of qualifying small business stock that is acquired before January 1, 2012 and held for more than five years;
• extends through 2011 the special 15-year cost recovery period for certain leasehold improvements, restaurant buildings and improvements, and retail improvements;
• extends through 2011 the $0.50 per gallon alternative fuel credit and credit for energy-efficient improvements to existing homes.

Fed Proposes New Interchange Fees

On Thursday, the Federal Reserve announced a set of new debit-card fee restrictions more aggressive than most industry experts expected. The new restrictions, most of which will not be made final until April 21, are designed to restrict the fees that debit-card issuers can charge merchants. Banks would face a seven-to-12-cent-per-transaction cap on the interchange fees under either of the two proposals unveiled Thursday. Under the first plan, card-issuing banks could use a formula to determine the maximum amount of the interchange fee that it would collect, based on certain processing costs and would set a “safe harbor” standard at seven cents per transaction. The second alternative would set the cap at 12 cents without any safe harbor. Under the Fed’s proposal, the Fed Board would re-evaluate the cap every two years.