Monthly Archives: June 2011

Fed set interchange fee at 21 cents

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The Federal Reserve Board just approved a final rule capping debit interchange fees at 21 cents, with an additional 5-cent adjustment for fraud. The Fed said the fee on an average debit card transaction ($38), with  a typical fraud prevention allowance, would be approximately 24 cents. This is an increase from the 12-cent cap the Fed Board proposed last December. The Fed received more than 11,000 comment letters, many from bankers and other debit card issuers who said the cap was ridiculously low.

Earlier this month, 54 U.S. Senators voted for legislation which would have required the Fed to hold off for up to a year to study the issue further. The provision in the Dodd-Frank Act which requires the cap was not publically debated in hearings to the extent other Dodd-Frank provisions were when the legislation was pass a year ago.

Fifty-four votes was not enough to pass the delay law on June 8, and the Fed remained obligated to put a cap in place. The vote, however, gave the Fed a sense that a majority of members of the Senate were uncomfortable with the 12-cent cap. The Fed responded with the higher cap proposal today, and passed it around 3:40 p.m. central time. It becomes effective Oct. 1.

Despite the increase, the cap is a serious blow to banks, particularly smaller banks which have fewer options for making up for the lost revenue. Some of the banks are likely to drop debit cards as a product altogether.

The consumer gets nothing out of the deal. Any cost savings realized by retailers will never be passed onto customers, and many of those customers will now have fewer payment options from their bank.

Here is the Fed Board’s official announcement. This commentary from the Competitive Enterprise Institute is an interesting take on the situation. Here is ABA’s reaction; here’s what ICBA had to say about it. Here is the reaction  from the Food Marketing Institute, which was a big fan of the 12-cent cap.

State bank exams on hold if Minn. government shuts down

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With only a couple days before the end of the month, it is looking more likely that the state of Minnesota will close its government-run offices on July 1. The legislature and the governor still remain about $1.5 billion apart on a budget. If they can’t come to an agreement, the state shuts down at the close of the current fiscal year. Here is the latest report from the local newspaper.

About two weeks ago (June 15), Bill Horlitz, assistant deputy commissioner in the Minesota Department of Commerce, participated in a panal of regulators addressing a group of bankers in the Twin Cities. One of the bankers asked: “How will the department cope if the state shuts down?” After joking that he was “going to the lake,” Horlitz’s responsed:

“It is going to be difficult. We are developing contingency plans right now. The department is not deemed critical at this point so it will be shuttered. We’ve all gotten layoff notices; they came last week. Everyone is hoping it won’t occur. But we are expecting it will coccur. Hoping it will be shorter rather than longer. Hoping that hte legislature and the executive branch can get together and solve the problem.”

CFA seeks to help community banks operate better

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U.S. Rep. Blaine Luetkemeyer (R-Mo.) has introduced H.R. 1697, the Communities First Act. This is legislation supported by the Independent Community Bankers of America that seeks to modify numerous laws so that community banks can operate more effectively and efficiently.

“The Communities First Act contains many reforms that would improve the regulatory environment and overall community bank viability, which would be of tremendous benefit to our customers and communities,” said Greg Ohlendorf, president and CEO of First Community Bank and Trust in Beecher, Ill., in testimony before the House Small Business Committee on June 16. Click here for more on Ohlendorf’s testimony.

Karen Thomas, the ICBA senior executive vice president for government relations and public policy, gave bankers a preview into the CFA legislation last May at the BHCA spring seminar. Speaking on May 3 to nearly 200 bankers gathered in Bloomington, Minn., she said the legislation would provide “targeted regulatory and tax relief” to community banks.

Thomas explained: “Components of the Act include: allowing community banks to amortize losses on commercial real estate loans over 10 years for regulatory capital purposes; boosting to 2,000 from 500 the number of shareholders allowed before SEC registration would be required; giving bank regulators a greater say in rule-writing at the Consumer Financial Protection Bureau; and requiring FASB to do a cost-benefit analysis before changing accounting standards.”

I asked Thomas about the 10-year amortization on commercial real estate losses. Here is a transcript of our exchange:

Bengtson: You mentioned as part of the Communities First Act, the 10-year amortization or real estate losses, which a lot of people want to see. How realistic is it that this will become law in 2011?

Thomas: That one has a long, uphill climb. The lawmakers on Capitol Hill will ask bank regulators what they think about that provision and they will not get a positive answer.

Bengtson: The regulators don’t like it, but they did it in the 1980s and it worked out pretty well.

Thomas: That’s right. That’s our argument, that they did it for Ag lenders in the ’80s. But that was pre-FDICIA. There’s always that wrinkle that what you use for your financial statement doesn’t have to match how you calculate regulatory capital, and that’s what this provision would ask for – your balance sheet capital, your account statements, you cannot amortize losses over 10 years, but for regulatory capital, you would be able to. I think it’s tough politically, but we’re going to push it.

This one will be worth watching. A Community First Act introduced years ago never passed as stand-alone legislation, but important pieces of it were folded into other legislation that did become law.

Congress seeks checks and balances for CFPB

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In early May, a group of 44 Republican senators sent a letter to President Obama that said they will not confirm any nominee for CFPB director unless structural changes are made.

“As presently organized, far too much power will be vested in the CFPB director without any effective checks and balances,” Republicans wrote in the letter.

Meanwhile, the House Financial Services Subcommittee passed three bills that would make significant changes to the bureau. (Read a summary of House Republicans’ proposals to limit the CFPB’s authority.)

However, Warren has pointed out that the following checks and balances are in place, as reported by HousingWire.com:

  • The Financial Oversight Stability Council, a separate entity consisting of federal regulators, can overrule the CFPB with a vote. (“The council can act only if the regulation puts at risk the safety and soundness of the entire U.S. banking system or the stability of the U.S. financial system. Moreover, the procedural requirements for the FSOC to act are so high that it would be practically impossible for the FSOC to overrule the CFPB director,” the Republicans argue in their letter.)
  • Under Dodd-Frank, the CFPB is required to submit financial reports to Congress twice each year.
  • The CFPB director is required to testify before Congress twice each year on the bureau’s activities.
  • The Government Accountability Office will conduct an audit each year on the bureau’s expenditures and submits a report to Congress.
  • The CFPB must submit its financial operating plans, forecasts and quarterly financial reports to the Office of Management and Budget.

Recently, the House Appropriations Committee limited the mandatory funds for the CFPB to $200 million in its 2012 appropriations bill. Additionally, the bureau would be subjected to the annual appropriations process beginning in 2013. Currently the CFPB has a funding cap of $600 million – a percentage of the Federal Reserve’s budget – and is independent of the appropriations process.

“This new agency created by the Dodd-Frank legislation has not yet been fully constituted and many questions remain as to its authority and mission,” the committee said, according to the American Bankers Association.

One week left to comment on rule transfers to CFPB

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One week remains for the financial services industry to comment on the “Identification of Enforceable Rules and Orders” that the Consumer Financial Protection Bureau  published in the Federal Register on May 31. Comments are due June 30.

Under the Dodd-Frank Act, this list of rules will be transferred from other regulatory agencies to the CFPB on July 21.

The list includes the following rule transfers from seven agencies:

Federal Reserve

Equal Credit Opportunity Act

Home Mortgage Disclosure

Electronic Fund Transfers

Registration of Residential Mortgage Loan Originators

Consumer Leasing

Privacy of Consumer Financial Information

Fair Credit Reporting (Regulation V) (with certain exceptions)

Truth in Lending (Regulation Z)

Truth in Savings (Regulation DD)

Federal Deposit Insurance Corporation

Privacy of Consumer Financial Information

Fair Credit Reporting (with exceptions)

Registration of Residential Mortgage Loan Originators

 

Office of the Comptroller of the Currency

Adjustable-Rate Mortgages (but only as applied to non-federally chartered housing creditors under the Alternative Mortgage Transaction Parity Act (AMTPA))

Registration of Residential Mortgage Loan Originators

Privacy of Consumer Financial Information

Fair Credit Reporting (with exceptions)

 

Office of Thrift Supervision

Adjustments to home loans (but only as applied to non-federally chartered housing creditors under AMTPA)

Alternative Mortgage Transactions (but only as it relates to AMTPA)

Registration of Residential Mortgage Loan Originators

Fair Credit Reporting (with exceptions)

Privacy of Consumer Financial Information

 

National Credit Union Administration

Loans to members and lines of credit to members (but only as applied to non-federally chartered housing creditors under AMTPA)

Truth in Savings

Privacy of Consumer Financial Information

Fair Credit Reporting (with exceptions)

Requirements for insurance, but only with respect to Truth in Savings, Privacy of Consumer Financial Information and Registration of Residential Mortgage Loan Originators

Registration of Residential Mortgage Loan Originators
Federal Trade Commission

Telemarketing Sales Rule

Privacy of Consumer Financial Information

Disclosure Requirements for Depository Institutions Lacking Federal Depository Insurance

Mortgage Assistance Relief Services

Use of Prenotification Negative Option Plans

Rule Concerning Cooling-Off Period for Sales Made at Homes or at Certain Other Locations

Preservation of Consumers’ Claims and Defenses

Credit Practices

Mail or Telephone Order Merchandise

Disclosure Requirements and Prohibitions Concerning Franchising

Disclosure Requirements and Prohibitions Concerning Business Opportunities

Fair Credit Reporting Act (with exceptions)

Procedures for State Application for Exemption from the Provisions of the [Fair Debt Collection Practices] Act

 

Department of Housing and Urban Development

Hearing Procedures Pursuant to the Administrative Procedure Act

Civil Money Penalties: Certain Prohibited Conduct (but only as applied to the Real Estate

Settlement Procedures Act of 1974 (‘RESPA) and the Interstate Land Sales Full Disclosure Act (ILSA))

Land Registration

Purchasers’ Revocation Rights, Sales Practices, and Standards

Formal Procedures and Rules of Practice

Real Estate Settlement Procedures Act

Investigations in Consumer Regulatory Programs (but only as applied to RESPA and ILSA)

 

The list of rules is meant to serve only as a “convenient reference source.”

“[T]he inclusion or exclusion of any rule or order would not alter the CFPB’s authority. In addition, section 1063(i) does not require the CFPB to update, correct, or otherwise maintain the final list,” according to the Federal Register notice.

“Unlike the underlying laws, the regulations can be changed by the CFPB without Congressional approval. To change a regulation, the CFPB would need to follow normal notice and comment rulemaking,” the National Association of Federal Credit Unions writes.

NAFCU’s reminder to credit unions extends to any financial institution and CFPB-regulated entity: “Credit unions of all asset sizes will need to focus on the CFPB’s rulemaking process to stay up-to-date on new compliance challenges.”

Capital remains the best remedy for TBTF

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There has been a lot of chatter about the need for more capital at the nation’s largest banks. The greater the capital requirements, the less of an issue too-big-to-fail becomes. This is an interesting piece from the New York Times, and if you have a subscription to the Wall Street Journal, be sure to click on the essay’s link to an op-ed piece on the topic in that publication.

Congress could have avoided passing the 800-page single-spaced Dodd-Frank Act if it had instead demanded higher capital from the “systemically important” banks. I argued this point in with this essay that appeared in NorthWestern Financial Review magazine over a year ago. If we are going to allow banks to become enormous, we should demand that they have sufficient capital to protect themselves from their own mistakes.

Most smaller banks are encouraged to maintain capital ratios of 10, 11, even 12 percent. These banks pose no threat to the economy. So why don’t we demand at least something similar in terms of capital reserves, given the significant threat ultra-large banks do pose to the economy?

Here’s what I wrote in February 2010:

Instead of continuing to collectivize risk, the government should force the mega banks to self-insure. The way to do that is to dramatically increase capital requirements, by statute, enough to fully offset the too-big-to-fail subsidy. Currently, to be rated as well-capitalized, banks must hold Tier 1 capital amounting to about 6 percent of assets. For banks (including all the shadow banks and quasi-banks as well) managing more than $100 billion, that figure should be raised certainly to 10 percent and more likely to 12 percent. And all such institutions should be required to be well-capitalized all the time.

People are still proposing variations on this because it’s a good idea.

Meet three Rising Stars

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NorthWestern Financial Review has the pleasure, once again, of honoring mid-career professionals through its Rising Star program. Let me introduce you to three Rising Star bankers honored in our June 15 edition:

Jackie Herman, senior vice president, chief financial officer and director of operations for Flagship Bank Minnesota in Wayzata, Minn. Born and raised in Atwater, Minn., Jackie worked at the Atwater State Bank for a number of years before joining Flagship Bank a year ago. She was involved in numerous projects at the Atwater State Bank. On of her mentors was Keith Markwardt, president of Atwater State Bank’s sister bank in Kimball, Minn. Keith was honored with Rising Star recognition in 1998.

Doug Truex, president, Iowa Falls State Bank, Iowa Falls, Iowa. Raised in Denver, Iowa, Doug started his professional career as a bank examiner for the state of Iowa. In 1996, he joined the Homeland Bank Group in Waterloo, Iowa, but a year later was recruited over to Iowa Falls State Bank, where he has been ever since. In 1999, he was promoted to vice president/trust officer; and in 2002 he was named senior vice president/senior loan officer. He was named president of the bank in 2010.

David Hanson,senior vice president and chief financial officer, American State Bank & Trust Company, Williston, N.D. David worked for 10 years at an accounting firm before joining American State Bank & Trust in 2003. Hanson is past president of the Board of Education for WIlliston Public School District No. 1, he is an honors graduate of the Graduate School of Banking in Boulder, Colo., and he serves on the board of the North Dakota Bankers Association.

Four other banks will be honored in our July 1 edition. Watch for a future post to meet them. We very much appreciate our readers who took the time to submit nominations for this year’s selections.

I think it is very important to honor the best in any industry. Many, many people do important work and are rarely or only minimally acknowledged for it. The Rising Star program is NorthWestern Financial Review magazine’s way of shining a spotlight on some of the people who make banking a great industry.

What if July 21 comes and CFPB still has no director?

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With a July 21 start date nearing and no director yet in place at the Consumer Financial Protection Bureau, many are wondering what powers the agency will have and what work it will do.

Without a director, the bureau would face certain restrictions on the cases it could pursue, and investigations would have to be referred to the CFPB by other federal regulators, according to Politico.com. The article cited a January report by the Treasury’s inspector general that said the CFPB cannot prohibit “unfair, abusive or deceptive” practices until a director is in place.

Should a director not be named, some expect the CFPB’s enforcement head to take on greater responsibility. Treasury hired Richard Cordray, former Ohio attorney general, for the position last December.

“The ability of the CFPB to investigate financial firms and then bring enforcement actions for violating existing laws is the most potent weapon the agency has absent a director. It is also one that will garner politically attractive headlines,” wrote Jaret Seiberg, an analyst for MF Global, in a report quoted on Politico.com.

However, according to CNN, and as detailed by the Bureau of National Affairs’ Banking Report, if no director is appointed and confirmed, Treasury Secretary Tim Geithner would step up to run the consumer bureau, and he could designate management responsibilities to Elizabeth Warren.

Bloomberg reported that Steven Antonakes, bank supervision director at the CFPB, said oversight of banks with more than $10 billion in assets will start as planned on July 21. His unit will supervise 111 banks, thrifts and credit unions controlling about $10 trillion, or 80 percent of U.S. banking assets.

“Our own belief is that we’re not sure there’s much the bureau can do without there being an officially appointed head,” said Wayne Abernathy, an executive vice president at the American Bankers Association in a NASDAQ.com article.

He said there are “definitely legal issues if there is no director” come July 21 but “there’s disagreement as to just how nasty the legal problems are.”